With the surge of borrowings from China under the China-Pakistan Economic Corridor (CPEC), the State Bank of Pakistan (SBP) has admitted that a large chunk of power machinery from China is being imported without using Pakistani banking channel for financing.
In its quarterly report of the second quarter of (FY) 2016-17, SBP has claimed that the difference in its import data and that of the Pakistan Bureau of Statistics (PBS), has widened to $ 3.0 billion in July-December of FY 2017.
According to the report, a large share of this discrepancy can be explained by the surge in import of power generation machinery, which is being recorded by customs but is not fully visible in import financing data available with SBP. The gap in import data for power generation equipment also widened dramatically to $ 1.1 billion in the first half year of FY2017, from the previous 10-year’s average of just $ 193 million.
Since most of the power sector activity in the country is taking place under the CPEC umbrella, it is highly probable that the widening gap between the two imports data sets is linked with the CPEC accord signed in April 2014. Typically, banks report import financing data to 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 commercial banks to SBP.
“Hence, it appears that the bulk of these machinery imports is being financed from outside the Pakistani banking channel,” SBP claims, adding, “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 $ 3.0 billion in Jul-Dec FY17, as per PBS data, without a commensurate increase in financing flows). This difference indicates that capital equipment imports into the country, Foreign Direct Investment (FDI) and loans from China are not being fully captured in the balance of payment (BoP) data”.
To deal with the situation of the widening gap between the two data sets, SBP claims, it has enhanced reporting requirements for commercial banks regarding foreign currency accounts maintained with them by corporate entities operating in the country. It says through Exchange Policy Department (EPD) Circular Letter No. 14, issued on December 7, 2016, SBP has directed commercial banks to clearly specify whether each project/company maintaining a special Foreign Currency Account (FCY) account with them, is part of the CPEC or not. Moreover, banks have also been instructed to clearly specify the nature of each foreign exchange (FX) transaction conducted in these accounts (like import payments, loan disbursements and repayments, repatriation of dividends, disinvestment of foreign investment, and issuance of bonus shares, etc.). This will help clarify whether the financing of CPEC-related capital imports is coming in the form of loans, and equity investment.
SBP claims that due to a variety of factors (like imports on deferred payments, freight and insurance, etc), there is a natural discrepancy between the two datasets.
According to Dr Waqar Ahmad, Deputy Executive Director, SDPI, there should be no difficulty in reconciling the import datasets of SBP and PBS, as the same practice is normal in other countries of the world. In reply to a query, he said Pakistani banks are ignored for import or export of machinery when a firm makes a business deal with a foreign company while using its same company registered in the other country. “This way, the firms usually avoid taxes and duties in Pakistan,” he said.
According to reliable sources, the machineries were now largely being imported by either Chinese firms, registered both in China and Pakistan, or any Pakistani company having registration in Dubai to avoid the duty and taxes. Hence, the country ultimately was losing huge revenue in terms of taxes and duties, they claimed.
