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Govt mulls treating CPEC funds as FDI
By Shahbaz Rana
Published: January 10, 2017
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Prime Minister Nawaz Sharif meets Chinese President Xi Jinping. PHOTO: REUTERS
ISLAMABAD: Pakistan is wrangling over the treatment of Chinese cash flowing in under the $55 billion bilateral package, as the money has so far been reflected as loans in the official books instead of foreign direct investment (FDI), which may create problems for the government, especially in managing its accounts.
The issue appears to be an accounting problem but carries political implications for the government that has so far been defending the $55 billion China-Pakistan Economic Corridor as the largest Chinese investment in any regional country.
So far, work on the $16 billion worth of energy and infrastructure projects has begun but the total Chinese FDI during the last one and a half year stood at only $750 million, according to sources in the planning and finance ministries. The government believes the FDI should have been far more than this. Compared to $750 million FDI, China gave $2.2 billion loans during this period.
For whatever reasons, Chinese investment is not appearing as equity on the radar, said an official privy to these discussions. For instance, during the first five months (July-November) of this fiscal year, Chinese direct investment stood at only $156 million, according to the Board of Investment (BoI). During this period, Chinese loans to Pakistan amounted to $1.12 billion, according to the Economic Affairs Division (EAD). The $1.12 billion were disbursed for Havelian-Thakot Motorway ($97 million loan), Sukkur-Multan Motorway ($216 million loan), Orange Line Metro project ($74 million loan) and $700 million in loan for balance of payments support.
Similarly, in the last financial year, Chinese investment in Pakistan stood at just $594 million while Beijing made commitments to give $9.4 billion in loans. Out of $9.4 billion, it disbursed $1.1 billion last year and the rest would come in the coming years.
Sources said the State Bank of Pakistan, BoI, EAD and the ministries of finance, power and planning were trying to resolve this issue. So far, they have not reached a conclusion.
Unlike other transactions, CPEC transactions are complex, according to another official. The lender is in China, the manufacturer of the machinery and the supplier are also in China but the manufactured goods are imported in Pakistan, they said. The Chinese have won engineering, procurement and construction (EPC) contracts for execution of these projects.
Due to this all-Chinese arrangement, the goods that are coming from China are treated only as imports, which have shot up the import bill, while also affecting the current account balance, said the sources. During the first five months of this fiscal year, the import of power generation machinery stood at $1.4 billion, according to Pakistan Bureau of Statistics.
During the last meeting on this issue, the power ministry had proposed that Chinese power generation machinery should be shown as part of FDI, said the sources. This will help increase the current low total FDI volume of only $1 billion to over $3 billion.
The sources said a form would be given to Chinese operators of the power plants to declare the categories of their imported equipments, which the central bank would subsequently reflect in its accounts as part of FDI.
The sources said that in order to address this issue, the government might have to change certain accounting definitions to declare the Chinese money as investment. But they said that still there will be certain projects funded by China that cannot be declared as Chinese foreign direct investment. The projects where locals have majority shares cannot be treated as FDI, like Engro’s projects in Thar. The $1.6 billion Chinese loan for Orange Line project cannot be treated as FDI, said the sources.
We have reviewed the SBP methodology and there is no error in it, said BoI Chairman Dr Miftah Ismail. He said Chinese FDI would significantly increase this year due to progress on CPEC projects, insisting that it was just an accounting issue.
Whether Chinese money is a loan or equity, this will have no implications for Pakistan’s foreign currency reserves, said a finance ministry official. He said in case of equity, the dollars will be provided for repatriation of profits and in case of loans, the greenback will be given for payments of interest and principal amount.
Published in The Express Tribune, January 10th, 2017.
By Shahbaz Rana
Published: January 10, 2017
4SHARES
SHARE TWEET
Prime Minister Nawaz Sharif meets Chinese President Xi Jinping. PHOTO: REUTERS
ISLAMABAD: Pakistan is wrangling over the treatment of Chinese cash flowing in under the $55 billion bilateral package, as the money has so far been reflected as loans in the official books instead of foreign direct investment (FDI), which may create problems for the government, especially in managing its accounts.
The issue appears to be an accounting problem but carries political implications for the government that has so far been defending the $55 billion China-Pakistan Economic Corridor as the largest Chinese investment in any regional country.
So far, work on the $16 billion worth of energy and infrastructure projects has begun but the total Chinese FDI during the last one and a half year stood at only $750 million, according to sources in the planning and finance ministries. The government believes the FDI should have been far more than this. Compared to $750 million FDI, China gave $2.2 billion loans during this period.
For whatever reasons, Chinese investment is not appearing as equity on the radar, said an official privy to these discussions. For instance, during the first five months (July-November) of this fiscal year, Chinese direct investment stood at only $156 million, according to the Board of Investment (BoI). During this period, Chinese loans to Pakistan amounted to $1.12 billion, according to the Economic Affairs Division (EAD). The $1.12 billion were disbursed for Havelian-Thakot Motorway ($97 million loan), Sukkur-Multan Motorway ($216 million loan), Orange Line Metro project ($74 million loan) and $700 million in loan for balance of payments support.
Similarly, in the last financial year, Chinese investment in Pakistan stood at just $594 million while Beijing made commitments to give $9.4 billion in loans. Out of $9.4 billion, it disbursed $1.1 billion last year and the rest would come in the coming years.
Sources said the State Bank of Pakistan, BoI, EAD and the ministries of finance, power and planning were trying to resolve this issue. So far, they have not reached a conclusion.
Unlike other transactions, CPEC transactions are complex, according to another official. The lender is in China, the manufacturer of the machinery and the supplier are also in China but the manufactured goods are imported in Pakistan, they said. The Chinese have won engineering, procurement and construction (EPC) contracts for execution of these projects.
Due to this all-Chinese arrangement, the goods that are coming from China are treated only as imports, which have shot up the import bill, while also affecting the current account balance, said the sources. During the first five months of this fiscal year, the import of power generation machinery stood at $1.4 billion, according to Pakistan Bureau of Statistics.
During the last meeting on this issue, the power ministry had proposed that Chinese power generation machinery should be shown as part of FDI, said the sources. This will help increase the current low total FDI volume of only $1 billion to over $3 billion.
The sources said a form would be given to Chinese operators of the power plants to declare the categories of their imported equipments, which the central bank would subsequently reflect in its accounts as part of FDI.
The sources said that in order to address this issue, the government might have to change certain accounting definitions to declare the Chinese money as investment. But they said that still there will be certain projects funded by China that cannot be declared as Chinese foreign direct investment. The projects where locals have majority shares cannot be treated as FDI, like Engro’s projects in Thar. The $1.6 billion Chinese loan for Orange Line project cannot be treated as FDI, said the sources.
We have reviewed the SBP methodology and there is no error in it, said BoI Chairman Dr Miftah Ismail. He said Chinese FDI would significantly increase this year due to progress on CPEC projects, insisting that it was just an accounting issue.
Whether Chinese money is a loan or equity, this will have no implications for Pakistan’s foreign currency reserves, said a finance ministry official. He said in case of equity, the dollars will be provided for repatriation of profits and in case of loans, the greenback will be given for payments of interest and principal amount.
Published in The Express Tribune, January 10th, 2017.
