Today all three national parties - Pakistan Muslim League-Nawaz (PML-N), Pakistan Peoples’ Party (PPP) and Pakistan Tehreek-e-Insaf (PTI) – are fully supportive of projects under China Pakistan Economic Corridor (CPEC). The reason is as valid today as in 2015: a dearth of foreign direct investment (FDI) inflows, a desired form of foreign exchange inflows.
Pakistan has never been an attractive destination for foreign direct investment inflows though by anteing up the discount rate it has been the recipient of 4 to 5 billion US dollar portfolio investment that has unceremoniously left the country overnight at the slightest possibility of uncertainty, political or flawed economic policies, or at the prospect of better earnings elsewhere in the world.
On average FDI was 156.77 million dollars between 1997 to 2022 and registered 542.5 million dollars July-November 2021-22, plummeting even further to 397.2 million dollars in the comparable period of the current year.
In 2013 China’s One Belt One Road (OBOR) strategy sought to rekindle the Silk Road of centuries past, a centre piece of President Xi’s foreign policy initiative that also provided Chinese companies with purchase orders at a time when global recession was curtailing demand and, in some instances, provided jobs to Chinese workers. OBOR was a win-win for all participating countries by providing a unique opportunity to all those that signed off on the initiative (149 countries as of August 2022) to develop their inadequate physical infrastructure facilities.
China Pakistan Economic Corridor (CPEC), a major component of OBOR, was all the more eagerly sought by the then PML-N administration with a plummeting rupee against all major currencies, a dearth of foreign exchange reserves (Saudis extended a grant of 1.5 billion dollars in early 2014), and a severe energy crisis resulting in load-shedding of several hours every day. In addition, CPEC was the only available FDI inflow at the time, an inflow that did not require to be repaid.
The two major national parties at the time hailed CPEC – the ruling PML-N and the PPP. The PTI expressed serious reservations on project selection at the time, a reservation that was unwisely expressed by Razzak Dawood in the last quarter of 2018 when he was the Commerce Minister in the Khan administration – a view that he as well as other senior leadership of the party backtracked from within months.
President Xi Jinping visited Pakistan from 20 to 21 April 2015 and signed off on 46 billion US dollar investment for 51 projects including construction of roads, rails and power plants, an amount that was upgraded to 65 billion dollars by 2022. The bulk of Chinese investment was for the power sector on a commercial basis, envisaging Chinese companies seeking loans from Chinese banks and insisting on the same contractual conditions as those enjoyed by existing Independent Power Producers (IPPs) criticized by many politicians as well as power sector experts for unfairly benefitting the IPPs on two major counts – capacity payments irrespective of how much electricity is actually bought and payment in dollars.
The Khan administration successfully renegotiated with IPPs set up under previous policies assisted by intelligence agencies however such an outcome has not been evident with projects set up under CPEC. It is critical for the coalition government to explore this possibility for as noted in the 2019 World Economic Forum report “executives ranked energy price shock as the highest risk for doing business in Pakistan.”
Counterpart funds and the 100 percent repatriation of profits and dividends allowed by Pakistan may account for the discrepancy in the CPEC inflows against actual FDI data released by the government of Pakistan. Board of Investment (BoI) data suggests that total FDI from 2015 till 2022 was 21.38 billion dollars (the bulk from China) though this amount does not include outflows. Finance Division data estimates inflows for the period to a little over 15 billion dollars – a far cry from investment of 65 billion dollars under CPEC.
As per Forbes by the end of 2020 those with high debt to China were all involved in OBOR with Pakistan’s external debt to China rising to 77.3 billion dollars, Angola 36.3 billion dollars, Sri Lanka 6.8 billion dollars. This high degree of debt to China has however not led to the actualization of predictions by Western doomsayers.
Former US Ambassador Alice Wells remarked on 21 November 2019 at the Wilson Center Washington DC that “CPEC is the Chinese communist party’s largest OBOR Initiative, reflecting over 60 billion dollars in regionally pledged commitment for projects in Pakistan;” and cited three major areas of concern: (i) “According to Pakistani government statistics, for each megawatt generated by a completed CPEC thermal energy project, developers spent an estimated 1.5 million.
In comparison, the cost per megawatt of building non-CPEC thermal plants is half of that, or 750 million;” (ii) “what are the burdens that have fallen on the new government to manage, now with an estimated $15 billion in debt to the Chinese government and another $6.7 billion in Chinese commercial debt? Because it’s clear, or it needs to be clear, that CPEC is not about aid. This is almost always the form of loans or other forms of financing, often non-concessional, with sovereign guarantees, or guaranteed profits for Chinese state-owned enterprises that are repatriated to China. Even if loan payments are deferred, they’re going to hang over Pakistan’s economic development potential, hamstringing Prime Minister Khan’s reform agenda;” and (iii) “lack of transparency can increase CPEC costs and foster corruption resulting in an even heavier debt burden for Pakistan.”
US Institute for Peace’s article dated 26 may 2021 by Uzair Younus notes: “China’s ability to exert influence on Pakistan’s economy has grown substantially in recent years, mainly due to the fact that Beijing is now Islamabad’s largest creditor. According to documents released by Pakistan’s finance ministry, Pakistan’s total public and publicly guaranteed external debt stood at $44.35 billion on 2013 just 9.3 percent of which was owed to China.
BY April 2021 this external debt had ballooned to 90.12 billion with Pakistan owing 27.4 percent – 24.7 billion dollars – of its total debt to China, according to the IMF. Nevertheless, China, to date, has refrained from directly influencing Pakistan’s economic policies.
In fact, as the ongoing IMF loan programme has indicated, the IMF, World Bank and ADB continue to be the key players when it comes to determining the fiscal policies that are adopted in Islamabad.” One may well add that the three multilaterals are also key players in determining all other economic policies including monetary policy, exchange policy, the role of the SBP in the economy and last but not least the need to focus subsidies on those who need it rather than as has been evident since October 2022 on the elite.
To conclude, it is the inexplicable adherence to its own flawed policies by successive Pakistani administrations (partly due to appointing the same individual as finance minister by multiple administrations who, in turn, supports the same flawed policies), and refusal to implement structural reforms while preferring to pass on sectoral inefficiencies on the hapless consumers that are responsible for the current appalling state of the economy and the simmering public discontent.
Copyright Business Recorder, 2023
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