Editorial: Increase in FDI

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According to data uploaded by the State Bank of Pakistan, foreign direct investment (FDI) has increased by 155 percent during the first two months of the ongoing fiscal year in comparison to the corresponding period of last year. This is very good news for the economy as FDI, apart from exports and remittances, is a source of highly desirable foreign exchange that, unlike borrowing – be it from multilaterals/bilaterals or equity borrowing – does not need to be repaid with interest.

The major contributor to this rise is China with total inflows of 259 million dollars as opposed to 48.4 million dollars in July-August last year. FDI is defined as equity investment characterised by ownership by a foreign investor and normally implies control over management, a joint venture or transfer of technology and/or expertise. The question that is being repeatedly asked by the independent media is whether the FDI from China can be defined as FDI or whether it is a loan which has to be repaid with or without interest. Due to lack of transparency by the PML-N government on all matters/projects relating to China Pakistan Economic Corridor (CPEC) it cannot be stated definitively that inflows under the CPEC constitute FDI.

Initially the then Minister for Planning, Development and Reforms Ahsan Iqbal had stated that projects under the CPEC are in the private sector and therefore not loans that would be repayable by the government. Reports that have not yet been challenged indicate that 15.5 billion dollar energy projects that were to be constructed by the private sector of the two countries would be financed by China’s Export-Import (Exim) bank at 5 to 6 percent interest rate with Pakistan government committing to purchase electricity from these plants at pre-negotiated prices. Or, in other words, it is a win-win situation for the Chinese company.

At the same time, credible reports indicated that the Pakistan government has decided to extend sovereign guarantees for the CPEC projects which raised the hackles of the International Monetary Fund (IMF) when Pakistan was on the Extended Fund Facility promoting it to hastily put together a technical assistance on the framework for public-private partnership. In the eighth review under the EFF dated October 2015, the Fund warned that “any demand-driven economic expansion as a result of project implementation is expected to be limited as increased investment may initially be offset by a significant increase in imports as the Chinese contractors are expected to import a large share of the required machinery and raw materials”. The current trade deficit due to rising imports is a source of concern for the newly-installed Abbasi administration and can be partly sourced to the CPEC.

In August 2015, China announced that concessionary loans for several projects in Gwadar totaling 757 million dollars would be at zero interest rate and would include construction of the $140 million East Bay Expressway project, installation of breakwaters in Gwadar at a cost of 130 million dollars, a 360 million dollar coal power plant in Gwadar, a 27 million dollar project to dredge berths in Gwadar harbour and a 100 million dollar 300-bed hospital in Gwadar. One month later, China announced that the 230 million dollar Gwadar International Airport project would no longer be financed by a loan. Given that the projects under the CPEC are estimated at over 45 billion dollars, zero interest loans totalling 757 million dollars and one would assume a grant of 230 million dollars to build the airport is no more than a storm in a teacup.

Be that as it may, there is no doubt that Chinese investments under the CPEC can be a game changer in the long run especially given that external infrastructure investments have all but dried up in recent years. But the government would be well advised to take the Fund’s warning highlighted in its eighth review: “CPEC has the potential to raise productivity and growth as long as the projects are well-managed and potential risks are mitigated. To reap the full benefits, risks will need to be well-managed. This requires sound practices in the evaluation, prioritization, and implementation of public investment projects, along with strong procurement and public financial management systems. PPAs need to be agreed in a way that mitigates potential fiscal risks, and to prioritize infrastructure project execution such that they remain within an overall fiscal envelope aimed at gradual debt reduction.”

 

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