The
reported news that the incoming Imran Khan government of Pakistan the
IMF for a bailout package of USD 12 billion highlights the new economic reality
against some participating countries of the Belt and Road Initiative (BRI) and the need
to formulate new rules for the program.
Pakistan
is the most active participant under the BRI. The BRI projects of the country under the
banner of the China-Pakistan Economic
Corridor is estimated to cost approximately USD 62 billion and will run into the 3030s. Press reports indicate that the Chinese have done so
so far more than USD 10 billion spent in the initial phase of the multi-year year
program.
The Pakistani economy moved to a balance of payments (BOP)
crisis in 2018. The State Bank of Pakistan reported that its liquid foreign
exchange rate reserves decreased from USD 14 billion at the start of 2018 to less than
USD 10 billion at the end of June. The reserve figure is barely sufficient to import goods for two months. This is short
of the generally accepted minimum forex reserves
that is that the reserves should be sufficient to cover at least three
months of import.
The Chinese commercial banks had a bridge financing of
several billions of dollars to support the currency position of Pakistan
in the last 12 months, and the Islamic Development Bank also promised a USD 4.5
billion triennial oil financing facility recently to the country
to several billions of dollars in recent accusations from Saudi Arabia. However, Pakistan & # 39; s
external position remains precarious, and
the market expects to stabilize a new IMF program
the BOP position. The press had reported that the US is asking Pakistan to publish the conditions on its BRI
projects and to include them in any restructuring conditions imposed by
the IMF. The American move is an attempt to cast shadows on the viability of the
BRI.
Pakistan
dilemma has brought to light several new economic realities asking for review
some economic assumptions behind the BRI
the fifth year since the launch.
First, the development of infrastructure helps a development
the country to tackle bottlenecks that hamper their economic growth, but it
issue of earning sufficient foreign exchange to maintain the associated service
infrastructure loans
not easy. The case of Pakistan
emphasizes this problem. The economic of the country
the growth had improved from 4 percent in fiscal 2014 to more than 5.6 percent in fiscal terms
2018 since joining the BRI, but it slipped
in a BOP crisis. Domestic growth often means increasing imports, but
Translating domestic growth into export competitiveness is often not easy. The
threatening slowdown in world trade as a result of the threat of trade war means the ability of many developing countries
the generation of export earnings is becoming increasingly stupid, even though they are domestic
economic performance may have improved.
Second,
China had a current account deficit of USD 28.3 billion in the first half of 2004
2018; it is the first current account deficit in twenty years when the country
began to report its GDP on a quarterly basis
base. Most economists are looking for the current account position of the country
to deteriorate with the surplus
less than 1 percent of GDP this year and beyond
change in a negative area by 2020-2021. The ability of the country to
provide long-term loans for infrastructure
via the China Development Bank (CDB) or the Export-Import
Bank (Eximbank) is hit hard by the turnaround of the current account. The trade tensions are likely to continue
pressure on China's current account in the coming years. China did not expect the deterioration of the position on the current account when setting up the BRI in 2013.
China needs to develop
his expertise in the field of cooperation with multilateral agencies, particularly in the field of
potential BOP problems of BRI countries and are willing to do it alone if it
can not agree with these agencies.
Thirdly,
the current restructuring of the Chinese financial sector will affect the
financing mechanism of CDB and Eximbank, the two primary financing vehicles below
the BRI. For their financing of domestic
infrastructure, these two institutions have raised funds by selling bonds with a maturity of ten years
local banks and a thin spread added for
fulfill the role of credit officer. Their
bonds enjoy high credit ratings and the credit spread of the Chinese government
bonding is usually very small. The spread
has been growing lately, and the cost of
the financing now fluctuates around 4 percent. CDB and Eximbank then borrow the money
out at 4.5 percent to 5.5 percent. The two banks
do not disclose their financing mechanism for BRI projects, but the market
believes it is similar to local loans
with the central bank that provides additional currency swap facilities to protect
CDB and Eximbank against currency risk. The loan for CDB's domestic infrastructure runs
usually less than ten years, while that for the BRI often runs
twenty years.
The
the world passes a new rate increase cycle after settling
Quantitative Easing (QE). The mismatch in borrowing ten-year loans and the use of
the proceeds to lend for more than ten years
infrastructure loans create a duration mismatch risk. Also depending on the structure of the loans, the raising of funds tied
at commercial rates and use the funds to borrow loans for long-term infrastructure loans creates interest rate risk for both
borrower or lender.
This one
new economic reality of the BOP problems of the recipient countries of the BRI project and the duration / cost of the financing
mismatch deserves a revision of the rules for the BRI and calls for the improvement of national rules
ability to deal with the new situation.
There
are two critical skills required in
deal with the BOP challenge. The first is the ability to develop a healthy debt
sustainability analysis and monitoring procedures to ensure that the BRI
the internal and external financial conditions of recipient countries remain healthy in the light of the multi-annual nature of BRI
loans. Second is the ability to work out a restructuring
Plan with the host countries in the undesirable event of an unexpected BOP crisis, with spending discipline being reduced to a minimum
conditionality and disruption of the population and the economy.
In
In April 2018, the Chinese government set up the new China IMF capacity
Development Center (CICDC) with the express intention to develop the ability to address implementation challenges
on issues arising from the BRI.
The IMF
is the recognized leader in dealing with BOP crises. It has developed a framework for monitoring the countries of being
debt sustainability and leading the debt restructuring of his ailing
members. The new economic reality means that China needs to accelerate the learning process to acquire the skills described above.
However, it should be noted that the objectives of the IMF can be
do not match the intentions of the lenders as the Greek rescue operation demonstrated in the years 2010.
In the Greek rescue plan, the triumvirate of the European Commission, the European
Central Bank and the IMF formed the rescue team with the two Europeans
institutions that provide the most rescue funds while the IMF
technical expertise. The European partners
often exceeded the recommendations of the IMF because they had the broader objectives
preservation of the euro zone and European unity, while the IMF was more focused on
recovery of Greece's external payment position and the tendency to impose stricter conditions.
China
deals with similar problems when it wants to cooperate with the IMF in rural areas
restructuring. The IMF mandate means that it is
more focused on the financial aspects of
BOP crises, while China will have broader considerations on the long term
bilateral relations. In addition to learning the essential skills in dealing with BOP problems, China needs to develop its own problems
expertise in the field of cooperation with multilateral agencies, especially in terms of potential
BOP problems of BRI countries and willing to do it alone if it can not come
conditions with these agencies.
On
the issue of the financing model for BRI
projects with a rising environmental environment, China should look at the financing model of CDB and Eximbank to
ensure the long-term viability of the model when financing BRI projects. Based on
the publicly available record, the assets of CDB at the end of 2017 were 15.96
trillion yuan and it had an outstanding foreign currency loan of about USD
300 billion, while that of Eximbank
3.33 trillion yuan at the end of 2016 with foreign currency loans accounting for 30 percent of lending
book. The two banks are the largest financial institutions of their kind
in the world. The reform of the financial sector is a good time to look at
in their positions in the financial system and address possible weaknesses.
About the author
Henry Hing Lee Chan
Henry Chan is a deputy research fellow at the East Asia Institute, National University of Singapore. His research area is development economics and geo-politics in Asia.
Source link