CPEC turnaround: how realistic is goal?

President Xi Jinping of China in a congratulatory message to Prime Minister Shehbaz Sharif stressed that “China and Pakistan should continue their traditional friendship, strengthen exchanges and cooperation in all fields, jointly build an upgraded version of the China-Pakistan Economic Corridor (CPEC), continue to deepen the China-Pakistan all-weather strategic cooperative partnership and build a closer China-Pakistan community with a shared future in the new era to bring more benefits for the people of the two countries”.

Embedded in this customary message of greeting is the undeniable message of the President to get moving with the China Pakistan Economic Corridor (CPEC) and jointly build up an upgraded version of the CPEC and a close-knitted China-Pakistan community. The upgraded version is not defined but could well mean something novel over the prevailing model of the CPEC and more in favour of the people of the two countries.

Ahsan Iqbal, the federal planning minister for planning and development, took no time to respond and is reported to have stated: “Our coalition government has restored the confidence of China in the CPEC. We are ready to start five new corridors with China under the project. We will implement China’s offer with full determination.” The statement has not defined these five new corridors.

In the same breath, he stated that the Chinese investment of $25 billion was made possible in the first phase. “There is very little room in Pakistan’s economic situation. Our budget is running entirely on loans,” the minister said. He further remarked that over Rs7.5 trillion was needed to repay loans, adding that running expenses, salaries, pensions, and subsidies were in addition to this. “All these expenses are being met by taking more loans,” he said. Earlier, Prime Minister Shehbaz Sharif had made an identical point.

While there appears to be an enthusiasm at both ends to move on with the CPEC with a new vigour and vision, the realities on ground do not promise to turn this vision into a reality anytime in the near future. CPEC, so far, is all about development tagged to mega loans and largely commercial loans.

In FY2024, Pakistan faces an estimated debt maturity of USD 49.5 billion, with 30% as interest payments, excluding bilateral or IMF loans. The majority of debt accumulation has supported a consumption-driven and import-heavy economy, lacking investment in productive sectors or industry.

Pakistan’s cumulative public debt exposure to China is estimated at $67.2 billion for the period from 2000 to 2021. That surpasses the $46 billion recorded for the same period in the World Bank’s International Debt Statistics, based on voluntary disclosures from Pakistan.

A significant portion — $28.4 billion — of Pakistan’s loans from China was in the energy sector. Experts believe Islamabad actively sought Beijing’s support in the field, accumulating the largest amount of Chinese energy financing of any country. Most of which is in the power generation sector.

The random deployment of loans into the power generation was flawed in more than one way. The misconceived increase in power generation was not matched with the power evacuation capacity of the transmission and distribution network of the system nor with the economic and industrial growth pattern of the country with the result that there were delays in power evacuation and its non-utilisation by the consumers on account of low demand and unsustainable tariffs. Idle power plants do not generate revenue but accumulate debt, which over-extended period of time spins out of control.

The outstanding dues of power projects of the China-Pakistan Economic Corridor (CPEC) have alarmingly increased to a record Rs493 billion or $1.8 billion as of last month, showing an increase of over three-fourths in a span of just seven months. China is unhappy about this development.

The most vulnerable are the imported coal-fired power plants. The report showed that out of Rs493 billion, Pakistan owed Rs97 billion to the imported-coal fired Sahiwal power plant – the highest obligation to any Chinese energy project that also represents one-fifth of the Chinese outstanding energy dues.

Whereas, Rs82 billion is owed to the coal-fired Hub power project, Rs80 billion to the coal-fired Port Qasim power plant, and Rs79 billion to the Thar coal project. One can say that moving from imported fuel oil to imported coal has been unwise.

The Chinese government has multiple times raised this issue at all forums. It has come to the point that China linked the approval of a $600 million new foreign commercial loan with the prior settlement of the debt that Pakistan owes to the Chinese power plants.

China, in the past, had also raised the issue of Pakistan’s overall public debt un-sustainability and its implications for obtaining $6 billion to $7 billion new loans for the Mainline-I railways project of the CPEC.

The loan liabilities to Chinese lenders and outstanding payments liabilities to Chinese Independent Power Producers (IPPs) would not go unnoticed by the IMF while firming up the foreseeable Pakistan’s new agreement with the Fund.

It has shown serious concerns on the growing and unsustainable circular debt in the energy sector and the country’s energy and financial managers’ inability to come up with a realistic and sustainable solution.

The IMF did not approve the Rs1.27 trillion circular debt reduction plan recently submitted to it. The IMF objected to the government’s proposal on the grounds that it carried serious fiscal risks, as it also rejected the proposal of issuing Rs745 billion additional supplementary grant.

Under the prevailing constraints China may not be inclined to expose fresh funding towards energy or infrastructure projects, nor is Pakistan in a position to absorb new loans.

Notwithstanding the above facts, China’s engagement in Pakistan’s economic development and growth is the dire need of Pakistan in these times and perhaps the only hope to move the country out of its unprecedented economic and fiscal crisis.

Bilateral engagements have not been fruitful in either country’s interests. These arrangements have ended up in a status quo, fiscal and competence fiasco, non-functionality of assets invested into, lack of revenue generation and return on investment.

A different model, which is self-sustainable, generating its revenues, paying off loan liabilities and making profit, has to be worked out. It can only be a business-to-business model with the government moving out of the system with its role restricted to, at best, that of a facilitator at an arm’s length.

Delivering his maiden work report at the National People’s Congress, Chinese Premier Li Qiang has announced an ambitious 2024 economic growth target of five per cent, vowing a new leap forward through accelerated industry modernisation and “development of new quality productive forces”, which means a “systematic shift to high-end, smart and clean manufacturing industries” by diverting more resources for tech innovation as Beijing seeks to curb industrial overcapacity.

China is relocating its low end industry offshore. Its focus is on Vietnam, Myanmar, Cambodia, Indonesia, and Bangladesh. Pakistan is not there.

Development of Special Economic Zones all over Pakistan and its population with Chinese support is a part of the CPEC. However, in pursuit of non-revenue generating mega projects, Pakistan largely ignored development of economic zones.

This segment of industrial and business growth is far more beneficial for Pakistan in terms of revenue generation, tax enhancement, investment, employment and real term GDP growth. To once again kick-start the CPEC the starting point should be to get Pakistan included among the countries benefiting from relocation of the Chinese industry.

China’s technological growth in artificial intelligence, IT and unimaginable innovations in industry and science has taken the world by surprise. Pakistan’s industry, IT technology, etc., are looking towards the West. It’s about time our industry looked at China’s markets and technology transfer.

There is much for Pakistan’s businesses to gain from China. The approach so far is only under-leveraged. It’s the private sector’s call.

Copyright Business Recorder, 2024