Deciphering CPEC’s ‘Debt-Trap’ Myth

By Saddam Hussein

The China Pakistan Economic Corridor (CPEC) is the new buzz word for the international media and power corridors nowadays. CPEC, once again, has come under vicious attacks, apparently after recent tug of war between China and the United States. The strategy to malign the project has become part of a greater hybrid warfare for dominance in global political landscape.

CPEC, seen as a window of opportunity for Pakistan, has become a source of discomfort for some regional players who are not comfortable with the scale of the project, and therefore have started propagating conspiracies against it. One of the biggest recent conspiracies regarding CPEC is related to Chinese loans and its repayment by Pakistan.

The scoffers of CPEC are apparently off the beam when they pronounce that Pakistan would not be able to service the loans and repatriate the profits to Chinese investors, due to diminishing exports and exhausting foreign reserves. According to some analysts, the country would be trapped in grim debt obligations to China which would allow the latter to take the steering wheel of the Pakistan’s assets including the deep sea port of Gwadar – CPEC’s pivot.

An unbiased and dispassionate analysis would divulge that the nitty-gritty of all these apparent problems lies in the energy crisis that led the Pakistani exports to recede gradually over time. Export orders could not be fulfilled as the exporters did not have dependable and consistent power and gas supply. Had the energy limitation been absent, a growth rate of around 10 percent per annum would have been attained in the (last) few years’ time (as evident by growing exports in 2018 as the energy crisis eased up).

In that regard, Pakistan’s exports would have touched USD 36 billion in fiscal year 2018 if all variables remained constant. Current account deficit with the unchanged volume of imports would have been lower by at least USD 15 billion and the need for short term commercial borrowing would not have arisen. Foreign exchange reserves would have been more than adequate and debt servicing burden manageable. Debt and debt servicing projections prepared by the Ministry of Finance for the period 2018/19 to 2022/23 show declining debt servicing ratios.

The added burden of CPEC debt as well as repatriation of profits on investment would not create any pressure and is quite manageable. The International Monetary Fund (IMF) has estimated that at its peak the repayments on both debt and investment account would be between USD 2.5 to 3 billion annually. This amount can be easily absorbed by increased exports, savings in imports of fuel, and transit fees etc. Thus, the fear of debt entrapment does not stand the test of empirical validity.

Recently, the Planning Commission of Pakistan also issued a statement, in a bid to clarify the concerns of the global community about Pakistan’s CPEC-related Chinese debts and probably also to address the uncertainty factor currently prevailing in the economy. According to the statement, outflows under China-Pakistan Economic Corridor (CPEC) will begin in 2021 and peak over the next three years without creating a debt trap. Starting in 2021, these repayments will be about USD 300-400 million annually and gradually peak to about USD 3.5 billion by fiscal year 2024-25, before tapering off with total repayments to be completed in 25 years.

The statement categorically dismissed the fears surrounding the loans and repayments, stating that “CPEC is not imposing any immediate burden with respect to loans repayment and energy sector outflows”, arguing all debt related outflows will be outweighed by the resultant benefits of the investments to the Pakistan economy. The Commission reiterated that CPEC was a “flagship” and most active project of the Belt and Road Initiative where 22 projects worth a total of USD 28 billion have been actualized over the past four years. “The project could not be compared with Chinese overseas investment in Sri Lanka or Malaysia as frameworks and financial modes of CPEC are altogether different in nature” the statement continued.

CPEC finances are divided in government to government loans, investment and grants. Infrastructure sector is being developed through interest free or government concessional loans. Gwadar Port is grant-based investment which means the Government of Pakistan does not have to pay back the invested amount for the development of the port. Energy projects are being executed under Independent Power Producers (IPPs); mode and finances are mainly taken by the private companies from China Development Bank and China Exim Bank against their own balance sheets, therefore, any debt would be borne by the Chinese investors instead of any obligation on part of the Pakistani government. Pakistan has, thus, opted for Chinese investment under CPEC due to the favorable financing arrangements.

The key point here is that Pakistan’s balance of payments will 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. However, 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. The point to ponder is that structural reforms are direly needed to complement CPEC in providing conducive environment for economic activity.

The writer Saddam Hussein is a Research Fellow/Program Officer at Center for Research and Security Studies (CRSS)/Afghan Studies Center (ASC), Islamabad. He tweets @saddampide

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