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Pakistan’s expensive gamble

Senior economists in the country are now increasingly voicing their concern over the terms 
of financing from China, which is mostly shrouded in mystery

Gulf News

The China-Pakistan Economic Corridor (CPEC) launched formally during Chinese President Xi Jinping’s visit to Islamabad in 2015 symbolises the enduring China-Pakistan friendship. The implementation of the $54 billion (Dh198.61 billion) projects should in theory help boost Pakistan’s economic and social development. Considered as a part of China’s One Belt One Road vision, it is aimed to promote regional connectivity and infrastructure development. Underscoring its importance for China, it is now a part of its 13th five-year development plan.

Pakistan’s population is very unevenly spread amongst its provinces. Majority of Pakistanis live in Punjab — Prime Minister Nawaz Sharif’s home province. Balochistan, where the ‘crown jewel’ of the CPEC, Gwadar is located, comprises 43 per cent of land area, much of mineral resources, but with only 3 per cent of population. Smaller provinces accuse the government of disproportionately favouring Punjab.

The CPEC was expected to bring various units of Pakistan together in an integrated economic and communication framework but has instead fanned provincialism and discord, for now. To bring parties on board, the Chinese took the unusual step of holding the Joint Cooperation Council (JCC) — the highest decision-making body of CPEC — in Beijing during December 2016. Attended also by the five chief ministers of constituent units of Pakistan, the Beijing meeting calmed the parties, through evenly-distributed industrial estates and mass-transit systems.

However, misgivings remain.

Gwadar faces many hurdles before it can reach its potential. The city’s water-supply dam has dried up following three years of drought. The existing desalination plant does not work. There is no more water to provide. Unless Gwadar gets its full road and rail connectivity, the port cannot flourish. Gwadar itself is tied to the sense of alienation of many in Balochistan. They suspect that much of the CPEC benefits are going to outsiders. Unless most of the wealth Balochistan creates is invested back for the betterment of the indigenous people, they are likely to remain restive.

Senior economists in Pakistan are now increasingly voicing their concern over the terms of financing from China, which is mostly shrouded in mystery. Selectively obtained information adds to doubts. A recent report by Pakistan’s top commercial body expressed concern over the lopsided role allowed to Chinese investors and entrepreneurs in public sector services. For Pakistan’s troubled economy, with falling exports, home remittances and foreign direct investment, the Chinese seem to be on a buying and lending spree.

The State Bank of Pakistan, in a recent report, points to heavy borrowings from Chinese commercial banks at questionable rates to pay for the Chinese machinery imports. Loans to Pakistan from China during the first quarter this financial year have jumped to $979 million, compared to $138 million during the comparable period last year. What are the terms of these loans from China, even the governor of State Bank of Pakistan does not seem to know. Independent economists warn that Pakistan seriously risks another International Monetary Fund bailout once the outflows on loans and profits to China begin in earnest.

Though terrorism-related violence is significantly down through Pakistan Army’s operations, security of the CPEC-related projects and that of the Chinese personnel working on them remains a serious concern. A 15,000-strong force has been raised to provide protection to these facilities, adding to the overall project cost and fuelling differences over its funding.

Droves of Chinese are arriving in Pakistan as part of a workforce and for supervision of the Chinese-aided CPEC projects. The security issue apart, their deployment through extended periods will increase the labour costs compared to a situation where Pakistanis are employed on the project, in which case it would have cost a lot less.

The other question is: How efficient will these outsiders be?

Sceptics of Islamabad’s close financial embrace of Beijing warn of a similar situation between Sri Lanka and Pakistan. Both countries fighting insurgencies and terror with their weakening economies have turned to China seeking investments to turn things around. China has stepped in both cases while there is little information on the cost and nature of funding. As in the case of Sri Lanka, most of the proposed CPEC investment would flow back to China for material, equipment and manpower acquisition.

Sri Lanka, saddled with unpayable Chinese loans is now set to allow $1.4 billion debt for 80 per cent equity swap that will allow China a 99-year lease on the Hambantota port and 1,500 acres of adjacent land where the Chinese are expected to set up a ‘Special Economic Zone.’ In Gwadar, the Chinese have signed a 40-year lease on 2,300 acres of land to develop a ‘Special Economic Zone’ and an international airport. The similarities between the two are unmistakable. With State Bank of Pakistan confirming that Pakistan’s tax collection is unable to pay for debt servicing, economic planners need to ponder over the long term consequences for the country.

Despite these odds, there is confidence that China’s strategic interests and Pakistan Army’s commitment will see the project through. The challenge on payback will depend on how sincerely Pakistan’s civil machinery works. Wrong choices are too risky for Pakistan.

Sajjad Ashraf is an adjunct professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. He was a member of Pakistan’s Foreign Service from 1973-2008 and served as Pakistan’s consul general in Dubai during the mid-1990s.

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