Pakistan will start the payback of the CPEC loan after 2020 and it will be a significant amount.

CPEC: a game changer but for whom?

Nearly all will say CPEC is a game-changer, but some will ask for whom? Others will flag that CPEC is the largest foreign investment into Pakistan, but many will question whether the country will be able to bear the debt burden resulting from it. The ongoing debate on financing the burden of CPEC needs to be analyzed based on facts rather than opinions.

Ties between Pakistan and China haven’t just stood the test of time but have also been proverbial in many ways. Yet, it is imprudent to say that it emanates from altruism or the milk of human kindness. History bears testimony to the stark reality that in international relations self-interest has always remained supreme for survival in the international community. Therefore, instead of gloating with joy, we should seriously ponder and professionally appraise the imperatives of this investment, particularly because now a long-term plan for CPEC is also on the anvil.

The total committed amount under CPEC of $50 billion is divided into two broad categories: $35 billion is allocated for energy projects while $15 billion is for infrastructure. The entire portfolio is to be completed by 2030. Energy projects are planned for completion by 2020, but given the usual bureaucratic delays, it won’t be before 2023 that all projects are fully operational. Infrastructure projects such as roads, highways, and port and airport development, amounting to $10 billion, can reasonably be expected to be concluded by 2025, while the remaining projects worth $5 billion would spill over into the 2025-30 period.

Foreign investors’ financing comes under foreign direct investment; they are guaranteed a 17 percent rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost). The loans would be taken by Chinese companies, mainly from the China Development Bank and China Exim Bank, against their own balance sheets. They would service the debt from their own earnings without any obligation on the part of the Pakistani government.

Import of equipment and services from China for the projects would be shown under the current account, while the corresponding financing item would be FDI brought in by the Chinese under the capital and finance account. Therefore, as far as the balance of payments is concerned, there will not be any future liabilities for Pakistan.

Many experts consider CPEC as a complicated set of infrastructure investments, which will largely be paid by Pakistanis, in one form or the other, with cumulative interest rates going much higher than what is being projected. Serious scrutiny of the following is therefore in the national interest, lest we end up munching peanuts yet again:-

1. Real financial cost to Pakistan
2. Long-term social, economic and strategic implications

3. Expected benefits to each side

4. Utility of each project

Plans for a corridor from China to the Arabian Sea date back to the ’50s, but these took tangible shape in the last decade. Incidentally, I was posted as communications secretary at that time, which enabled me to see matters first-hand.

In early 2002, I led a delegation to Beijing to finalise the terms and conditions of the project. The contract was signed and sealed in a week. Upon my return, I was stunned to discover that even before the ink was dry on the contract, China Harbour Company had started working on the project. Every aspect of the project was meticulously planned and orchestrated by China, well in advance. It isn’t rocket science to conclude that for China it was an opportunity of the millennium. No wonder the port was completed ahead of schedule and strictly as per specifications.

If this was the mindset of young and educated Chinese surely the elders, who had dreamt for generations, must have been blown off their feet. We need to recognise that China has offered CPEC as a fulfillment of their lifelong dream and it is naïve for anyone to take credit for bringing this investment.

There are a few more hard facts to acknowledge and understand. The importance of CPEC to China can be gauged from the fact that it is included in their 13th five-year plan. The reasons are both financial and strategic as this will be a much shorter, safer and alternative route.

Analysts believe, strategically, CPEC is part of China’s vision to write the rules of the next era of globalisation. Furthermore, China imports 80 per cent of its energy needs through the Malacca straits and this route is also the main access to Europe, Africa and the Middle East. Recent muscle flexing by the US and India has sent jitters among Chinese quarters because they know that hostilities can paralyse their economy and the nightmare, known as “Malacca dilemma”, can become a reality. A less frequented sea route is through South China Sea but this is an unsafe and contentious route. As opposed to this, the Arabian Sea provides a vital and safe route for trade to the Pacific, Atlantic and the Gulf. Most importantly, from western China to Gwadar it is 3,000km and from the eastern ports it is 6,500km, while the sea route is 12,000km. Savings in time and money will be colossal besides safety of passage. Hence, for China this is a far greater game changer than for Pakistan.

Considering the importance of CPEC to China, it is crucial that every project they offer is secured keeping Pakistan first. The fate of Chinese investment in Sri Lanka and African countries can perhaps serve as a lesson.Mounting debt and deficits in Pakistan is raising the prospect that an abrupt rise in interest rates or tougher borrowing conditions might be damaging.

According to experts, Pakistan will start the payback of the CPEC loan after 2020 and it will be a significant amount. But no one really knows the details and the real financial implications. Hence, it is absolutely necessary for experts to carry out a professional financial analysis of the project to present the true picture, in order to safeguard the vital stakes of the country.

On leaving the ministry in 2005, my specific recommendation to the government was to lease the Port to China for operations, in order to gain maximum advantage. Why the then prime minister gave it to a company from Singapore is still a mystery. The port never took off and we lost valuable time. Hence, to recognise the real dynamics of the Gwadar Port, one must recognise its financial and strategic implications in the regional and global backdrop. Neither the US nor the Gulf countries would like to see this port operational. While the reasons are compellingly economic for the neighbouring ports, they are more strategic for the West. One only needs to see the geographical positioning of Gwadar to realise how seriously it will impinge upon the economic interests of the ports situated further up the Straits of Hormuz and what strategic advantage it will give to China.

We should recognise and capitalise on these fundamentals to bargain from a position of strength instead of ecstatically crowing over CPEC.This is the moment to safeguard our interests and one of the solutions is to associate as many bordering countries in the project as possible, especially Russia. This way we won’t be dependent on a single country and also improve our relations with our neighbours.

The current account deficit is expected to remain high in fiscal year 2018, projected at 4.2 percent of GDP, with rising imports, declining remittances, and stagnant exports. Imports are expected to continue to increase as growth spurs domestic demand that domestic production cannot meet. Financing Pakistan’s burgeoning trade deficit remains a key challenge as remittance inflows, however substantial, continue to fall. Worker remittances have shown some unexpected improvement, however, in the first 2 months of fiscal year 2018, increasing by 13.2 percent from the same period in fiscal year 2017.

If this rebound can be sustained for the rest of fiscal year 2018, it may ameliorate the projected deficit. The share of exports in GDP nearly halved from 13 percent in fiscal year 2006 to a dismal 7.1 percent in fiscal year 2017. Exports fell annually by 2.5 percent on average from fiscal year 2013 to fiscal year 2017 due to lack of competitiveness and bad conditions for modernizing investment, leaving persistently low value addition to fetch low unit prices.

In the near future, the government must carefully manage external debt, the balance of payments and their financing requirements, while instituting macroeconomic and structural reforms to support economic stability and expansion as well as to make Pakistan more competitive and fiscally sustainable. This has become increasingly important given the increasing government and CPEC-related repayment obligations.

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