Pakistan's fast growing economy has made it darling for foreign investment : Chinese Media
BEIJING (China) (APP): China should work closely with Pakistan to make sure that the projects it has invested in can generate tangible growth in Pakistan's real economy, help the country properly manage its deficit level and put it on a sustainable growth path.
While Pakistan's fast growing economy has made it a darling for foreign investment, the surge in the country's fiscal deficit and public debts has become a source of concern, said a report published in the Chinese newspaper "Global Times".
Given the massive investment that China has made in the country as part of the China-Pakistan Economic Corridor (CPEC), China has an interest to ensure that the fiscal deficit in Pakistan does not convert into a financial crisis.
There is broad consensus that the deficit ratio should not exceed 5 percent of GDP for developing countries otherwise it could lead to a sharp rise in the debt level and put pressure on the country's currency to depreciate.
More importantly, a majority of the projects China financed in Pakistan are part of the $51 billion CPEC, a flagship project of China's One Belt, One Road initiative, which aligns the political, economic and strategic interests of both China and Pakistan. China cannot afford for these projects to fail financially.
China needs to develop a plan to help Pakistan properly manage its deficit. To do that, China and Pakistan should effectively implement the CPEC project, make it more inclusive and prevent inefficiency and corruption from undermining the project.
Pakistan should also seize the opportunity to expand its economic base and boost the real economy in order to achieve long-term debt sustainability.
China may need to diversify its ways of financing the CPEC projects. Currently, many projects are financed by Chinese government concessional loans. Such a lending model is likely to drive up the debt level of the recipient country and toss it into a vicious cycle of inflation and currency devaluation.
After all, economic and fiscal sustainability cannot be achieved by relying on concessional loans and aid. That requires China and Pakistan to develop a marked-based model to finance these projects and improve loan efficiency.
The country is in urgent need to boost its exports to reduce its trade deficits and develop manufacturing to attract foreign investments.
To be fair, given a GDP growth of almost 5 percent, there is still great potential in Pakistan. Financial magazine Barron's Asia called for investors to forget India and instead profit from the "quiet rise" of Pakistan along with Sri Lanka and Bangladesh.
Fitch Ratings recently put Pakistan's long term default ratings at stable outlooks. It is possible for Pakistan to avoid a major debt crisis but it needs to work hard to improve its investment environment, launch fiscal reforms and curb corruptions without impeding economic growth in order to bring the economy on a sustainable path.