CPEC-related ventures: government must reassess implications of FTA with China: SBP

The State Bank of Pakistan (SBP) has suggested that Pakistan must reconsider the implications of Free Trade Agreement (FTA) with China in the light of developments under China Pakistan Economic Corridor (CPEC). According to State Bank of Pakistan''s first quarter (July-Sep) of FY18 report "The State of Economy Pakistan", historically, FTA has benefited China more than it has Pakistan, putting a strain on the already skewed trade balance between the two economies.
It is therefore necessary that Pakistan gains supportive concessions in tariff from China of an equivalent magnitude as those enjoyed by the ASEAN economies in order to engage on a relatively equal footing, it added. The report said that CPEC provides the industrial sector of Pakistan with an opportunity to modernize and become more efficient and competitive and the various energy projects, coupled with improvements in infrastructure and road networks, would help address some of the key constraints to growth.
More importantly, the development of Special Economic Zones (SEZs) would enable industries to smoothen supply chains, enhance collaboration and innovation capabilities, and help reap significant economies of scale.
However, this process will take time to materialize, and the nature of its trajectory would depend, at least in the short to medium term, on two main factors: (1) how the industrial transformation currently under way in China creates potential opportunities for Pakistan; and (2) how prepared Pakistan''s economy is to take advantage of this opportunity.
The report said that after experiencing rapid economic growth over the last three decades, China has been moving towards a new phase of development. The overall policy direction for this transformation stems from the 13th five-year plan (2016-2020), which was adopted by the Chinese government in March 2016.
The plan acts as a guiding principle to all ministries, industries and local governments in formulating their policy goals and development initiatives to complement this new growth paradigm.
"Pakistan not only has an edge over possible competitors when it comes to attracting such technology transfers due to geographical proximity and a policy of strategic alliance, but with CPEC an actualizing step towards the One Belt One Road initiative, it also shows closer compatibility with China''s new growth model," the report said.
Furthermore, the ongoing construction of numerous coal-based power plants throughout Pakistan to ensure consistent electricity provision and the establishment of special task forces to protect CPEC-related ventures are reducing the major binding constraints to growth and FDI inflows.
However, the SBP has pointed out few hindrances in maximize returns from these opportunities.
According to report to reduce the resultant frictional and structural costs of employment, several vocational trainings focusing on a common set of essential skills are required. Furthermore, with domestic labor force inexperienced and its knowledge base low, the economy would have to adjust to allow a transitional period where workers from China arrive to work and train their counterparts in Pakistan.
However, the contractual nature of this employment must eventually ensure the transfer of skills to the latter. In addition, industries that are being "phased out" of China may trigger a prolonged inflow of associated workers, necessitating a preemptive assessment of such a development.
SBP also urged for co-ordination between federation and provinces and said that efforts are also needed to align the objectives of federal and provincial government bodies in order to ensure a consistent and comprehensive support policy.
Investment policy is now a provincial matter after the 18th Amendment, whereas the federal government is leading all industrial initiatives under the CPEC. Inclusive proceedings such as the Joint Coordination Committee (JCC) meeting in Beijing (which was attended by representatives from all four provinces alongside federal officials) are encouraging, and similar efforts are required concerning the operational activities of the projects on a consistent basis.
A strong coordination is needed between provinces and the federal government for the success of SEZs. It is important to provide complementary services such as legal, hospitality, consultancy, accountancy and health on a large scale to support various core activities of the SEZs.
For market structure, SBP said that government must strive to ensure that the entrants help spur a competitive environment and not instead become part of the cartelization that is being observed in varying degrees in segments such as cement and auto manufacturing. Incentive based policies are needed to steer the industry''s focus towards the latter.
Discussing the liberalization policies SBP said that the tariff structure of the economy would need an overhaul to benefit fully from the opportunities provided by CPEC. Tariff liberalization has not only been slow in Pakistan when compared with regional countries, but has also been applied disproportionately and in a non-uniform manner, it added.
Finished products are granted more protection than semi-finished and basic commodities, while major industries such as textiles and automobiles enjoy high protection rates. This has resulted in an industrial structure that promotes anti-export bias and ineffectiveness, the report pointed out.
Pakistan would have to focus on developing a roadmap that is less intrusive (shielding) and more facilitative. Export oriented sectors would need to be liberalized so as to welcome foreign participation and encourage innovation and quality enhancement, especially with respect to the potential Special Economic Zones (SEZs), the SBP suggested.
For trade with China, SBP said that Pakistan must also reassess the implications of its Free Trade Agreement (FTA) with China in the light of developments under CPEC. Historically, it has benefited China more than it has Pakistan, putting a strain on the already skewed trade balance between the two economies. It is therefore necessary that Pakistan gains supportive concessions in tariff from China of an equivalent magnitude as those enjoyed by the ASEAN economies in order to engage on a relatively equal footing.
Furthermore, the small-scale segment of Pakistan economy has suffered because of cheap inflow of Chinese products. High inflows of Chinese consumer durable commodities, and non-availability of their local substitutes, present indications that local SMEs are losing ground in the domestic market, the report said. Along the same lines, it is crucial to ensure that Chinese involvement in the industrial sector results in benefits for local players as well, SBP suggested.
Lastly, SBP mentioned that the issue of water availability is to be addressed head on in order to inhibit the adverse impacts of climate change. Demand-pull factors such as increased industrial activity, more coal-based power projects, coupled with a rise in population and urbanization efforts associated with CPEC, would add significant pressures on the already vulnerable supply of water. For instance, it is feared that the water availability in Pakistan in per capita terms would pass the threshold of "absolute water scarcity" by 2025. Avenues such as recycling and waste disposal need to be utilized in this regard.