The State Bank of Pakistan’s admission, that it is unaware of the way imports of power generation machinery for the China-Pakistan Economic Corridor power projects are being financed, has triggered concerns about its possible implications for the country’s external sector as the current account deficit widens on the back of a rising import bill and falling exports and remittances.

In its State of the Economy report for the second quarter of the ongoing financial year to December, the central bank says the gap in import datasets maintained by the SBP and the Pakistan Bureau of Statistics (PBS) has nearly doubled to $3bn from the 10-year average difference of $1.6bn for the first half of any given fiscal year.

The report says the gap between the datasets of the SBP and the PBS has consistently been rising since 2015, the year Pakistan signed, with China, the $46bn power and infrastructure projects under the Corridor initiative.

The central bank usually doesn’t talk publicly about this discrepancy because of the different sources from which the two entities get their data: The bureau receives import data from the Customs after physical arrival of the imported goods and the SBP get its numbers from the banks when the payment is made against the letter of credit (L/C) for the same imports.

“Due to a variety of factors (like imports on deferred payments, freight and insurance, etc), there is a natural discrepancy between the two datasets. Deferred payments, for instance, result in a time lag between the recording of imports by (the) Customs and their reporting to (the) SBP.

“Besides, there are certain items, like gold and vehicles (under the baggage scheme) etc, for which the payment burden doesn’t fall on the interbank market. Usually, for any period, import data recorded by the PBS tends to be higher than that available with the SBP,” the report explained. Then why has the central bank chosen to report this ‘discrepancy’ in one of its reports now?

A senior Lahore-based banker thought that the SBP was compelled to “make the issue public because it is being kept completely in the dark (by the government) about the mode of financing for the CPEC projects. Moreover, the central bank admits in the report that it doesn’t even know if the CPEC-related capital imports are being financed with loans or through equity investments.”

The bank has sought to explain this discrepancy by attributing it to a surge in import of power generation machinery for the CPEC power projects being financed by Chinese companies, which is recorded by the Customs but is not fully visible in the import financing data available with the SBP.

The report says the gap in import data for power generation equipment has widened dramatically to $1.1bn in the first half of the present year from the previous 10-year average of just $193m.

“Since most power sector activity in the country is taking place under the CPEC, it is highly probable that the widening gap between the two import datasets is linked with the CPEC accord. Typically, banks report import financing data to (the) SBP after importers make payments against L/Cs.

“However, that appears not to be the case with imports of power generation machinery over the past two and a half years: there has been a relatively minor increase in these imports based on L/C-level data provided by the banks to the SBP. Hence, it appears the bulk of these machinery imports are being financed from outside the Pakistani banking channel.

“This is also supported by the absence of any outsized pressure in the interbank (which would have been a near certainty if the import bill had grown by a further $3bn as per the PBS data without a commensurate increase in financing flows).” The discrepancy between the two sets of data, according to Dr Ishrat Hussain, former SBP governor, means that Chinese companies building power projects under the Corridor initiative are borrowing money from their own banks and bringing the capital equipment to Pakistan.

“Therefore, financing — both investments and loans from China — for these projects isn’t being captured in the balance of payment (BoP) data. The government should however ask Chinese companies to provide details of financing for the imports that these investments (and loans) are reflected in the SBP’s BoP data.”

Once this happens, according to the central bank, the figures for both imports and loans/FDI (foreign direct investment) in the SBP’s BoP data may be revised significantly upwards in the future. “While this will inflate the trade and current account deficits due to recording higher imports, it will be netted out through an equal increase in loans and/or FDI in the financial account — leaving zero net impact on the country’s reserves position for that period.”

Dr Hussain also sought to dispel concerns that the country may have to pay at a later stage for power equipment imports not reflected in the SBP data at present.

“Power projects under the CPEC are being set up as IPPs (independent power producers). The government’s agreement with investors allows them a guaranteed return of 17pc — and more than 25pc in case of coal-based plants — and all kinds of payments are built in their tariffs.

“Moreover, every payment that goes out of Pakistan is authorised only if inflows (loans or investment) pass through the SCRA account of the bank.”

Former finance minister Dr Hafiz A. Pasha said the actual reflection of the power generation machinery in the SBP’s BoP would massively expand the country’s current account deficit, which has already widened to $5.47bn or 2.6pc of GDP in the first eight months of the ongoing year from $2.48bn or 1.3pc of GDP a year earlier.

“The IMF now says it could widen to 2.9pc of GDP. But I think it will be bigger than that at the end of the year,” he added.

Published in Dawn, Economic & Business, April 10th, 2017