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Pakistan’s Expensive Gamble

Jan 21 , 2017
  • Sajjad Ashraf

    Adjunct Professor, National University of Singapore

The China-Pakistan Economic Corridor (CPEC), launched formally during President Xi Jinping’s visit to Islamabad in 2015, symbolizes the enduring China-Pakistan friendship. The implementation of the $54 billion projects should in theory help boost Pakistan’s economic and social development. Considered as a part of China’s One Belt, One Road (OBOR) 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. The majority of Pakistanis live in the Punjab, Prime Minister Nawaz Sharif’s home province. Baluchistan, where the ‘crown jewel’ of the CPEC, Gwadar is located, comprises 43 percent of Pakistan’s land area, much of its mineral resources, but with only 3 percent of population. Smaller provinces accuse the government of disproportionately favoring 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. 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 by the five chief ministers of constituent units of Pakistan, the Beijing meeting calmed the parties through promising 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 following three years of draught. 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 Baluchistan. They suspect that much of the CPEC benefits are going to the outsiders. Unless most of the wealth Baluchistan creates is invested back for the betterment of the indigenous people there, 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, expresses concern over the lopsided role given to the Chinese investors and entrepreneurs in the public sector services. For Pakistan’s troubled economy, with falling exports, home remittances, and FDI, 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 the Chinese commercial banks at questionable rates to pay for the Chinese machinery imports. Loans from China during the first quarter this financial year have jumped to $979 million compared to $138 million during the comparable period last year. Even the Governor does not seem to know the lending terms of these loans. Independent economists warn that Pakistan seriously risks another IMF bailout once the outflows on loans and profits to China begin in earnest.

Though terrorist related violence is significantly down through Pakistan Army’s operation, security of the CPEC related projects and the Chinese personnel working on them remains a serious concern. A 15,000 strong force meant to provide protection to these facilities adds to the overall project cost, further fueling issues in its funding.

Droves of Chinese are arriving in Pakistan as a part of workforce and for supervision of the Chinese aided CPEC projects. Their deployment through extended periods will necessarily increase the labor costs compared to a situation where Pakistanis are employed, costing much less. Would they be as efficient?

Skeptics of this close financial embrace with China warn of the similarity of situation between Sri Lanka and Pakistan. Both countries fighting insurgencies and terror with a weakening economy turn to China for investments to turn things around. China 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 investments flow back to China for material, equipment and manpower acquisition.

Sri Lanka, saddled with un-payable Chinese loans is now set to allow $1.4 billion debt for 80 percent 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 the Pakistan Army’s commitment will see the project through. The challenge for paying back the loans will depend how sincerely Pakistan’s civil machinery works. Wrong choices are too risky for Pakistan.

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