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Will new Asian infrastructure bank put $1b into Pakistan?

Projects may be in Karachi, Rawalpindi, and Lahore

SAMAA | - Posted: Jan 31, 2019 | Last Updated: 3 years ago
SAMAA |
Posted: Jan 31, 2019 | Last Updated: 3 years ago

Projects may be in Karachi, Rawalpindi, and Lahore

The Asian Infrastructure Investment Bank is set to announce today whether it will be “investing” one billion dollars in Pakistan for transport, urban, rural water and energy projects.

A press conference is scheduled for Thursday afternoon in Islamabad. The new projects under consideration are in Karachi, Rawalpindi, and Lahore.
The bank has already unveiled its thinking in an Asian infrastructure report for 2019 titled ‘Bridging Borders: Infrastructure to Connect Asia and Beyond’. Its representatives are expected to provide more information on Pakistan at the press conference. The AIIB is a relatively new player as it was launched in 2016. It is a multilateral development bank like the Asian Development Bank and World Bank.

The AIIB says it has already “invested” $400 million in two projects in Pakistan. Government data on how much has been given in foreign economic assistance for 2018-19 shows that the AIIB has given Pakistan loans for these projects so far:
Motorway-M4 Shorkot-Khanewal Section (NHA)
Rehabilitation of Existing Carriageway DI Khan-Saraigumbel Section (NHA)
Rehabilitation of Existing Carriageway Rajanpur-DG Khan Section (NHA)
Rehabilitation of Existing Carriageway Sehwan-Ratodero (NHA)
Tarbela 5th Extension HPP (1410) MW) Swabi (Wapda)

Focus and motivations

The AIIB’s report on infrastructure issued on January 29 talks about how Asia is “held back from realizing its full potential by huge constraints in crucial infrastructure caused by a lack of investment.” The AIIB was created to address this infrastructure gap, it says. Since it started work, it has provided financing in loans and other ways close to $7.5 billion (end-2018), and hopes to approve projects worth another $4 billion in 2019.

The AIIB’s regional members range from Afghanistan and Pakistan to Russia. China has put in the most money, $29,780m, and has the biggest say in what it does with 26% voting shares. Compare this to the WB which has perhaps more American decision-making powers. The WB is four financing institutions (the IDA, MIGA, IFC and IBRD) and their member country breakdowns show that the US has the highest percent of voting powers in all four. In IDA, which gives Pakistan money, for example, the US has the highest number of votes at 10% from all the countries.
In the ADB, on the other hand there are two major players: the US and Japan with neck-in-neck voting powers of exactly 12.784% each.

Financing

The AIIB infrastructure report stresses that the bank feels that more private sector financing is required. “[I]n Asia, the need for infrastructure makes it imperative to find a sustainable source of funding beyond government,” the report says. The AIIB takes pains to mention that this idea is not new and that the ADB and WB emphasize private participation in infrastructure development. It will be interesting to see how the AIIB plans to engage with Pakistan. When we get foreign economic help, it can come in the shape of loans or grants which we don’t have to pay back.

The ADB, for example, is engaging with Pakistan on 81 projects of which only six are grants and the rest loans. The World Bank is engaged on 53 projects which are all loans except for 3 grants.

Outlook on Pakistan
The Asian infrastructure report has a chapter on how the bank sees Pakistan going forward, but much of this information will perhaps not be new to our economic managers. The bank says that our currency is forecast to depreciate 15%. This means that a weaker rupee will make infrastructure projects and paying for them more vulnerable.

“In Pakistan, the infrastructure construction activity outlook is neutral but with high uncertainty,” the AIIB report says. “Pakistan has approached IMF for financial assistance though it is unclear if Pakistan will eventually adopt the IMF program, which will likely include some austerity measures.” A weaker rupee and inflation will increase the cost of construction. although the increase may be limited as prices have increased significantly earlier in 2018.

The AIIB notes that as input prices have already risen this year, further increases  may be more limited. “Road construction would be less affected by currency uncertainty as the  raw materials for highway projects are mainly sourced domestically within Pakistan; only machinery needs to be imported.”

What is clear because of CPEC’s $62b is that Pakistan thinks infrastructure development will remain a key economic driver. The money is mostly going into the power sector projects along the corridor, with some allocation for roads and ports. In April 2018, the government proposed spending 62% of its public sector development budget on infrastructure (mostly roads).

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