China corridor to spark outflows from Pak: IMF

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The International Monetary Fund (IMF) has warned that Pakistan will need to manage rising outflows related to the China-Pakistan Economic Corridor in the years ahead and suggested that its government undertake reforms that support growth and exports to generate adequate resources for meeting payment obligations.
The China-funded CPEC is estimated to cost $44.5 billion – around 16% of Pakistan’s GDP last fiscal – of which $28 billion is allocated to “early harvest” infrastructure projects. The government will execute projects to the tune of $10 billion through the regular development spending envelope and the remaining $18 billion will be funded via foreign direct investment.
In the energy sector, power plants will be funded through FDI by Chinese firms with commercial loans from Chinese banks. These firms will operate as independent power producers (IPPs) with electricity sales guaranteed through pre-negotiated power purchase pacts, including guaranteed tariffs. In the transport sector, financing will be provided by the Chinese government and state banks as concessional loans.
While there will be a surge in FDI during the investment phase of the early harvest project, there will also be forex outflow to purchase equipment. “If implemented as envisaged, the CPEC could go a long way towards alleviating Pakistan’s long-standing supply-side bottlenecks and lifting its long-term potential output,” the IMF said adding that this will reduce power shortage and boost economic activity. Similarly the transport projects would allow easier and lower-cost access to markets and boost exports.
But there is a flip side, the IMF warned. “Pakistan will need to manage increasing outflows. As Chinese IPPs start their operations, profit repatriation by these firms would begin to rise in subsequent years… these outflows could reach about 0.4% of GDP per year over the longer run,” it cautioned.

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