CPEC: Should Pakistan be worried?

Chinese investment in other regional countries have not borne the expected fruit, will Pakistan be the exception?

The world economy faces uncertainties and pessimism in 2017 over a series of “black swan” moments like Brexit and Donald Trump’s election in 2016 on a protectionist agenda. Mr. Trump’s recent move of pulling USA out of the Paris Climate Deal adds to this uncertainty, which in-turn creates a vacuum of global leadership that presents ripe opportunities to allies and adversaries alike to reorder the world’s power structure.

And the likely contender: Of course China. The Chinese are eager to fill this evolving void – that Washington is leaving behind – on everything from setting the rules of trade and environmental standards to financing the infrastructure projects that will give Beijing vast influence. Almost to the end of the year, unlike the rest of the world, China instead sees positive developments in the global economy. It firmly believes that as its dominance on the world stage grows the outcome from its push on trade & connectivity will further strengthen the global markets despite the current challenges and opportunities they face.

And it is in this context that one needs to be mindful of the reality that the China Pakistan Economic Corridor (CPEC) is not entirely a manifestation of the mutual desire of China and Pakistan to expand economic ties, but primarily of the larger global vision of China to revive the ancient silk route, returning China to the glory days of the Ming Dynasty when China literally dominated global trade – and this through the OBOR (One Belt One Road) initiative. Within the OBOR, so far, CPEC with an outlay of around $50 billion (and potential for even more) is currently the largest investment by China, but this could change.

Also, there are other larger Chinese strategic interests at play here: a) Shortest, quickest and cheapest access to the warm waters of the Arabian Sea; something which the USSR could not achieve, b) With presence in Gwadar the ability to control, police and safeguard (where required) oil interests of China, which is the largest oil consumption economy in the world today, and last but not least c) Help the grand development transition from East to West within China.

This transition from East to West China will not only lift the under-developed western areas of China out of poverty and help resolve some long standing/traditional secessionist issues, but more importantly, will also significantly add to the buying power of a big chunk of the Chinese population, thereby boosting the Chinese overall endeavor to sustainably and remaining on the present economic growth path through shoring up its domestic/home consumption.

So, the important question here is that do these Chinese objectives in anyway clash with Pakistan’s own economic interests? Answer: Not directly, but nevertheless it will be prudent on Pakistan’s part to recognize some of the challenges that it is bound to encounter against the planned investments under CPEC. These include:

– Diminished negotiating power, given our political and military dependence cum reliance on China and also owing to lack of other investment options with us at present.

– No real expertise to handle inflows of such magnitudes totaling $50 billion.

– Lack of human resource and a professional apex structure to transparently and professionally manage CPEC’s implementation.

– Resultant future debt servicing issues.

– CPEC can adversely hit our current account deficit by ballooning imports.

– Erosion of domestic/home industry.

– Political/provincial bickering adding to disunity in Pakistan.

– Pressure on external account once profits and re-payment start flowing out, with present currency Swap arrangements being inadequate.

The above becomes even more noticeable if one takes into account experiences of some other countries that were recent recipients of OBOR investments and went on to face some real time concerns. For example, recent Chinese investments in Sri Lanka have not generated the kind of returns they originally envisaged. Among many botched projects from the perspective of financial sustainability the Hambantota initiative stands out.

The four-lane highway leading out of the town of Hambantota and in addition the boondoggles built and financed by the Chinese beyond and along this highway have thus far failed to generate the kind of economic activity required to justify the payback on the debt accumulated against these projects: A 35,000-seat cricket stadium, an almost vacant $1.5 billion deep water port and a 16 miles inland airport at the cost of $209 million stands as amongst the world’s emptiest international airports.

Mattala Rajapaksa International Airport, the second largest in Sri Lanka, designed to handle a million passengers per year, currently receives only about a dozen passengers per day. Projects like Mattala are not driven by local economic needs but by remote stratagems. When Sri Lanka’s 27-year civil war ended in 2009, the president at the time, Mahinda Rajapaksa, was fixated on the idea of turning his poor home district into a world-class business and tourism hub to help its moribund economy. China, with a dream of its own, was happy to oblige.

Hambantota sits in a very strategic location, just a few miles north of the vital Indian Ocean shipping lane over which more than 80 percent of China’s imported oil travels. A port added luster to the “string of pearls” that China was starting to assemble all along the so-called Maritime Silk Road. Sadly, no travellers have come, only the bills. The Mattala airport has annual revenues of roughly $300,000, but now it must repay China $23.6 million a year for the next eight years, according to Sri Lanka’s Transport and Civil Aviation Ministry. Overall, around 90 percent of the country’s revenues go in servicing debt. To relieve its debt crisis, Sri Lanka has put its ‘white elephants’ (unsustainable investments) up for sale.

In late July 2017, the Sri Lankan government agreed to give China control of the deep water port – a 70 percent equity stake over 99 years – in exchange for writing off $1.1 billion of the island’s debt. Ironically, China has promised to invest another $600 million to make the port commercially viable. The question that arises here is that why wasn’t it done originally? Likewise, stories emerging from the experiences of Indonesia, Nigeria and lately Kenya (where an inter-connecting railways has been built by the Chinese at a colossal expense) tell similar tales.

To conclude, the economic cum geo-political reality is that the CPEC, with an enormous potential to ultimately deliver up to $62 billion of bilateral developmental projects between Pakistan and China, can be a “game changer” not only for Pakistan, but also for entire South Asia, however care needs to be taken. While the excitement felt among political and economic circles stems to a large degree from Pakistan’s wobbly economic performance in recent years, where the country has been failing to meet its GDP targets, the trouble is that unless the self-sustainability of each undertaking is independently ensured, these big time investments could in-effect backfire for Pakistan’s economy in the long run.

And ensuring this sustainability will not be easy – as Pakistan battles extremism, terrorism, and rampant corruption/mismanagement at home and a growing isolation abroad, perhaps CPEC becomes more of a compulsion than an option. And this makes it even more tricky, because care will have to be taken from the very start that Pakistan safeguards its long-term economic interests in a way that the projects undertaken today do not become the cause of pain tomorrow!