China’s investments in CPEC is set to change the face of Pakistan in the times to come. However, the lack of transparency and accountability in execution of the projects has raised serious doubts in minds of several economists. Akbar Zaidi, a noted Pakistani economist, raised serious concerns about the viability of this economic corridor and its effect on Pakistan’s sovereignty, while delivering a talk on the subject in Kolkata. He compared the project with the British East India company and argued that China would make Pakistan its colony in the similar manner. 2. There are various fault lines in the conception of CPEC and the way it is being executed.
In this chapter we will discuss each of the problem areas and the likely effect of these problems on the Pakistan economy. The impact of some of these problems on the social setup in Pakistan would also be discussed. Some of the problem areas in relation to CPEC are listed below: -(a) How much debt Pakistan is likely to repay? Will the high debt owed to Chinese companies result in a debt trap for Pakistan like what Sri Lanka is in now?(b) The CPEC route passes through sensitive areas which are prone to terrorist attacks and it would be extremely difficult to increase exports through this corridor.(c) Will the projects being executed under CPEC stimulate Pakistan economy and increase local employment in view of only Chinese companies being awarded contracts?(d) Due to already existing Free Trade Agreement (FTA) between China and Pakistan and the improved access between these countries what will happen to the already skewed import-export balance?(e) With Pakistan offering long term tax exemptions to Chinese companies, will Pakistan earn enough out of the CPEC projects and SEZs?3. Pakistan’s Debt. The present condition of Pakistan economy is precarious.
The foreign reserves are hovering at dangerously low levels of about $ 8 bn and the country is likely to default on sovereign loans. Pakistan is likely to ask for an IMF bailout to avoid this situation. This would be the 12th IMF bailout funding to Pakistan since 1988. Before assessing the capability of Pakistan to repay its debt let us ascertain how much does Pakistan owe to the Chinese companies.(a) Two third of the total investment under CPEC is being done in the energy sector and it will be executed in the IPP mode as applied to all private power producers in Pakistan. Foreign investors’ financing comes under foreign direct investment; they are guaranteed a 17% rate of return in dollar terms on their equity. Taking a highly generous capital structure of 60:40 debt-to-equity ratio for energy projects, the total equity investment would be $14bn. The 17 % guaranteed return on these projects would entail annual payments of $2.
4bn from the current account.(c) Infrastructure loans amounting to $15bn will be financed through government-to-government. These loans would be concessional with 2 % interest to be repaid over a 20 to 25-year period. This amount’s debt servicing would be the Pakistan government’s obligation. Debt-servicing payments would rise by $910 million annually because of CPEC loans. Going by these calculations, we can assume that the additional burden on the external account should not exceed $3.5bn annually. 4.
The total external debt of Pakistan was $ 61bn in 2013, which has increased to $ 91bn in 2017 and is likely to increase to $ 103bn this year. The total external debt is 68% of the GDP. Along with a spiraling debt, the ability to repay debt is reducing in terms of the reduction in value of exports as also the loss of currency value. This situation is likely to result in Pakistan heading for a debt crisis like Sri Lanka and will be forced to give concessions to China, which may compromise its sovereignty.
5. Security concerns: CPEC. The CPEC route passes through Gilgit-Baltistan region which is part of Pakistan Occupied Kashmir and there are territorial disputes with India on the same.
India and Pakistan have been involved in four major conflicts on this issue in the past and any future conflict is likely to endanger the route in future. Also, the route in the final stages passes through Baluchistan. The province of Baluchistan has faced numerous uprisings in the past and the Baluchi nationalist fighters have carried out multiple attacks on the Chinese workers and damaged CPEC infrastructure. To provide security to the CPEC projects, Pakistan has raised a force of 15000 personnel.
The provisioning of this force is likely to result in additional cost to the Pakistani Exchequer. The insurance costs for transit on the CPEC route are likely to be high and result in higher cost to transporters.6. Stimulus to Pakistan Economy. The Chinese investments in CPEC infrastructure was supposed to stimulate the Pakistan economy.
However, the monopoly of the Chinese companies in bidding for the projects has resulted in only superficial foreign direct investments in CPEC. Most Chinese companies procure all material and machinery from China and even get workers from China. This has result in minimal employment opportunities to the local population and lesser stimulus to local industries. Also, industries in Pakistan would require enough capital in forms of cheap loans to accelerate their involvement in infrastructure projects, as and when the opportunity arises. The availability of cheap capital is a distant dream in Pakistan due to the falling currency and increasing interest rates.
Thus, the dream that CPEC will stimulate the local Pakistani industries appears to be a myth.7. Effect on Sino-Pak Trade Deficit. China Pakistan Free trade Agreement for trade in goods and services came in to being in 2007 and 2009 respectively. The result was a drastic increase in imports of Chinese goods in Pakistan. This has led to a highly skewed import-export ratio between these two countries.
This trade imbalance has occurred due to Pakistan’s failure to fully tap and utilize the concessions granted by China under the FTA. It has used only 3.3 % of the total tariff lines out of the total 7550 tariff lines. Pakistan exports mainly raw materials and intermediate products and value-added products have been completely missed out. Given the improved connectivity between China and Pakistan afforded by CPEC, the import-export balance is likely to further tilt in China’s favour. This fact will increase the existing trade deficit of Pakistan and is likely to further reduce its foreign currency reserves and affect its debt servicing capabilities.
8. Pakistan Income from CPEC. Pakistan has granted tax concessions to the Chinese companies investing in the SEZs along CPEC route along with substantial tax concessions to Chinese companies managing Gwadar port and involved in construction of major infrastructure projects. About 91% of the total income from Gwadar port operations would be routed to China. Pakistan would earn about $ 3 billion in transit fees once the corridor becomes fully operational. This amount is nothing when compared to what Pakistan may be required to pay to China. So, the myth that Pakistan would gain substantially from the transit fees from the CPEC projects appears to be un-true.
Given the massive tax exemptions for the Chinese companies involved in construction of the CPEC projects and those involved in the SEZs, it seems this project is designed to benefit the Chinese companies at the cost of Pakistan.IMPACT OF A FAILED CPEC ON PAKISTAN SOCIAL SETUP9. Radicalization of Population. The CPEC seemed to be planned by China to help its close ally Pakistan to rise as a regional economic power. It was to be the Marshall Plan of Pakistan. The entire country is obsessed with this project and it is thought that this project will solve all the evils of the country. Given the reasons mentioned above it is unlikely that the CPEC will achieve its intended aim of improving Pakistani economy.
This would result in rising unemployment, increasing inflation and reduced expenditure of the government on social sector needs like education, healthcare, etc. The population of Pakistan is growing at a rate of 2% per year. Most of the population is under 35 years of age. The lack of employment avenues is likely to force the youth to gravitate towards radical Islamic groups operating in Pakistan. The rise of dreaded radical groups like ISIS and Al-Qaeda in parts of Iraq and Afghanistan are a testimony to the fact that radical groups grow exponentially in places where the youth is disillusioned and un-employed.
The signs of growing radicalization of the Pakistani society are visible wherein one of the stated objectives, of the newly elected Mr. Imran Khan led government, is to make Pakistan an “Islamic Welfare State”. Further the finances of the Pakistan government are likely to be weak due to the rising expenditure on servicing external debt which will result in reduced spending on the social sector needs like education. This would further aggravate the situation wherein more youngsters would be tutored in Madrassas being funded by radical groups and get influenced by radical ideology. China on the other hand is using CPEC to economically develop its western province of Xinjiang to stem the growth of radical Islamic elements in this province. The reverse of this is likely to occur in Pakistan.10. Insurgency due CPEC.
The most prominent province in Pakistan is Punjab. Since independence majority of the developmental projects in Pakistan have been carried out in this province. Though not a resource rich province, the Punjab province has a lion’s share in terms of the water resources, gas supplies, electricity, infrastructure projects, etc. Also, given the dominance of the Punjabi populace in the national politics and the powerful armed forces, there already exists a simmering discontent amongst people of provinces like Baluchistan and Gilgit-Baltistan. The CPEC route when it was conceived was to pass through the eastern part of Pakistan as it was the shorter. But again, due to internal politics the route was diverted to pass through Punjab and Sindh provinces before entering Baluchistan.
In Baluchistan the local population fears that CPEC will result in influx of people from other provinces into Baluchistan and result in making the ethnic Baluch people a minority. The skewed distribution of the CPEC projects along with the fear of influx of outsiders, has seen increased resistance to the CPEC projects in Baluchistan. This has resulted in increased attacks on the CPEC related projects by the Baluch nationalist fighters.
In case these uprisings are to occur at a larger scale, there could be a civil war like situation in Pakistan and the sovereignty and territorial integrity of the country will be threatened.11. Given the huge investments involved in the project, failure of the CPEC in achieving its intended aims, will result in collapse of the Pakistan economy. A failed economy is likely to result in multiple social problems like increased radicalization of the populace and flourishing of the terror groups in Pakistan. Such a situation may result in the Pakistan armed forces getting involved in internal security duties on a larger scale.
The reduced force levels on its eastern border with India, its arch-rivals, will force the Pakistan security establishment to go unconventional and implement its “Bleeding by a thousand cuts” policy in a more vigorous manner. The failure of CPEC has the potential to un-balance Pakistan and this in turn has a direct bearing on its attitude and policies towards India.