The Pulse

Can Pakistan Afford CPEC?

Recent Features

The Pulse

Can Pakistan Afford CPEC?

There are concerns that the secretive agreement will lead to unsustainable debt for Pakistan while China reaps the benefits.

Can Pakistan Afford CPEC?
Credit: Wikimedia Commons/ Umargondal

China’s investment of $62 billion in the China-Pakistan Economic Corridor (CPEC), as part of its Belt and Road Initiative (BRI),  is set to change the face of Pakistan’s economy.

However, many economists have questioned the CPEC project’s lack of transparency and accountability. The agreement, in its present form, is shrouded in secrecy and the lack of information has severely impeded a proper cost-benefit analysis of the project. There are suspicions that the agreement may be heavily skewed in favor of China. This apprehension comes from the way the projects are being handled — for example, all materials (except cement, which is sourced from Pakistan), equipment, and manpower are being brought from China, with little or no participation by the local communities.

Some economists based in Pakistan feel that the Chinese strategy is to bring rich dividends back to its own country. The Chinese approach of not partnering with local companies will not help Pakistan create job opportunities for millions of its youth. There is also apprehension about the viability of the projects, as Pakistan has become an epicenter of terrorist activities. Recently, two Chinese nationals were killed, with Islamic State claiming responsibility. As some of the projects are located in strife-torn areas, it is only a matter of time before these projects could be targeted by disgruntled elements.

Akbar Zaidi, a noted economist from Pakistan, recently delivered a lecture titled “Has China taken over Pakistan?” in Kolkata, the capital of the Indian state of West Bengal. Zaidi raised serious concerns about the viability of the economic corridor and its effect on Pakistan’s sovereignty. Zaidi, while accepting that the project has the potential to transform the Pakistani economy, feels that this transformation would come at a very high price. He argues that once the project is operationalized, it would make Pakistan a colony of China. Perhaps at the back of his mind he drew from the history of the British East India Company and the way it conquered India by stealth.

According to Zaidi, “[A]part from the danger of becoming a colony, the project may undermine [Pakistan’s] sovereignty as its foreign policy, especially with India… will be dictated by China.” Zaidi has cautioned Pakistan to look at the fallout from projects in Sri Lanka, Tajikistan, and several countries of Africa, all of which are now facing huge debt risks brought by Chinese investments. Although Zaidi has not come out with any CPEC-specific facts to support his concerns, it would be unwise to dismiss his warnings without making an in depth cost- benefit analysis of the project.

The Chinese daily The Global Times, dismissing Zaidi’s concerns on sovereignty, alleged that such concerns were a conspiracy theory meant to present China in a poor light. According to the paper, “the construction of infrastructure is aimed at actually facilitating Pakistan’s modernization and industrialization instead of exploiting or dumping surplus Chinese goods in the local market.”

Meanwhile, the United Nation’s Economic and Social Commission for Asia and Pacific, in a recent report, has also concluded that the economic corridor may further damage India -Pakistan relations. The report raised two major concerns: first, the CPEC may create further tensions between the two countries, and in the process create political instability in the South Asia; and, second, the political tension in Afghanistan may severely impede the benefits of transit corridors in South Asia.

India has refused to participate in China’s broader Belt and Road Initiative (BRI). New Delhi did not attend the Belt and Road summit held in May in Beijing, largely due to sovereignty concerns stemming from CPEC. India has expressed unhappiness over China building roads and infrastructure in the disputed territory of Gilgit-Balistan, which is under Pakistan’s control but which India claims as a part of Jammu and Kashmir.

Many economists and scholars, both in China and Pakistan, have expressed their concerns over the viability of the economic corridor. They feel that the infrastructural projects are aimed to shore up Chinese industries, which are facing the problem of excess capacity (a view widely held in India). According to this argument, CPEC was conceived to boost the Chinese economy, bail out Chinese public companies and not to help the industries in Pakistan.

Although it can’t be denied that the CPEC will change the face of Pakistan’s economy by modernizing infrastructure, energy, and transportation networks, Pakistan has to measure how they are going to raise resources to serve the resulting debts. It is estimated that Pakistan would be required to repay principal and interest of approximately $3.5 billion per year over a period of 20 years.

The International Monetary Fund has also expressed its concern over this fiscal impact of CPEC. “During the investment phase, as the ‘early harvest’ projects proceed, Pakistan will experience a surge in FDI and other external funding inflows,” the IMF found in a recent report. However, the surge in imports required for the projects  “will likely offset a significant share of these inflows, such that the current account deficit would widen.”

According to Dawn:

The report estimates that CPEC-related imports could reach 11 percent of total projected imports by 2020, equal to just over $5.7 billion, while inflows under the corridor will touch 2.2 percent of projected GDP in that year. Gross external financing needs of the country will jump almost 60 percent by then, from a projected $11 billion  for the current fiscal year, to $17.5 billion in 2020.

The IMF adds that “Pakistan will need to manage increasing CPEC-related outflows” once Chinese investors being moving their profits back home to China.

In another article from Dawn, Khurram Hussain tallies up the costs. He writes that “the debt service outflows will be about $1 billion and the return on equity will be $646 million if it is kept at 17 percent. Add to that $1.9 percent as repayment of principal. That means an annual net outflow of $3.546 billion per year once the corridor becomes fully operational.” Prominent local economists have also expressed serious concerns over Pakistan’s ability to service the debt. Hafiz Pasha, a former finance minister, and Ashfaq Hassan, a former adviser to the Finance Ministry, have estimated that CPEC loans will add $14 billion to Pakistan’s total public debt, raising it to $90 billion by the fiscal year ending June 2019.

China has assured Pakistan that once the CPEC becomes operational, it would be able to cover these payments over the long term, but China has not given any guarantee to this effect. Considering tensions with Afghanistan and Iran, it’s unclear how long the Pakistani government will be able to secure the projects from terrorist strike. Some of the projects are located in sensitive areas, which are now seeing increased attacks by Islamic State and the Taliban. If tension further escalates, Pakistan would find it extremely difficult to increase its exports through this corridor, which is a sine qua non for servicing its debt.

It is in this context, Pakistan should study the Chinese business model in Sri Lanka, Tajikistan, and African countries, where China has invested heavily in infrastructural projects. These countries are now saddled with a huge debt burden and questions have been raised over their ability to fulfill their obligations.

In sum, while the CPEC can transform the Pakistan’s economy and significantly boost its growth, necessary safeguards have to be provided in the agreement to ensure Pakistan’s ability to service its debts. Further, there are many unanswered questions about the viability of the projects, especially when Pakistan has become an epicenter of terrorism. Moreover, as China is not involving local communities, the projects may not help Pakistan in meeting its rising unemployment problem. Worse, CPEC is being undertaken by Chinese state-owned enterprises, which are known for inefficiency and poor execution abilities. This could lead to substandard execution of projects, not to mention cost overruns.

The government of Pakistan, which has kept the agreement with China under wraps, needs to make a full disclosure, so that proper analysis can be made on Pakistan’s ability to repay Chinese loans. There is an urgent need to ensure transparency and accountability for the project.

China should also make an effort to be transparent in its agreements so that participant countries can wholeheartedly support the BRI. Many Western countries have  been lukewarm toward the project because they fear that it is heavily skewed in China’s favor. Unless China partners with all the countries along the planned route, the BRI may not yield the desired results.

K.S. Venkatachalam is an independent columnist and political commentator.