The China-Pakistan Economic Corridor (CPEC) has become the mother of all foreign investments in Pakistan. And there is truth to this. What started as a $46 billion set of projects has now increased to $51 billion as China has recently also committed to fund Karachi-Lahore rail line under CPEC. This price tag alone places it on par with all foreign investments to Pakistan put together.
Every talk show on Pakistan’s economy has this segment about CPEC. Every seminar or conference on any issue of Pakistani economy that any cabinet minister turns up at, there are talks of CPEC. As a nation, we are investing way too much in this silk handshake. But then, it makes sense. What else do we have at the moment other than CPEC? It is true what they all say: CPEC is a game-changer for the country.
Still, I believe our obsession is going way too far here. What really convinced me towards this realisation was that Pakistan has witnessed net outflow of foreign investment worth $130.5 million during FY16 (July-September) from the United States of America (USA). Such outflows of different scales were also observed from Turkey, South Africa, Saudi Arabia, Qatar, Philippines, Luxembourg, and Germany. Interestingly, some of these countries have always been among major investing countries to Pakistan. Chinese net FDI, on the contrary, has witnessed almost a 100 percent surge in FY16. Do we really need to worry about this trend? Yes, we do.
It is the matter of simple principle. We are not putting our eggs in many baskets. Rather, it is just one and that is a Chinese basket. To me, as much as it can strengthen Pakistan, it can make us increasingly vulnerable as well.
There are precedents to this. China has made massive investments in Latin American economies. Just like CPEC they were heavy on the infrastructure side. As much as these countries imported merchandise from China, they also imported aftershocks of a Chinese slowdown. This was followed by inflation increasing by 700 percent in Venezuela. Stock markets of Brazil, Chile, and Peru tumbled as negative sentiments took hold. Exports also skidded in Latin American economies. Similarly, any future slowdown in Chinese economy can have negative bearings on our economy as well given our increasing future connectivity with China through CPEC. In the same vein, our foreign direct investment flow will also become susceptible to Chinese money.
But these can be offset by boom years of Chinese growth. So where can major risks come from that can have widespread and sustained implication for Pakistan? To me, the biggest of them all can come from energy projects.
Most of the CPEC energy projects are coal-based, which are being built under build-own-transfer principle. Any Chinese company building a power plant will own it once it is completed, and after securing an agreed-upon profit margin will transfer the power plant to the government of Pakistan. So what can the government do with such a large scale of power infrastructures? It sure can’t run them all by itself. One option can be to contract them out to foreign investors. But given that world economies are moving away from fossil-fuels based energy — particularly coal-based — to renewables, government may find it hard to rope in many foreign investors.
This shift towards renewable source of energy is based on efforts to contain global warming through curbing carbon dioxide emissions. Energy produced through fossil fuels like coal, oil, and gas are high in carbon content, while energy produced through renewable sources like solar, wind, and nuclear are virtually carbon-free. Based on this premise, not many international banks are going to finance a purchase of a coal-based power plant.
The result? These power plants can become a fiscal liability. A liability worth billions of dollars. Ideally, in this scenario, Pakistan should look to hedge against such potential risks by investing its time in other opportunities as well. Pakistan should look beyond CPEC.
One way to accomplish this is to ensure that policy incentives shouldn’t just be a Chinese prerogative only; these incentives should be accorded across the board to all foreign investors. It is like following the famous dictum in finance of putting ones’ eggs in many baskets, and not just one. Pakistan should also put its eggs in many baskets wrapped in different colours not just red.
The writer is a research associate at the Policy Research Institute of Market Economy