Will Pakistan forever be indebted to China for CPEC?

Published: October 29, 2016
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Pakistan’s Prime Minister Nawaz Sharif shakes hands with China’s President Xi Jinping. PHOTO: REUTERS

Loans are no fun, nor is $51.5 billion coming under the cover of China–Pakistan Economic Corridor (CPEC). It is easy to find yourself in debt, but it is hard to get out of it. This leads to the question, how will Pakistan get out of Chinese loans?

CPEC has financial arrangements on South-South Cooperation model which don’t just depend on giving aid like the North-South Cooperation. Under this Cooperation, China has made use of four major tactics: investment, aid/grants, joint ventures and equity ratio. And when BOT (build-operate-transfer) is not possible, the next best alternative is opting for soft loans. These loans are comprised of three categories: preferential buyer’s credit, concessional loans and interest free loans.

Loans are not given to the government of Pakistan, so, by no means do they burden Pakistan’s economy. The loans are being given to the companies that are involved in CPEC related projects. For example, if a company wants to undertake a project, it has to take loan from China’s Bank. How does that burden Pakistan’s economy when the country has nothing to pay back?

There is no need to worry about repayment obligations either. Here is why:

Firstly, all energy projects are investments which are based on Independent Power Producer (IPP) mode. They are required to have some equity ratio. The equity ratio, basically, is a debt ratio that is meant to access a company’s leverage, a figure calculated by dividing the company’s total liabilities by its stockholders’ equity. Some projects are directly invested in by the Commercial Bank of China and Import-Export Bank of China, whereas others are joint ventures like the Port Qasim power plant, with an approximate investment of $2.085 billion. The equity ratio of this project is 25%, while the rest has to be arranged by the sponsors through debt financing from the Import-Export Bank of China (China EXIM Bank). Some are financed by the International Finance Corporation (IFC) of the World Bank Group and The Silk Road Fund such as Karot hydropower station. So, the financial arrangements of CPEC’s energy projects do not burden the government of Pakistan, but the companies involved in it.

Secondly, these are not only loans that the IMF has been giving us, but a mega-investment under the guise of loans meant to ensure the smooth functioning of CPEC projects – it’s a somewhat cautious investment. Pakistan has $65 billion in debt.

What have we been utilising this huge amount of debt for?

To my readers’ surprise, we have been utilising it for meeting day-to-day expenses and paying consultants, hence it adds little to the benefits of Pakistan. On the contrary, CPEC, which is not a complete debt based project, adds a lot in the long-term value. It means huge benefits in terms of port access, transit corridor, trade hub, Foreign Direct Investment (FDI), and internal development.

Let’s get back to the past for a while. A few years ago, Pakistan was declared a ‘failed state’. No country was willing to invest in Pakistan. Investors, if there were any, used to sit in Dubai to negotiate. American Stock Index Provider, Morgan Stanley Capital International (MSCI), categorised it as a frontier market, which was an indicator of the poor state of Pakistan’s economic affairs. But, with China’s investment, Pakistan’s economic prospects are becoming brighter. MSCI has included it amongst the 10 most emerging economies of the world. It also listed the KSE-100 share index as the world’s fifth best market. Another American international ratings agency, Atlantic Media Company (AMC), has ranked Pakistan as a comparatively stronger economy of South Asia which is bound to flourish in the coming years. AMC believes that the investment in infrastructure, coupled with the relative political stability, has accelerated the country’s GDP.

So, what are investors looking for in an emerging economy like Pakistan?

The companies that invest in emerging markets, in fact, look for increasing their profits and dividends rapidly. Arthur Kwong, the Hong-Kong based head of Asia-Pacific equities at BNP Paribas Investment Partners that oversees around €552 billion ($619 billion), has answered that,

“Basically people are looking for alternatives, finding markets that are less correlated to the US interest rate-cycle and the China macro-slowdown. Pakistan, no doubt, is one of the outstanding spots.”

In that regard, a reference is being made to the recent IMF report on the monetary issues of CPEC. If you read the language of the report, it is very careful and defensive. Even more, it endorses the fact that CPEC is good, but there is no guarantee. Pakistan’s industrial sector needs to be competitive enough lest its imports outweigh its exports. The issue of current account deficit is on the list, but it shouldn’t be blown out of proportion. No country has, so far, been bankrupted by an FDI. And no country has been bankrupted by a current account deficit either.

There are many concerns over CPEC. The Pakistani industry should equally benefit from the project and there must be transparency regarding CPEC related projects. There are no two ways about it. Are we expecting CPEC to be a zero-risk economic package? Has there ever been such an economic package? Even the Marshall Plan wasn’t altruistic in nature. There are no economic projects that involve zero-risks. There is no free lunch either. Pakistan needs to strike a smart bargain and initiate long-term institutional reforms and internal development packages, which will take decades to bring fruits.

In academia, think-tanks and policy circles, these issues have been taken under consideration. There must be assessments, recommendations, positive criticism and drafting a roadmap for the way ahead. But we must be realistic and stop looking into CPEC in terms of absolute gains. If we think so, we are clearly mistaken.

Ghazanfar Ali Garewal

Ghazanfar Ali Garewal

Ghazanfar Ali Garewal is Lecturer in International Relations department NUML Islamabad and Coordinator of the department. He has been writing on Politics, Social Issues and Education for an English newspaper, Pakistan Observer.

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Sami Shahid

    Why is this Pak media trying to confuse the nation ? Pak Media what do you want ? Chinese are just investing in our country so that we can get jobs ! They will invest and earn the profit !Recommend

  • G. Din

    “… how will Pakistan get out of Chinese loans?”
    Do what the Sri Lankans did? Lease the entire port to the Chinese on a perpetual basis.Recommend

  • Rohan

    That’s what happens when you allow only ideological projects and not evaluate them from a financial and technological perspective.Recommend

  • disqus_MKeynes

    100% agree.
    But as you say- “but when the governance is right and economy is progressing”, that is the million dollar question of which the most likely answer is ‘No’ simply because Pakistan has never had any track record in the past.Recommend

  • disqus_MKeynes

    Spot on !Recommend

  • Hari Om

    CPEC = Colonizing Pakistan to Enrich ChinaRecommend

  • Irfan Grewal

    V NiceRecommend

  • Razwan Grewal
  • Asmara Ali

    Excellent piece of writing….
    Recommend

  • disqus_MKeynes

    you have to look at all sides.Recommend

  • Syed Bushra

    Because ExpressNews isn’t exactly Pakistani Media. Its an American mouthpiece sponsored by New York Time.

    Dawn is the real Pakistani news outlet.Recommend

  • Sami Shahid

    All Pakistan need is to increase its income and CPEC will enable Pakistan to increase its income with the help of Foreign investment , electricity , and road connectivity. CPEC will enable PAKISTAN to pay back loans much more easily.Recommend

  • anurag

    It is interesting that China is taking the bet even as Guinea Pig with 51 $ Billion investment…As the author rightly said, this is not a North South Corporation model but South South–Every dollar of investment has to be paid back , it looks some third of 51$ billion has to be paid back by Govt, and the rest (power and steel) is owed by companies…So there has to be strong visibility of ROI by these companies , the previous one had seen none in a war rid country, where Govt credibility is so low, the chances of default is so high for Pakis which is already under 70$ bilion debt…China can as well invest in Nigeria, Somalia–there are reserves available over there as well, but the cost of ROI is trmendously high..Same goes with Pakistan which is worlds most dangerous country to live in , the militants blow up Peahwar school, every week a dozen shiaites are blown up in Mosques, Bolotchs kidnapped, minorities slaughtered, women raped, Mohazir suppressed—With all these, what are the ROI for any company to invest…The whole IT revolution took place in India last decade, none took place in Pakistan which has similar English speaking and demographic devidends, it simply did not happen because Pakistan remains world’s most dangerous place …Recommend

  • rehaan

    Sami, did you forget that Pakistan has taken one Sri Lankan Aircraft for lease?Recommend