In our contemporary times of multi-polar world order, states are cozying up to each other. First, to reap the fruits of economic collaboration and second to secure themselves in the backdrop of worldwide turbulence along with burgeoned fears originating from the hegemonic powers.
Ensuing this globally acknowledged maxim, China Pakistan Economic Corridor (CPEC) is making strides of success and once it is complete, it will supposedly change the fortunes of not only Pakistan but the rest of the region too.
Anticipating its mammoth economic benefits, the Central Asian states including Russia are warming up to relish the economic ascendance through CPEC.
Iran and some European investors are keen to invest particularly in the coastal city of Gwadar which is evolving as a core of the innovative commercial activities in near future.
Economic trajectory of CPEC can surely weave together South Asia, Central Asia, Africa, the Middle East, and Europe. More interestingly the quiet rise of Bangladesh and Nepal will likely get a boost from this game changing project, too.
CPEC is best seen as a window of opportunity, not as some sort of nosh from heaven that will come and solve all our glitches. The worst mistake is to view CPEC as some sort of self-paying enterprise, as if the investments will somehow generate the required level of economic activity to automatically fulfill all the repayment obligations that they bring. This is a mistake because it cannot be taken for granted.
CPEC is part of a much bigger One Belt One Road (OBOR)/Maritime Silk Route initiative of China worth 900 billion USD. Over 20 countries involved in this grandiose and striving project OBOR/Maritime Silk Road will provide access for China’s domestic overcapacity and capital for regional infrastructure development. Total size of CPEC is 45 billion USD, one of the largest mega projects ever undertaken.
Pakistan will eventually be paying 90 billion USD to China over a period of 30 years against the loan and investment assortment worth 50 billion USD under CPEC, report of a brokerage house estimated.
The estimated return – sum of principal and interest on foreign currency debt and repayment of profits/dividend on equity investment – shows 40% return on investment. The amount increased to 54 billion USD after the inclusion of more projects in CPEC such as investments in Pakistan Railways and financing of the Karachi Circular Railways project.
The volume of return would increase accordingly. Infrastructure and power projects – part of the CPEC portfolio and divided across time in terms of priority – are expected to be completed by fiscal year 2030. Leading economists have estimated annual average repayments of 3-4 billion USD per year post fiscal year 2020.
It should be noted that project financing for CPEC is being done between Chinese companies and banks and around 25% of CPEC investment is expected to come in Pakistan.
The Topline Securities report further argued the repayment would remain manageable despite additional burden of debt servicing and repatriate of profits on equity investment in CPEC. The amount for additional repayment would be generated from the expected surge in exports, drop in imports and increased inflow of remittances.
The bottom line is that Pakistan’s balance of payments is not possibly to come under significant strain due to CPEC. What probably is to put the external account under strain is the quantum of non-CPEC related energy imports, mainly on account of Liquefied Natural Gas (LNG) imports. This could run into several billion US dollars annually as Pakistan’s exploited natural gas reserves exhaust sharply.
The brokerage house anticipated exports to surge by 4.5% a year till fiscal year 2025, which is higher than the previous decade’s average of 3%. This is because of expectation of CPEC-led higher GDP growth in the coming years and positive impact on local industry.
Imports are expected to grow by 4% in line with last decade’s average. Further, remittances are expected to grow within 4-4.5%. Services to China for transporting its trade cargo via Pakistan would generate 500-700 million USD per year for Islamabad. This amount may be exploited to pay back China’s debt for CPEC projects.
The important point to ponder here is that structural reforms are direly needed to complement CPEC in providing conducive environment for economic activity. Tax compliance is a national issue in this regard. Other matters include circular debt, bad governance, business climate (as depicted in low ranking of Pakistan in Ease of Doing of Business Ranking).
Without structural reforms CPEC cannot be translated into a success story, as history tells us super-mega projects like railways and largest irrigation system by the British in sub-continent failed eventually due to bad governance.
There is another speculation circling CPEC, that is, it may prove to be another East India Company for Pakistan according to a few Indian and Western experts. This assumption may not be applicable here and there is no point of comparison between East India Company and CPEC.
The only comparison that might work is in the extraction of a surplus from Pakistan and its transmittal to China. But, even here, it must be kept in mind that the surplus is not being extracted through the use of force or from land revenue/taxation, but purely from debt servicing and the repatriation of profits.
All foreign investment involves these elements, not just the one coming from China. On the contrary, we are also hearing about the arrival of Chinese investment under CPEC, we also have auto makers entering the Pakistani market from Korea and Europe, as well as a Dutch company acquiring stakes in the food sector. This is not necessarily a creeping colonisation.
Some analysts also highlight the divergence in civil military relations regarding CPEC. The military’s increased role, with increasing security requirements to protect CPEC projects and personnel, along with a complex law and order situation in Baluchistan, had added to the government’s insecurities.
Much was made of the reported difference of opinion on the powers of the military with regard to security of CPEC and the Special Security Division raised by the military. It seems that matter has been resolved in the best possible manner; government, military and provinces seem to be on the same page now, anticipating the windfall gains of CPEC and pledging to make it a success story putting Pakistan on the track of sustainable development.
Saddam Hussein is a Research Fellow at Center for Research and Security Studies (CRSS), Islamabad, while pursuing his MPhil. in Public Policy from School of Public Policy, Pakistan Institute of Development Economics, Islamabad.