For CPEC to take-off, Pak will need to lift exports, boost productivity and give large spur to private enterprise

To ensure the commercial efficacy and efficiency of the China Pakistan Economic Corridor (CPEC), Pakistan would need to lift its exports, boost its productivity, and give a large spur to private enterprise.

An article appearing in the Dawn says, "In reality, to properly afford the CPEC projects that are being undertaken, the country (Pakistan) will need to lift its exports, boost its productivity, and give a large spur to private enterprise to get the wheels of domestic investment moving again."

It further states that while the government has already announced that loans are being taken under CPEC projects and will be repaid at two per cent interest spread over 20 to 25 years, what is not being revealed is the fact that "more than two-thirds of the money committed for the 'early harvest' projects is actually on commercial terms."

The article states, "Of the total USD 28 billion that has or has to come under the 'early harvest' projects, a full USD 19 billion is in the form of foreign direct investment on commercial terms and even the agreement signed in November 2013 between the governments of China and Pakistan that created this raft of investments mentions that these will follow "market principles".

"In those project documents that are publicly available, the debt services terms are seven to eight percent, with many of them pegged to six-month Libor and include Sinosure, which is the fee for reinsurance of all loans that Chinese banks require all foreign borrowers to have.Then there is the equity portion. Most of the projects coming in as direct investment, have a debt-to-equity ratio of around 80:20, or in some cases 75:25. And in most cases, return on equity (ROE) is guaranteed at either 17 percent or 20 percent.

The question that therefore arises is that if USD19 billion is coming in as investment on commercial terms, and 80 percent of that is debt with the remaining as equity, what is the size of the outflow as debt service and return on equityan discern?

The article in the Dawn reveals that hypothetically speaking if debt service outflows are estimated to be about USD one billion and the return on equity is estimated to be USD 646 million and return on equity is kept at 17 percent. And a sum of USD 1.9 billion is kept as repayment of principal, the annual net outflow would be to the tune of USD 3.546 billion once commercial operations of the CPEC begin.

In fiscal 2016, Pakistan's total interest outflows (on government borrowing alone) was USD 1.1billion, and therefore, according to the article in the Dawn, it is difficult to visualize how CPEC investments will be booked "as technically they will not be on government account and each project will earn its own money and service its own obligations, whether to its creditors or its sponsors, from its own cash flow."

Government debt figures are direct loans, whereas CPEC-related investment would be an investment against a loan.

The article warns that both will place a burden on foreign exchange reserves, which will need to increase correspondingly if proper benefit from CPEC projects is to be extracted.

The International Monetary Fund (IMF) and the State Bank of Pakistan (SBP) are both warning that for the country to carry its external debt burden, exports need to increase rapidly and that there is also a need to bridge payment gaps when it comes to taking short-term loans from foreign banks.