InternationalVOLUME 15 ISSUE # 08

CPEC’s economic cost

The United States has once again expressed its serious reservations about the China-Pakistan Economic Corridor (CPEC). Its warning about the project pushing Pakistan deeper into an already stifling debt burden, fostering corruption and repatriating jobs and profits to China may have some substance but it is more directed at China, with which it is fighting a trade war.

Experts say China had launched the CPEC for its own benefit but it has also huge potential for Pakistan. The US is concerned about debt burden, corruption and repatriation of jobs and profits to China. The US fear of the debt trap is misplaced because 91 per cent of Pakistani debt is owed to the West, including multilateral institutions, and only 9pc to China. As regard corruption, it is, no doubt, rampant in Pakistan but there are minimum chances of it in CPEC projects because they are regularly audited by Chinese and Pakistani officials. The fear of the repatriation of jobs and profits to China is not unfounded because Pakistan lacks experts for the project and Chinese engineers and workers are working on posts for which Pakistani experts are not available. Pakistan may be getting a fraction of share from jobs and profits from the project, but it will still be enough for it. It has no other choice.

In a renewed warning to Pakistan about the CPEC, US Assistant Secretary Alice Wells said the multi-billion-dollar project would take a toll on Pakistan’s economy at the time of repayments and dividend in the coming years. “The CPEC is not an aid to Pakistan but a form of financing that guarantees profits for Chinese state-owned enterprises, with little benefits for Islamabad,” she told a gathering of diplomats, scholars and journalists at a Washington think tank.

Citing specific examples from the project, she explained, “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 2018, Pakistan’s railways minister announced that they had negotiated the price down to $6.2 billion, a saving of two billion. And he explained Pakistan is a poor country. We cannot afford this huge burden of these loans. But recent media reports claim the price has now risen to $9 billion. So, why doesn’t the Pakistani public know the price for CPEC’s most expensive project or how it’s being determined?”

The US diplomat also underlined long-term effects in Pakistan of China’s “financing practices” and urged Islamabad to examine “the burdens that are falling on the new government to manage with now an estimated $15 billion debt to the Chinese government and $6.7 billion in Chinese commercial debt”.

Ms Wells also emphasised the need for Pakistan to know that China was providing loans, not grants, as the United States. “It’s clear or needs to be clear that the CPEC is not about aid. This is almost always the form of loans or other forms of financing, often non-concessional with sovereign guarantees or guaranteed profits for Chinese state-own enterprises that are repatriated to China,” she said.

Reacting to her comments, Chinese Ambassador in Pakistan Yao Jing said CPEC projects were free of corruption. With regard to the Main Line (ML-1) railway project which is to be executed under the CPEC, he clarified that the project’s cost was around $9 billion, but added that it was only an estimate. “The real cost of the project will be finalised in the second stage of a determining financial package of the project,” he added. Giving details of jobs to locals, he said so far over 75,000 Pakistani workers had already been employed and CPEC projects were expected to create around 2.3 million jobs for locals by 2030.

The US opposition to the CPEC is not new. It has expressed similar apprehensions in the past. The Trump administration opposed an IMF bailout for Pakistan on the pretext that much of the debt was run up by accepting billions of dollars in Chinese infrastructure investment. Secretary of State Mike Pompeo came out strongly against the IMF aid to Pakistan to repay Chinese loans. Officials in the Trump administration, including U.S. Treasury Secretary Steven Mnuchin, have criticized China’s infrastructure lending to developing countries, arguing that it has saddled them with unsustainable debt. The United States Defense Department also accused China of seeking to establish military bases around the world to protect its investments in its ambitious One Belt One Road global infrastructure program. Beijing currently has just one overseas military base, in Djibouti, but is believed to be planning others, including possibly Pakistan, as it seeks to project itself as a global superpower. “China’s advancement of projects such as the “One Belt, One Road” Initiative (OBOR) will probably drive military overseas basing through a perceived need to provide security for OBOR projects,” the Pentagon said in its annual report to Congress on Chinese military and security developments.

Rumours of a slowdown of the CPEC or abandonment of some initiatives under it also intensified after the government diverted Rs24 billion of the landmark project to development schemes for parliamentarians. Concerns were also raised about the actual outlay, debt and interest payment on the CPEC after Pakistan provided details to the IMF during talks for loan. According to statistics of the Ministry of Planning and Development, Pakistan will have to pay China $39.8b on $26.5b CPEC investments in 20 years. It means Pakistan, on average, will return $2 billion per annum to China. It also suggests that unlike the claims of $50 billion to $62 billion CPEC investment, the actual investment is likely to remain half of the initially announced investment figures. Out of $39.83 billion, debt repayments of energy and infrastructure projects amount to $28.43 billion. The rest of $11.4 billion will be paid in shape of dividends to the investors, official estimates say. After the report was published, China said the figures and estimates were misleading. The Chinese embassy in Islamabad also released a list of 22 “early harvest projects” in Pakistan totalling US$18.9 billion that have already been completed or are under construction. “Other debt was not owed by the government but was from private deals. The Chinese companies and their partners invested US$12.8 billion in energy projects in Pakistan, along with nearly US$10 billion raised from commercial banks,” the embassy said in a statement. Adding to the confusion, Pakistan’s Planning and Development Ministry also said the US$40 billion estimate was wrong, as the government owed US$6 billion to China in low-interest loans and grants for infrastructure projects spread over a repayment period of 20 to 25 years.

Experts say the confusion about the CPEC has compounded after the recent developments. Despite the confusion, it is clear that Pakistan will have to curtail its expenditure and increase exports significantly to repay the loans.