Daily Times

CPEC – China Pakistan Economic Corridor – is not a creeping colonisation as many experts portray it as such. Yet, CPEC manages to be a buzz word – with a negative connotation – for the international media and power corridors. It once again, has come under verbal attack, apparently after recent tug of trade-war between China and United States. The United States calls Belt and Road initiative (BRI) a “Made in China, Made for China” initiative while India says this initiative does not respect sovereignty. Deep down the issue is of power struggle, instigated by US and India against China and Pakistan. The strategy to malign the project has become a part of the greater hybrid warfare for the dominance in global affairs

It is being depicted these days that Beijing is laying a debt-trap for Islamabad which will make the latter dependent on the former, in the long run. On the contrary, China has decided to extend further trade concessions, under the CPEC, in order to help Pakistan, solve its current economic woes. These concessions are to be announced when Prime Minister Imran Khan visits China and attends the International Import Expo in Shanghai early in November. In this regard, the Chinese officials are trying to tailor CPEC as a ‘demand-driven program’ for Pakistan.

The gigantic project is being seen as a window of opportunity in Pakistan, but it appears that some players are not comfortable with it, and thus, conspiracies and misguided assumptions have been fabricated; one of these is ‘crafted mythologies’ about CPEC related loans and repayments. The scoffers of CPEC are apparently off the beam when they pronounce that Pakistan would not be able to service the loans and repatriate the profits to Chinese investors, due to diminishing exports, exhausting foreign exchange reserves, a stumbling current account and a heavy debt servicing burden. According to some analysts, the country would be trapped in grim debt obligations to China which would allow the latter to take the steering wheel of the Pakistan’s assets including the deep sea port of Gwadar – CPEC’s pivot. An unbiased and dispassionate analysis would divulge that the nitty-gritty of all these glitches lies in the energy crisis that led the Pakistani exports to recede gradually over time. Export orders could not be fulfilled as the exporters did not have dependable and consistent power and gas supply. Had the energy limitation been absent, a growth rate of 10 percent per annum would have been attained in the (last) few years’ time (as evident by the fact that during 2002-08 export growth rate was 14 percent and in the first eight months of fiscal year 2018 exports have risen by 11 percent as the load shedding has eased). In that connection, Pakistan’s exports would have touched USD 36 billion in fiscal year 2018. Current account deficit with the unchanged volume of imports would have been lower by at least USD 15 billion and the need for short term commercial borrowing would not have arisen. Foreign exchange reserves would have been more than adequate and debt servicing burden manageable. Debt and debt servicing projections prepared by the Ministry of Finance for the period 2018/19 to 2022/23 show declining debt servicing ratios. The added burden of CPEC debt as well as repatriation of profits on investment would not create any pressure and is quite manageable. International Monetary Fund (IMF) has estimated that at its peak the repayments on both debt and investment account would be between USD 2.5 to 3 billion annually. This amount can be easily absorbed by increased exports, savings in imports of fuel, transit fees etc. Thus, the fear of debt entrapment does not stand the test of empirical validity.

It is being depicted these days that Beijing is laying a debt-trap for Islamabad which will make the latter dependent on the former, in the long run. On the contrary, China has decided to extend further trade concessions, under the CPEC, in order to help Pakistan

Recently, the Planning Commission of Pakistan also issued a statement, in a bid to clarify the concerns of the global community about Pakistan’s CPEC-related Chinese debts and probably also to address the uncertainty factor currently prevailing in the economy. According to the statement, outflows under China-Pakistan Economic Corridor (CPEC) will begin in 2021 and peak over the next three years without creating a debt trap. Starting in 2021, these repayments will about USD 300-400 million annually and gradually peak to about USD 3.5 billion by fiscal year 2024-25, before tapering off with total repayments to be completed in 25 years.

The statement categorically dismissed the fears surrounding the loans and repayments, stating that “CPEC is not imposing any immediate burden with respect to loans repayment and energy sector outflows”, arguing all debt related outflows will be outweighed by the resultant benefits of the investments to the Pakistan economy. The Commission reiterated that CPEC was a “flagship” project and most active project of Belt and Road Initiative where 22 projects worth a total of USD 28 billion have been actualized over the past four years. “The project could not be compared with Chinese overseas investment in Sri Lanka or Malaysia as frameworks and financial modes of CPEC are altogether different in nature” the statement continued.

CPEC finances are divided in government to government loans, investment and grants. Infrastructure sector is being developed through interest free or government concessional loans. Gwadar Port is grant-based investment which means the Government of Pakistan does not have to pay back the invested amount for the development of the port. Energy projects are being executed under Independent Power Producers (IPPs); mode and finances are mainly taken by the private companies from China Development Bank and China Exim Bank against their own balance sheets, therefore, any debt would be borne by the Chinese investors instead of any obligation on part of the Pakistani government. Pakistan has, thus, opted for Chinese investment under CPEC due to the favorable financing arrangements.

The crux is that Pakistan’s balance of payments cannot possibly to come under significant strain due to CPEC. What probably is to put the external account under strain is the quantum of non-CPEC related energy imports. However, the worst mistake is to view CPEC as some sort of self-paying enterprise, as if the investments will somehow generate the required level of economic activity to automatically fulfill all the repayment obligations that they bring. This is a mistake because it cannot be taken for granted. Point to ponder is that structural reforms are direly needed to complement CPEC in providing conducive environment for economic activity.

In the meantime, it is encouraging to note that China and Pakistan have reiterated their commitment to ensure implementation of CPEC projects and a probable expansion of the endeavor entailing focus on social sectors as per the desire of the PTI’s new government.

The writer Saddam Hussein is a Research Fellow at Center for Research and Security Studies (CRSS) Islamabad. He tweets @saddampide

Published in Daily Times, October 28^th 2018.