Will Pakistan forever be indebted to China for CPEC?

Published: October 29, 2016

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.

  • shaan

    Loans are no fun, if you have to repay with interest.
    But million dollar question is if Pakistan proposes to convert this 51 b usd into gift money for strategic importance, how all weather friend can say no?Recommend

  • Raj – USA

    Pakistan has provided sovereign guarantees to China guaranteeing China a minimum return of 18.5% for 45 years on its investments in CPEC projects. ET has mentioned this in many of its reports. No one in Pakistan has ever disputed this too, nor can any do so. China will not allow it because it will be repudiation of signed agreement between China and Pakistan. When Pakistan has provided sovereign guarantees, it becomes an obligation for the State/Government. Every author who has written in favor of CPEC has avoided to make any reference to the guaranteed minimum returns that Pakistan has assured China on its investments for CPEC projects.Recommend

  • Asif

    CPEC is in early stage and its difficult to see all the potential benefit as of now, but its better than nothing. Huge debt accumulation is the risk, but when the governance is right and economy is progressing, debt doesn’t bother much.Recommend

  • viv

    Yes this is fact, Soon pakistanis will understand thisRecommend

  • Wajahat Shafi

    is NOT road only ,it consist of continuous laying of FIBRE OPTICS,
    under ground transmission of ELECTRIC wires, Fast track railway line,Oil
    and GAS Pipe lines,nearby the Road, so thats uninterrupted ,fast supply
    of energy goes to china, in KPK route and western route ,there is no such things only road is being built.
    iqbal in interview to Dunya reporter Wajahat S.Khan clealry told we do
    not have oil well to build same line on western route too like estern
    this punjani led central govt have Money for
    Kalabagh dam, but NO money for Basha dam, Dasu dam, they have huge money
    to build Coal power plant which produced expensive energy but no money
    for Dam in KPK.
    Plz hihlight in newspaper y Mian nawaz sharif cannot make BASHA DAM as a part of CPEC?Recommend

  • 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

  • Rahul

    Well it took me some time to digest what I read after knowing this was coming from a professor teaching in Islamabad. Lets take one at a time.

    a) The author says that because the loans are taken by companies in Pakistan and not by the Pakistan government, so we basically don’t need to bother about the payment. It doesn’t put any burden in Debt to Gdp ratio, which has already crossed comfort level. This assumption is completely wrong. No bank and I repeat no bank any where in world will give you loan without any guarantee, in case of International loans its sovereign guarantee. That means if company is not able to pay back, those company would be sold or declare insolvent, in any of the case Pakistan govt. has to intervene either by buying those companies or ending its operations and paying its remaining loan amount. And to pay such big loans you need big profit = costly goods sold to people and further reducing there purchasing power. And as the author mentioned till now there loans are only used in revenue expenditure and nothing substantial has came up.

    Pakistan to pay back those loans will need to take more loans(means simply kicking the ball further) or increase there exports. The main problem with increasing there export is to make it competitive .. Taxes, surcharges(like additional security for CPEC) and interest on previous loans is going to make this project very very costly thereby forcing all export oriented industries to be extremely efficient which Industries in Pakistan are not or increasing there cost = difficult to compete in international market. There is no easy way out. And at max Pakistan exports are raw material and low capital and skill goods like Textile which faces competition in International market from India, Vietnam, Bangladesh, Laos. All much more stable and far more competitive.

    b ) Coming to point where our author said no country has gone bankrupt by FDI or fiscal deficit. I can only say Sir you are horribly wrong. Let me remind you an incident called Asian tiger crisis of 90’s, countries like South Korea, Malaysia, Indonesia almost went bankrupt because of huge amount of capital outflow .. how they survived ?? High Forex reserve, low Non performing assets (bank dues) and low inflation allowed govt. to support. Pakistan have a luxury of none your inflation is 10%, Forex reserve is only 15 billion. Which means any outflow of this sort will make you bankrupt because Pakistan is depended on oil and other resource import .

    c ) Coming to Fiscal deficit.. Sir you might have heard of Greece. and the default it made on its payment last year, there was Troika and ECB to support them you have none. In case of high Fiscal deficit countries rating are reduced to junk and then further loans are extremely difficult + investment stops = Economic death. Moreover too much currency going out reduces its value forcing it to depreciate = which make debt servicing even difficult = Bankruptcy + imports at devalued currency + Inflation = further erosion of currency and the cycle goes on.

    Off course there is no free lunch but a lunch at this price and with this calculation means food poisoning. God bless Pakistan.Recommend

  • Biased

    Excellent analysis by G.A.G. ! As a corollary, Lagarde would not be in Pakistan if something “big” was not happening in Pakistan.Recommend

  • Yahya Khan

    China is trying to financially boost up its southern provinces by CPEC but Pak govt is playing politics on CPEC…by showing that it was their idea….moreover, the smaller provinces will benefit the least (at the moment it seems like that) from CPEC and that can cost us heavily towards the national integrity…..Recommend

  • Hozur

    Sounds rosy and great.Hope it lives up to the expectations of the author and not burden Pakistan.All one can say at this point nothing is free in this world..so figure out how this ‘loan’ gets paid.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….

  • Biased

    Not sure why when it is Pakistan, Indians become the best Economic Advisors Pakistan never needed nor desired. The inflation is at 4.5% and the Forex are at 24+ Billions USD and rising. Out of the 51 Billion committed thus far, a third is outright grant- that is FREE money which furthers Chinese interests. But bypassing the thickets of stupidity-do you think China is investing in Pakistan to make money by squeezing Pakistanis? Pakistan is now the Marquee in the Belt and Road and China is lavishing all this to show other small nations what China can do to transform their fortunes. Stay tuned, China might just double her commitment to Pakistan if it furthers Chinese global interests.

    China has not recalled 20 Billion from Venezuela even after a technical default. China has just promised Bangladesh $40 Billion loans, and bought the Lankan port. It is lending $40 Billion to build a new Cairo… What do you say to that?Recommend

  • Rahul

    You are saying that Pakistan is China’s guinea pig where the Chinese do experiments to show the world that the new policy is successful .. Shame on you .. before any thing else grow some ball and be a man. Instead of living on alms of other nation try to get something of your own. Chinese didn’t took out there 20 Billions from Venezuela because that country have oil to offer in return.. what does Pakistan have ?? They promised Bangladesh a “Loan” of 24 billion which they will take back with interest. They haven’t brought Lankan port In fact the new Lankan govt. put sanctions on its further development and there port in Bangladesh is taken over by India. Again check it there is no grant in cpec. Check international media and see what the world sees not what your puppet media tries to show. Any way here is one of your own pakistani claiming Pakistan has to mortgage its buildings and roads to get more loans. https://www.youtube.com/watch?v=1WCdLs6yds4Recommend

  • disqus_MKeynes

    you have to look at all sides.Recommend

  • disqus_MKeynes

    China wants to dispose of USD (buying gold, land, foreign influence, loans, grants) and increase its influence in the world to march quickly on its path to becoming an fully established world power. Other countries will repay the loans at some point but Pakistan has fundamental weaknesses that other countries don’t have to the extent Pakistan has. China has tried to advise Pakistan on some sensitive issues but Pakistan had had a fixeted mind. When you do an analysis, besides considering opportunities you should also consider threats and weaknesses. There is opportunity for China, no doubt. Whether there is opportunity for Pakistan will depend upon Pakistan;s level of preparedness to leverage that opportunity and its capabilities, which unfortunately do not exist and take at least a decade or two to build. Besides building a Plan B for alternate pathways to ocean and middle east (it already will get Plan C via Bay of Bengal, it just needs to mend relations with India), China’s opportunity is in getting a flat land route to Middle East and Europe for future army deployments and additionally getting markets and infrastructure project deals.
    You think China does not know that Pakistan will not be able to pay its loans back. China has another oppor here to subjugate Pakistan and forcibly change all its foreign and domestic policies in a way no other nation has been able to make Pakistan do. China can afford to leave this CPEC infrastructure built and lie unused for years but it will immediately begin acting against all Islamic forces of which Pakistan is the source.Recommend

  • Rafey

    Lol endians are behaving like they are world’s best advisors and when did you become so sympathetic for Pakistan?
    We don’t need your useless advices. The conclusion is that CPEC is our future and no matter what it is be very beneficial for us. Endia is feeling pain cox it is losing its thekydari lol. So stfu and stop telling us what to do. Revolution has just begin just stay back and watch. Finally a suggestion stop poking your nose in the matters of othersRecommend

  • Biased

    Thanks for the unnecessarily dilatory reply. Again, your economic advice is better served elsewhere. Now you switch from purely economic argument to channeling China’s inner mind. If Indians were good at understanding Chinese mind then India would not be in a disadvantaged position as it is now- beginning with 1962. You really do not know what China advises Pakistan do you? Are you the fly on that wall?
    Then you go on to blithely stating Pakistan has ‘fundamental’ weaknesses that ‘other’ countries do not have…..REALLY? So globally speaking Pakistan has some inherent ‘weakness’ that no other country has???? Boy talk about Bias…….
    But please do explain what that unique weakness is, and how it prevents Pakistan from benefiting from this infrastructure development?
    Finally, you may have heard the Chinese have gone ahead and operationalized the project. All Pakistan has to do to benefit is keep the port activity apace. ALL operational ports generate huge economic activities, that is a given. Look up any port used by China and you will be swamped by studies done to measure economic activities.Recommend

  • Biased

    Shame on you sir just for being nasty. And if you quantify “alms” or more appropriately Aid, India has received just as much Aid from the World as have smaller South Asian nations and still India is a third world country.
    Where did I say guinea pig? It is the inner echo chamber of your biased mind inflicted with the malady. Read my post again. China is investing in One Belt One Road infrastructure for her own strategic interests and is using CPEC as a showpiece for what it can do for small nations in Middle east, Africa and Asia. A successful execution of this project will make China look good- but it will also be good for Pakistan. That is called a mutually beneficial relationship- India can learn a lot from such relationships. Do some research, a majority of the investments are grants. And stop yakking “your this and that” and do not presume to know my nationality-you come off as more ignorant and biased that you actually are…
    Now go harangue Bangladeshis for their interest bearing loans.Recommend

  • disqus_MKeynes

    How is it mutually beneficial when in the absence of Pakistani industry and governance, all Pakistan can leverage is secondary and tertiary benefits, NOT PRIMARY benefits that map to Pakistan most important goals and objectives EXCEPT that its military and civilian rulers who don’t give a whoot about masses get assured Chinese protection for their continued rules and protection against western powers.Recommend

  • disqus_MKeynes

    We understand China, given we have been in its neighborhood and watched its behavior for decades and interacted with it too. India is in a bad shape since 1962 because India is a imperfect democracy that it is unsuited for given the unpreparedness of its population in selecting the right governments. If our governance was right, we would have controlled our population growth, and not missed the manufacturing bus that went to China instead. Regarding Pakistan, I am comparing it with 50-60% of the countries that have some semblance of governance not the outright fruit-basket cases. With that comparison, Pakistan stands as a pariah country of zero worth and high maint. cost factor to be met by other countries. It is known as the only country that is the fountain head of terrorism and where Islamic forces find convenient shelter, a country that has no identity, no governance, in serious international debt, where no one wants to live and a country that is ready to sell its remaining sovereignty in the form of land. In contrast, even Saudi Arabia has better governance, although not humanitarian, it has huge sovereignty since it is not in debt and it is a place where people want to travel, buy homes and live.

    Chinese operationalising the CPEC project is in namesake, to get things started, to serve as a motivator for lazy Pakistanis who were developing self-doubt about the project.Recommend

  • Biased

    Step out of your echo chamber. I guess IMF, WB, Renaissance Capital, Standar & Poor, MSCI (formerly Morgan Stanley) and others have not had the pleasure of your vast knowledge on Pakistan. You date yourself with all the claptrap. And this negates your original point of view that China is taking advantage of Pakistan. How would China bankrupt Pakistan if it is a “basket” case where the sovereignty is not HUGE………

    Again, with China investing in Pakistan, this narrative that you hold dear is being eroded. Get over it and worry more about slowing pace of industrial output in India.Recommend

  • Biased

    Just because you have not been invited to the Chinese Grand Plan for CPEC does not mean in any way that it is just what you think it is. Get it?

    Read my post again if you are having trouble understanding my plain English. What “PRIMARY” benefits are not “mapping” to Pakistan?

    Infrastructure accelerates ease of doing business and accrues to GDP. Pakistan’s GDP is estimated to reach 5-6 %. But the news is that you have finally accepted there are benefits for Pakistan in this….but of course you label them as secondary. Well from a failed/bankrupt scenario to secondary is progress……for you.

    You kinda lost me around EXCEPT…….
    If you understood a fraction of Keynesian Ec we would not be here.Recommend

  • Ahsan

    I think we’re pretty much screwed, no doubt it will increase gdp but there will be a time we will have to default, after all this loan alone is one fifth of our gdp and only growing….there is no way we will be able to pay it off..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

  • Sami Shahid

    Rahul, look who’s talking ! An Indian ! You hire an Air craft carrier from Russia on rent and show your eyes to several South Asian countries ! MAN, DONT YOU INDIANS HAVE A LITTLE SHAME ?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

  • lavanyag

    It’s a repeat of Sri Lankan Hambantota scam. Please read many articles on the topic and the future of this loan project as it follows sri lankan port story

    Clashes erupt as Sri Lankans protest China port deal

  • rehaan

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

  • Sami Shahid

    There is a difference between a civilian passenger aircraft and a military aircraft carrier.Recommend

  • ThePrincekhan999

    CPEC=Nervous Breakdown of IndiaRecommend

  • ThePrincekhan999

    Come Out Of Your Bollywood Induced Delusions And Get Some Fresh AIr In The Real WorldRecommend

  • ThePrincekhan999

    It Is Amazing How Indian Trolls Have Become Economic Experts Eversince CPEC Started

    The Entertainment Never StopsRecommend

  • Vishwas Patil

    True Pakistani brain! Sri Lankan port along with one airport and a few other assets are now under Chinese control for 99 years as Sri Lanka cannot service the loan. Venezuela is forced to sell oil to China under the debt terms – the debt that has no chance of ending. Read the news. Venezuela riots for food! You think China is so benevolent that it will ‘gift’ billions? Brainy people like you must be really loved by Chineses.Recommend

  • Vishwas Patil

    Wonder whether you are on pay role of China? No Pakistani nationalist will ever support CPEC.Recommend

  • Vishwas Patil

    Simple economic decision – Russia needed cash, India could easily afford – saved time and money. Now home made aircraft carrier and a host of submarines are ready. Indians really do not consider Pakistan for any comparison.Recommend

  • Vishwas Patil

    Its China. Not America or any European country. Why bother about strategic support of Pakistan when Chinese army itself is in Pakistan? God save Pakistan from people like you!Recommend