Lahore - The Institute for Policy Reforms has criticized the International Monetary Fund for its intervention in implementation of China-Pakistan Economic Corridor .

In a fact sheet written by IPR MD Dr. Hafeez Pasha, it states that the Fund’s emphasis to execute CPEC “within the overall envelope of the public sector development program (PSDP)” is euphemism for placing limits on its implementation. IPR recognizes that “CPEC is a potential ‘game changer’ for Pakistan.” The Fact Sheet urged the government not to allow IMF to constrain “either the size or pace of its implementation.”

The Fact Sheet responds to the IMF Staff Report issued two days ago.  Based on figures provided by the Government, IMF indicates that the overall investment under CPEC is about $45 billion. For energy projects, the outlay is $33.8 billion, equivalent to 75% of the total. The remainder, $10.6 billion, will be devoted to transport infrastructure. Government plans to complete CPEC transport projects by 2017-18. In addition, priority projects in the energy sector, which will create IPPs, are scheduled to add 10000 MW by 2017-18.

Transport infrastructure projects will be financed by government-to-government longer-term loans on concessional terms. Energy-related projects will be in the nature of foreign direct investment (FDI), financed by commercial loans from Chinese financial institutions to Chinese investors in Pakistan.

IPR is concerned at the IMF statement on CPEC. IMF states that the transport infrastructure projects ‘will be executed within the overall envelope of the public sector development program (PSDP).’ Further, the Fund expects the Government to ‘prioritize the infrastructure project execution such that they remain within an overall fiscal envelope aimed at gradual debt reduction.’ As such, it emphasizes that potential fiscal risks will need to be mitigated. The Fact Sheet states that the Fund has in a subtle way signaled its concerns on CPEC. The basic issue is one of the ‘fiscal space’ to absorb the CPEC infrastructure projects. Clearly, there will need to be a big hump of public investment due to the CPEC in 2016-17, 2017-18 and thereafter. Already, in 2015-16, 16 projects of the Railway and the National Highway Authority have been included in the Federal PSDP. The combined cost of these projects is almost Rs 334 billion. An allocation of approximately Rs 16 billion has been made to these projects for the current year.

The rise in public investment in the next two years will necessitate a big increase in federal PSDP and a corresponding upward adjustment in the size of the fiscal deficit. On the assumption of 40% implementation in 2016-17 and the remaining 60% in 2017-18, the allocation for CPEC infrastructure projects will have to be close to Rs 440 billion and Rs 660 billion respectively in the next two years. Based on the same pruning in allocations to on-going projects, the PSDP at the federal level will have to be larger by at least Rs 350 billion in 2016-17 and by almost Rs 550 billion in 2017-18.  This will imply a jump in the level of government investment by approximately 1.2% of the GDP in 2017-18 and 1.7% of the GDP in 2018-19.

The latest Medium Term Economic Framework prepared by the IMF, after the 8th Review, makes no provision for a big rise in government investment in the next two years, from the projected level of 3.8% of the GDP in 2015-16. In fact, a significant drop is proposed in 2016-17 to 3.4% of the GDP, rising somewhat to 3.6% of the GDP in 2017-18.

Does this mean that the Fund is expecting the PSDP allocations to on-going projects to be cut back drastically over the next two years or for the implementation of the vital transport infrastructure projects to be staggered over a longer period? Either option is unacceptable.