A Cautionary Tale

A Cautionary Tale

A famous quote highlights sustainability by discussing the difference between giving a man a fish and teaching them how to fish. Recently, it has become a common conception that China is using its Belt and Road initiative to hawk all of the world’s fish supply at least for the foreseeable future. How true is this?

In case of Pakistan, our Prime Minister Imran Khan’s trip to China in his early days has been regarded as a success in terms of Chinese aid to our current deficit. Particularly, the focus has been on the second phase of China-Pakistan Economic Corridor (CPEC) after completion of early harvest projects. A growing concern under these recent developments is whether Pakistan will follow footsteps of Malaysia or pay the cost similar to Sri Lanka. Possibly neither. That is because our options are not limited to either converting Chinese debt into equity like Sri Lanka or cancelling Chinese projects like Malaysia did. As Gwadar port projects cannot be rationally compared to other Chinese investments specifically those in Sri Lanka or Malaysia due to the difference in nature of underlying financial framework and instruments. Let’s discuss the two countries in question and their relationship with China and how CPEC is different?

Recently, Sri Lanka was drowning in debt with regards to its Hambantota Port project so large that the country approached Chinese to request a payment reschedule. China played its cards right and swapped debt in the project with equity effectively taking ownership of the port and industrial zone, the surrounding 15,000 acres of land, for the next 99 years.

This debt relief in exchange for control of strategic territory can be attributed to few other factors. This port had little to no commercial potential and was launched at one to two percent interest rate. The debt further escalated when the timeline was accelerated for political reasons. Similarly, Gwadar might take years before it reaches commercial viability. However, that can change if China diverts even a fraction of its sea traffic of its major shipping companies to this new port. Furthermore, many people attribute this transfer to Sri Lanka’s corruption and bad management. Unfortunately, Pakistan seems to suffer from these adverse traits too, thus, the policymakers need to actively monitor the progress and accountability of the projects.

On the other end, the Malaysian Prime Minister Mahathir Mohamad decided to suspend two multibillion dollar Belt and Road initiative projects. This was dubbed as an economic recalculation. The PM made it clear that this had nothing to do with BRI rather he wishes to strengthen Malaysia’s partnership with China. However, first Malaysia needs to balance its national budget as a priority and does not want a situation where it is unable to repay its debt. He foresees Malaysia eventually as a part of BRI, though once the internal problems are solved and Malaysia can benefit its economy rather than further burden it with foreign debt. Unfortunately, Pakistan does not enjoy the same socio-economic status as that of Malaysia. The benefits of CPEC are widespread and if done right they are the game changers for Pakistan’s economy.
Though Pakistan’s case is distinctive as there are enormous differences in the financials between the Chinese investment in Pakistan as compared to other countries. However, lack of publicly available information generates concerns and assumptions about China creating economic dependencies. Even if we do not know the exact numbers and distribution of investment in Pakistan but what we do know that its far larger in its BRI flagship project CPEC than in Sri Lanka. Though the financial side needs closer scrutiny and perhaps a more public evaluation. These are genuine questions concerning what we have signed up for in the CPEC projects. An external party should not only track progress of CPEC but also keep the citizens informed of the progress and any major changes in planning or implementation.

Even though the public information on CPEC is very limited as it is either encrypted at G2G level or is in Chinese, the following should help us understand the structure of financing for Gwadar. The initial $50 billion under CPEC were made up of grants, loans and concessional loans. Where concessional loans differ from normal loans as they have generous interest rates ranging from 2%-5% with longer payback period. According to the official CPEC information website the factsheet for major Gwadar projects and their financing is following.
  • Gwadar East Bay Expressway: $140.60 million, with a mix of concessional loans and grants.
  • New Gwadar International Airport: $230 million , total Chinese government grant.
  • Construction of Breakwaters: $123 million, mix of concessional loans and grants.
  • Dredging of Berthing Areas and Channels: $27 million, Chinese government concessional loan.
  • Development of Gwadar Free Zone: $32 million, Chinese government concessional loan.
  • Necessary Facilities of Fresh water and water supply: $130 million, Chinese government grant.
  • Pak-China Friendship Hospital: $100 million, Chinese government grant.
  • Technical and Vocational Training Institute: $10 million, Chinese government grant.
Concessional loans are still loans, they will need to be paid back. Hence, one of the key tools to be employed is debt sustainability. It defines the ability of a country to meet its financial commitments without requiring an external relief or delay in meeting these obligations. It is an essential part of the framework developed by the World Bank and IMF that helps countries mobilize critical financial resources. Policymakers need to use this analysis effectively to guide our borrowing decisions aligned with our current and future capacity to payback, hence, avoiding debt build-up.

Although PTI’s government has shown concerns over country’s reliance on foreign debt, it still seems to welcome CPEC with regards to its potential widespread benefits. The government needs to realize what is the cost of this development? Are we okay with a developed Pakistan, owned by foreigners? Let us hope that the decisions to continue and renegotiate further Chinese funded projects are based on rational evidence-backed decisions and not just political gains.

Source: http://www.pakistaneconomist.com/2019/05/06/a-cautionary-tale/