CPEC could be an expensive albatross around Pakistani necks

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Chinese trucks carrying trade goods are pictured parked at the Gwadar port, some 700 kms west of Karachi on November 13, 2016. Photo: AFP / Aamir Qureshi

Will the China-Pakistan-Economic Corridor (CPEC) benefit both countries, or only China? number of aspects of the project are only beginning to attract scrutiny, and some of them indicate Pakistan may not benefit at all. 

A note of caution was registered recently by the International Monetary Fund. The organization observed in a report that CPEC projects are expected to generate balance of payment outflows to the tune of US$3.5-4.5 billion for Pakistan by 2024. However, the report also warned that enhancing exports poses a real policy challenge for Pakistan and that failure in the endeavor will considerably diminish CPEC’s benefits.

One of the imperatives facing Pakistan is to increase revenues and build up its foreign exchange reserves. CPEC will cause an increase in yuan inflows to the country for both payment and settlement purposes, which may be welcome but will further damage Pakistan’s already yawning trade deficit. Moreover, most of Pakistan’s external trade is currently done using the US dollar, and CPEC will do nothing for its US dollar reserves. Further adding to the sense of insecurity is the government’s complete silence on these issues.

Over the past few months, I have spoken to several Pakistani industrialists and many of them expressed an expectation that CPEC will do damage to the local economy, in both the agricultural and industrial sectors.

Truck convoys coming from China via the mighty Karakoram Highway (KKH) have already begun to flood Pakistan’s domestic market with cheaper, made-in-China goods. The cost of production in Pakistan remains relatively high – partly due to the high costs inflicted by the country’s seemingly never-ending energy crisis. This also hampers the viability of Pakistan’s own exports. The corridor will, additionally, assist China to flood external markets which might otherwise have been receptive to Pakistani goods. 

One industrialist summarized the situation thus: while made-in-China goods are already relatively cheap, the shorter route afforded Chinese exports via Gwadar will further reduce import costs in markets that have so far been export destinations for Pakistan.

CPEC appears more and more to be a master plan for deep Chinese penetration into Pakistan’s economy, with long term economic and political consequences

Investments are being made to resolve the energy crisis in Pakistan through building more power plants; however, the roots of the problem go much deeper than a simple production shortfall. Indeed, another IMF report mentions that in the absence of a robust distribution sector, Pakistan’s added generation capacity will have little effect. The report notes that “routing the increased generation capacity through a loss-making distribution sector could result in faster accumulation of circular debt and fiscal costs, as well as undermine long-term financial sustainability of the new energy projects.” No investment has so far been made in improving distribution.

Another potential pitfall for Pakistan is the way Chinese companies are likely to emerge as new “middle-men” in Pakistan’s economy, particularly in the agricultural sector.

Pakistan’s “national food security policy mentions the potential of enhancing the country’s agricultural exports to China and perceives opportunities through CPEC to achieve, among other things, “food sovereignty.” The policy measures outlined, however, indicate an increased role for Chinese companies in facilitating exports of produce from Pakistan to China – despite such private sector middle-men also being identified, in the same document, as presenting a major obstacle to producers getting a fair price. It is unclear as to how this enhanced interaction between local producers and Chinese companies will benefit Pakistan.

When one considers this proposed co-operation in agriculture, along with Chinese development of road, rail and energy projects in Pakistan, CPEC appears more and more to be a master plan for deep Chinese penetration into Pakistan’s economy, with long term economic and political consequences. All too few in Pakistan are raising objections but CPEC may turn out to be more of a liability than a golden opportunity for the country. 

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