The agreement on the China-Pakistan Economic Corridor (CPEC) is being portrayed as the biggest achievement on part of the country’s economic managers and PML-N government.
However, some sceptics are concerned about the absorption capacity of Pakistan’s economy. They think this capacity is rather limited, owing to the shortage of skilled labour, security threats to foreign workers, political instability and poor governance regimes. On the other hand, the supporters of this project think that with domestic investment at a historic low, the country’s economy will absorb this foreign investment efficiently.
Ali Salman, CEO of Prime Institute, a think tank, tells TNS that out of the $46 billion, $35 billion will come in the form of foreign direct investment (FDI) in the Independent Power Producer (IPP) mode with the government-guaranteed return of 27 per cent on equity.
While the government of Pakistan offers this guarantee to all IPPs, the rate is significantly higher than the conventional 17 per cent. “As the profit repatriation will occur in dollars, it will have a direct effect on our foreign exchange liabilities from 2018 and beyond,” says Salman.
He adds that though the CPEC is spread over the next 15 years, the power sector projects will be completed in the next five to seven years. “As some projects come to the commencement stage, it will be binding on the government to start buying electricity and, hence, repayment will start around 2018.”
According to one estimate, he says, the effect may be around $2 billion dollars every year.
Salman believes the assumption is that as the country overcomes its energy crisis, its production and exports will experience a surge and create additional dollar-backed revenue to repay the profits. “However, this assumption is risky as energy is just one factor, and entire business environment needs to be reformed significantly.”
The efficiency of the country’s human resource is also being questioned in the context of CPEC. There are doubts that the administrative, technical, and operational capacity of the local workforce employed in the CPEC may not match the Chinese efficiency and make absorption of this huge investment difficult. If these issues are not handled properly the CPEC can be a non-starter. Such fears are strengthened by the fact that Chinese companies have stepped back from energy projects in Pakistan in the past, owing to public sector incapacity, unclear tariff structures, and other regulatory issues.
Adil Najam, Dean, Frederick S. Pardee School of Global Studies, Boston University thinks otherwise. He feels there is no reason why Pakistan should not be able to absorb the CPEC investments. “We keep using the $46 billion number as if it’s going to be delivered to us in cash in one go. Much of this will not come directly into the economy as cash. Some will be accounting artifacts with the budget. Parts of this — maybe large parts — will go to Chinese companies for work in Pakistan. And so on.”
But even if this is pumped into the economy as cash, it would happen over a number of years. “Let’s assume it will be around $10 billion a year. But let us remember that the size of the Pakistan economy is around $280-300 billion per year. So, at least theoretically, there is no reason why an economy should not be able to absorb a three to four per cent additional injection.”
Having said that, Najam adds, “of course, large amount of new money can trigger large-scale corruption… But that is not a factor of the state of the economy, that is a reflection of the state of governance in society.”
Mahmood Awan, an economist and head of Global Studies Institute, USA, believes human resource will not be an issue. The Chinese, he says, “will supervise everything because of their military needs. Pakistanis will work under their command and they will train them for their needs and standards.”
For him, absorption of funds is not an issue, “there is no investment in the CPEC. It is mostly loans at high interest rate that Pakistan cannot pay back. The real risk is that Pakistani bonds will become junk status.”
Awan says, “Pakistan is already paying three times the interest rate of comparable countries. Its debt servicing capacity is limited and the CPEC will make it even worse. Of course, the corridor will create construction jobs on the route and that will be helpful to the communities on the route but one must not expect any major breakthrough for the economy,” he adds.
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Naveed Iftikhar, a PhD student in Public Policy at the University of Delaware, USA and former Governance Specialist at Pakistan’s Ministry of Finance, says economic absorption capacity will not be an issue. “Pakistan has a huge size of young population and a thriving middle class that can produce and consume goods and services.”
However, he stresses on the need to improve business-government interface and Public Sector Development Programme (PSDP) governance, in order to reap benefits of the CPEC and attract domestic and foreign investment from other sources. “CPEC should not be considered as an alternative to domestic investment mobilisation, which is critically low at the moment.”
The CPEC project is not going to be executed in isolation and may need investment by the government in creating a supporting environment. But where will this additional investment come from? Saeed Alam, an economist, believes that the transmission line of KP and Balochistan will not be able to take the load of electricity generated from power plants set up under the CPEC. “Who will invest in upgrading this transmission line?” he asks.
While the National Assembly has given a clean chit to the CPEC, the recent debate on it in the Senate hints at several issues that have the potential to create disputes among different provinces in the near future. For example, there are concerns about shifting of substandard coal-power production plants from China — a country which has pledged to shift to renewable sources of producing energy.
PPP Senator, Taj Haider, has questioned the logic of including the local mass transit project of one city (Lahore) in the CPEC plan. Similarly, economist Dr Kaiser Bengali thinks only the projects along the route of CPEC should be made part for it and not the ones in isolated pockets.
He says confusion cannot be cleared unless the government comes up with a feasibility of the project and shares it with the public.