CPEC: Good or bad for Pakistan?

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VIAAnjum Ibrahim
SOURCEBusiness Recorder
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Ambassador Alice Wells, a frequent visitor to Pakistan in her capacity as Deputy Assistant Secretary of State for South and Central Asia, made some remarks at the renowned Woodrow Wilson Center on China Pakistan Economic Corridor (CPEC) that were promptly challenged by our Foreign Minister followed by the newly-appointed Minister for Planning, Development and Reforms Asad Umar who reportedly replaced Khusro Bakhtiar at China’s request.

Prior to challenging Wells statement the question is what was her source of information? Three sources of information were available to her. First and foremost Pakistan’s major creditors in recent months, particularly China, made a “firm commitment” to the International Monetary Fund (IMF) Board of Directors (including the US representative), that they will “maintain their exposure throughout the program period, including by extending new loans consistent with program objectives.” This led the Fund to conclude that “Pakistan faces exceptionally large external financing needs in the coming years. The financing commitments received provide the necessary assurances for the programme.”

It is highly unlikely that the US chair at the Fund Board would not have asked for details of Chinese assistance, subsequent to US Secretary of State Mike Pompeo’s statement last year that the Fund will not lend to Pakistan to pay off its loans to China. In other words, details of loans, rate of interest payable and amortization period, as well as sovereign guarantees extended for purported ‘investment’ by Chinese companies (actual loans and guarantees must not exceed 60 percent of the GDP as per Fiscal Responsibility and Debt Limitation Act 2005) was confirmed by China to the IMF board, a condition for loan approval.

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Also Read: CPEC as a game changer?

In this context, it is relevant to note that Pakistan’s economic team leaders defined the ‘exceptionally large financing need’ in writing: “the current projections suggest that with the policies outlined in this memorandum the financing needs for the next 39 months (the program period) will amount to 38.6 billion dollars.” These financing needs include the repayment of interest and principal as and when due as well as on the massive debt equity incurred during the Ishaq Dar years; however, disturbingly, this ‘large external financing’ would also finance the large 2019-20 budget deficit which includes a raise in the budgeted current expenditure by 30 percent and a raise in development expenditure of 40 percent. In total terms current expenditure rise is estimated at a whopping 1.53 trillion rupees while development expenditure rise consists of only 200 billion rupees.

The projected budget deficit for the current year is 7.2 percent, the same as what was inaccurately projected in the budget documents for last year. With the massive revisions in actual data released in August 2019 for the year past, the actual deficit for last year was 8.9 percent, which makes a mockery of all budgetary data for the current year, including current and development expenditure and revenue.

Second, Wells relied on routine information sent by the US Embassy – data that would no doubt include an assessment of Chinese engagement in the Pakistan economy. Given US opposition to One Belt One Road (OBOR) with CPEC considered the flagship for OBOR for whatever reason – be it political or a genuine desire to assist a developing country develop as maintained by Wells though the results to date have been poor – it is safe to assume that the US Embassy remains engaged in assessing the nature and depth of Chinese assistance to Pakistan.

And finally, Wells relied on OBOR projects in other countries which have been subjected to much criticism by the recipient countries particularly Sri Lanka and Malaysia as well as the US with its own unique bias based on its political and economic considerations.

Thus Wells had access to a wealth of information. Wells began by stating: “What we see today is a Chinese Communist Party promoting its own brand of development: the One Belt One Road Initiative, or what President Xi has called: ‘A project of the century.’ Around the world, and certainly in my area of responsibility, South and Central Asia, we see Beijing pressing countries to sign OBOR (One Belt One Road) MoUs (Memorandum of Understanding), emphasizing peace, cooperation, openness, inclusiveness, mutual learning, and win-win cooperation. That sounds great. This vision is attractive for governments facing enormous development challenges and infrastructure needs… . But after seeing OBOR in practice for the last few years, there are reasons to question the Chinese Communist Party’s largesse.” There is little doubt that Western governments including US administrations continue to use foreign assistance to further their foreign policy objectives – moral, an obvious example being the Kosovo war, but more often than not motivated by the perception of national self interest. The continuing massive annual US aid to Israel for example has fuelled rather than resolved the Middle East crisis and included supply of cluster bombs in Gaza in 2009, which is illegal as per US law. President Trump has taken self interest to mean personal political advantage and is facing an impeachment inquiry on extorting a foreign country, Ukraine, into investigating a political rival, Biden.

Wells further stated that “China offers substantial financing, usually as loans. But Beijing is not a member of the Paris Club, and has never supported globally-recognized, transparent lending practices. According to an estimate released by the Keele Institute, Communist China is the world’s largest official creditor, lending over $5 trillion worldwide. But China does not publish, or even report, overall figures on its official lending. So neither rating agencies, nor the Paris Club, nor IMF are able to monitor those financial transactions.” This statement is not debatable and Prime Minister Imran Khan has publicly acknowledged that China does not want to make details made public though the opposition leader Imran Khan was at pains to publicly criticize the PML-N administration’s lack of transparency and negotiating skills in CPEC projects.

There is therefore little evidence as to exactly how much has been borrowed under CPEC projects, though the rate cited is under 3 percent which implies concessional lending, and how much if any ‘invested’ without sovereign guarantees. Asad Umar in response to Wells noted that China has extended 18 billion dollar loans, though he did not clarify whether this amount was under CPEC or programme loans; and did not reveal total sovereign guarantees extended under CPEC however Pakistan requested and was granted a waiver from the IMF to exceed the limit allowed of sovereign guarantees by the power sector during the first quarterly review recently ended.

Wells further stated: “I think that today there is important debate that’s putatively over models of development, but it’s really about sovereignty and the freedom that nations can expect and that their citizens can enjoy. And America’s position really is unambiguous. Good governance, long-term capacity building, and market policies are the factors that enable the private sector to flourish that are essential for sustained development growth. Whether it’s Europe, Japan, Asian Tigers, India, the US approach to development has driven unprecedented economic expansion since the Second World War, lifting billions out of poverty.” There is no doubt that the energy model supported by the previous administration under CPEC umbrella did not follow public procurement rules – allowed under government to government transactions though not applicable to the private sector. Additionally, the energy projects account for high existing tariffs with environmental issues which has prompted the incumbent government to encourage renewable energy projects.

Wells further accused China of supporting its own labour in its projects overseas, a charge substantiated by many countries including Kyrgyzstan, but refuted by the Pakistan government recently claiming that primary data collected from 12 projects under CPEC has revealed that of 81,121 total workforce engaged in these projects more than 90 percent were Pakistani workers. This, however, is not independently verifiable.

And finally, Wells noted that “the Chinese Ambassador to Pakistan, Yao Jing, has repeated the off-used characterization of CPEC as a game-changer for Pakistan. In fact, the Ambassador has said that China wants to see its relationship with Pakistan serve as an example for its relations with other states. Now that might in fact be the case, because just as in the Maldives and Sri Lanka, after four years of CPEC, people in Pakistan are beginning to ask tough questions about what kind of deals their prior government struck with Communist China and what Pakistan really gains. It’s easy to understand why Pakistan’s previous government leapt at the opportunity to conclude a CPEC MOU. Just like many other countries in the region, Pakistan has huge infrastructure and development needs and for many of my friends in the audience who have spent time in Pakistan, you’ve experienced first-hand those energy shortages. Pakistan has a sovereign right to answer those questions for itself, but I want to make a few observations on cost, debt, transparency and jobs. On cost. According to Pakistani government statistics, for each megawatt generated by a completed CPEC thermal energy project, developers spent an estimated 1.5 million. In comparison, the cost per megawatt of building non-CPEC thermal plants is half of that, or 750 million. Similarly, CPEC’s most expensive single project is upgrading the railway from Karachi to Peshawar. When the project was initially announced, the price was set at $8.2 billion. In October of 2018, Pakistan’s Railway Minister announced that they had negotiated the price down to $6.2 billion, a savings of $2 billion, and he explained, Pakistan’s a poor country we can’t afford the huge burden of these loans. But recent media reports claim the price has now risen to $9 billion. So why doesn’t the Pakistan public know the price for CPEC’s most expensive project or how it’s being determined?” One would hope that Sheikh Rashid would respond to this statement.

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Chinese Ambassador to China, Yao Jing, on 22 November rejected Alice Wells’ arguments regarding CPEC, saying that Beijing will never force Islamabad to make timely payments of its debt: “If Pakistan is in need, China would never ask it to repay its loans in time,” said Jing.

Wells acknowledged that Pakistan is severely deficient in infrastructure and with no other country’s government or private sector coming forward to assist Pakistan there is little option for the country but to engage with China though one would hope that the government takes a better negotiating position, a position that Imran Khan repeatedly challenged when in opposition.

(The views expressed within this article are the personal opinions of the author. The newspaper does not assume any responsibility or liability for the same.)

(This news/article originally appeared in Business Recorder on December 2nd, 2019)

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