Sunday, 25 December 2016
CPEC is a classical googly can turn either way, Dr Shabir Choudhry
CPEC is a classical googly can turn either way, Dr Shabir Choudhry
25 December 2016
One Pakistani sums up the CPEC with the following comment: ‘CPEC appears to be a risky game changer - a classical googly and one need to wait to see which way it turns after bouncing.
The above comment makes a lot of sense for those who have studied the CPEC and have logically analysed it. My article is also for people with common sense; and not for those who observe things with prism of religion and who are emotionally charged.
Before you accuse me of opposing CPEC, I want to assert that no sensible citizen of Jammu and Kashmir is against Pakistan’s right to development because it is imperative for the progress and comfort of the society. However, we want Pakistan to treat others with compassion and care; and must abandon its policy of exploitation and plunder, especially in Gilgit Baltistan and Pakistan Administered Kashmir.
Before moving forward, it is pertinent to quote what some Pakistanis say about the CPEC. Senator Tahir Mashhadi, Chairman of the Senate Standing Committee on Planning and Development, while discussing issues related to the CPEC said:
“Another East India Company is in the offing; national interests are not being protected. We are proud of the friendship between Pakistan and China, but the interests of the state should come first.” 1
Some Pakistani leaders and political commentators think the CPEC is damaging the fragile federation of Pakistan because some provinces feel more benefits are being shifted to Punjab; and some provinces are being ignored. Some even fear that CPEC can become another East India Company which came as a trading company and eventually took over the entire undivided India. Senator Tahir Mashhadi feels this unfair treatment over benefits of CPEC can lead to serious threat to Pakistan. He said:
“We do not want the CPEC at the cost of the federation.” 2
Apart from that Jamat-I-Islami Emir Senator Sirajul Haq, while talking about the CPEC and deprivation of certain areas commented, ‘that like certain other parts of the country, Fata and AJK were also being neglected in the CPEC. “There is nothing for both areas in the CPEC,” he said and suggested that a 35km road (should be) built to link Muzaffarabad to the CPEC so that the people of AJK could also reap its benefits’. 3
Politics and relations among different nations revolve around common interests. This is why experts say there are no permanent friends or foes. Common interests bring people and countries closer to each other even when they live thousands of miles away.
China has initiated mega projects under One Belt One Road (OBOR), which will connect many countries between China and Europe by roads and rail networks. The OBOR project, once completed will connect more than sixty-five countries, which is approximately a third of the world’s total economy and more than half of the world population. The CPEC will complement other projects of OBOR. It will strengthen financial integration, trust, connectivity, cooperation and people to people contacts. It is interesting to note that out of sixty five plus countries, which will benefit from OBOR fifty seven are Muslim.
Costs of the CPEC
It needs to be understood that when the CPEC was initiated its cost was 45.6 billion US dollars; now it is projected to be 51.5 billion. Experts claim when CPEC is eventually completed the total cost could well be above 70 billion dollars. Both China and Pakistan have signed 51 MOUs. The CPEC won’t complete in 2018 as generally understood; however the Government of Pakistan is strenuously working to complete some projects before the next general elections to win the elections by showing its economic recovery and development plans.
When working out the costs of the CPEC people conveniently forget other costs like rupee depreciation against dollar, costs like security which has to be foolproof for the completion of the project and its smooth running, acute water shortage in Gwadar and environmental damage etc. This cost could also be in billions; but those who in charge of the CPEC do not care as loans will be paid back by Pakistani people.
People of Pakistan need to understand that China is not investing 51.6 billion US dollars because they love Pakistan and Islam. They clearly have their own agenda. Michael Kugelman, a senior associate at the Washington DC based Woodrow Wilson Centre said:
“China is not building the corridor as an act of charity for Pakistan. It will happily fund and build any structure that plays into this goal – whether we’re talking about roads or ports”.
For early completion of some projects to reap political benefits the government selfishly agreed to pay high interest rates for ‘early harvest’ projects. In return the Chinese agreed to provide 28 billion dollars under early harvest projects; out of which 19 billion is in the form of foreign direct investment with ‘debt service terms are 7pc to 8pc with many of them pegged to six-month Libor and include Sinosure, which is the fee for reinsurance of all loans that Chinese banks require all foreign borrowers to have’.4
It must be noted that interest on loan from World Bank and International Monetary Fund is generally around 0.5% and Pakistan, at times, have to borrow more money to pay instalments on the original loan. So question arises how Pakistan will manage to pay instalments of commercial loan with 7% interest; especially when the economic production is down, exports are down and money from Pakistani and Kashmiri Diaspora is also declining considerably?
It must be pointed out here that India is also building a mega project called Delhi Mumbai Industrial Corridor with help of Japan. The project includes building of infrastructure, smart cities and towns; and Japanese government is providing 43 billion dollars, which is 45% amount of the project. Unlike Pakistan, India doesn’t sing laurels for Japan that their friendship is higher than Himalayas and sweeter than honey; and still India got this loan from Japan at the interest rate of 0.25%. Pakistan with friendship sweeter than honey will be paying 7% interest to China with some hidden costs as well, as explained below.
With many of the projects under early harvest programme there is ‘a debt-to-equity ratio of around 80:20, or in some cases 75:25. And in most cases, return on equity (ROE) is guaranteed at either 17pc or 20pc’.
Khurram Hussain in his article in Dawn writes: ‘If $19bn is coming in as investment on commercial terms, and 80pc of that is debt with the remaining as equity, what is the size of the outflow as debt service and return on equity that we can discern? The debt service outflows will be about $1bn and the return on equity will be $646 million if it is kept at 17pc. Add to that $1.9bn as repayment of principal. That means an annual net outflow of $3.546bn per year once commercial operations begin’. 5
In order to properly understand how much is $3.546 billion dollars, one need to compare it with ‘last fiscal year’s figures, when interest payments on external debt were $2.1bn, and income (for foreigners) from investments in Pakistan was $3.2bn’. What that means is Pakistan’s total interest outflow on government borrowing alone was $1.1billion US dollars in fiscal year 2016. 6
As pointed above, apart from CPEC related loans, the government has other loan commitments which must also be honoured; and both loans will surely place heavy burden on foreign exchange reserves. If CPEC projects are not completed and run professionally then what Pakistan can have is herd of white elephants, which could prove to be disastrous to the economy and country’s standing. One must not forget how PIA and Steel Mill have been run in Pakistan.
Chinese money cannot bring success
Pakistanis need to do a bit of research before they sleep walk on to the CPEC bandwagon. Not all countries have benefitted from the Chinese supported projects; however China has benefited from all the projects. I won’t go in to details of what happened to African countries who borrowed heavily from China, I will just give an example from Pakistan’s friendly country Sri Lanka.
Sri Lanka also had a dream to establish a port like Gwadar, Hambantota; and they made similar arrangements with China, just like Pakistan did over the CPEC. Borrowing money and establishing a project is perhaps the easy part; one million dollar question is, has the borrowing government capacity and skills to manage the project and pay off the high interest loan instalments.
Hambantota was a small port town without much economic activity. When Mahindra Rajapaksa was elected President of Sri Lanka, he envisaged a grand plan to boost his home town Hambantota. His plans included a deep sea port, an airport of international standard, a cricket stadium, an LNG plant, tourist resorts and an industrial zone. 7
It was not possible for the Sri Lankan government to provide funds required for the projects, so China was requested to fund 8 billion soft loans. The projects were successfully completed; and situation after the completion is that the Mattala airport in Hambantota is almost idle – hardly two flights a day, Cricket stadium and conference centres are just as new because they are rarely used.
The business activity at the port and the industrial state is less than satisfactory because they are hardly used. Although the infrastructure is in place, the users are not there that government can call it a success or earn revenue. Whether users come or not all the infrastructure requires maintenance which adds to the government expenditure.
Those projects which are designed with political considerations in mind rather than economic viability generally end up with the same fate as in Hambabtota. It was Rajapaksa’s home town and he thought with the Chinese money he would be able to boost his political position; but he lost the next elections. Irrespective of what happened to the man who got the loans, the people of Sri Lanka will have to pay back the loan.
If a member of another nationality is doing something and you caution him of its dangers, he will appreciate that and feel obliged. However, if a Pakistani is doing something, and you caution him of its dangers he will not appreciate that, and instead he will say who the hell are you to poke your nose in my matters; and can even start a fight with you.
So advising Pakistanis, especially government officials, is a risky business. However, despite that I always point out what wrong they are doing. While building my case on the CPEC, I will mainly rely on comments of Pakistanis, who can tell their fellow citizens what wrong they are doing; but I don’t have that liberty because I am not a Pakistani.
A Pakistani columnist Shahid Mehmood wrote in his article, Lesson from Sri Lanka: ‘Gwadar and the CPEC represent some interesting comparisons. Gwadar is an outpost in the middle of nowhere – a rural setting which lacks modern facilities. It is located in a province which is almost half the size of Pakistan but is sparsely populated. It is from this province that the main arteries of the CPEC will pass and it is in Gilgit-Baltistan where they will ultimately end. But both provinces lack the population density to initiate or sustain a business surge. Simply put, there are not enough customers or producers to make it a business metropolis which can attract business and freight transport from all around the world. 8
Another Pakistani critic of the CPEC, Basit Ali wrote:
‘A brother China is using the route to export its manufactured products, do you think it would encourage competition to that. Can anyone imagine China concluding a development project in China where all the manpower and supplies came from outside the country? 9
It must be pointed out that apart from cement; almost everything related to the CPEC is imported from China, which is good for the Chinese economy, especially when there were clear signs of slowing down. And the icing on the cake is that Pakistan will partly pay for the recovery of the Chinese economy, which is competing with America and other countries.
Those who are emotional with Pakistan - China relationship need to understand that the Chinese are shrewd business people; and they leave emotions at home when they go to business meetings. Their only motive is profit and a lot of it with strategic and defence of the country in mind. If China is a true friend of Pakistan, then they should provide a favourable market access to Pakistani industry rather than just build roads and railway tracks to transport its finished products to other markets of the world.
As things are, CPEC will increase Pakistan’s dependence on China; and in future Pakistan’s ability to negotiate deals will be substantially reduced. True friendship requires China to give loans at the same interest as Japan has given to India 0.25%; and not 7% which is exploitation of a vulnerable friend. Another Pakistani critic of the CPEC wrote:
‘Chinese friendship, sweeter than honey. Chinese interest on loan, higher than Himalayas. Pakistan economy, deeper than the deepest ocean in the world’. 10
Pakistanis must understand that CPEC is essentially a trade route with other projects which are necessary for the successful operation of the CPEC; and moreover, they are designed to consume Chinese products for the revival of the Chinese economy. Trade routes on their own do not empower the nations; if that was the case then Egypt would have been the richest and most powerful as it is controlling very vital trade route of Suez Canal with billions of dollars in revenue every year. Same could also be said about Panama Canal. Abdul Jabbar, a Pakistani critic of the CPEC says:
The world is run by those who use that route – not by those who collect the toll tax.
Another critic says: ‘Unfortunately, the Chinese are conducting daylight robbery of Pakistan. On paper, China is giving Pakistan billions but most of that money is going back to China in the form of payments to Chinese companies, Chinese exporters & Chinese labourers. China did the same thing in Sri Lanka where they built infrastructure, ports & airports which are barely used. The Sri Lankans have realized their mistake but now they owe billions to China. The CPEC is a trade route & if trade routes could make a country prosperous, Egypt would be an economic giant...I really don't understand how in the world will Pakistan pay off billions Chinese debt along with interest, a high ROE, dollar appreciation etc. by collecting tolls’. 11
Everyone in Pakistan is fed with false hope that the CPEC is a game changer and that it will bring prosperity to Pakistan and strengthen Pakistan’s economy. I wish if that was true. Prosperity doesn’t come by borrowing money with very high interest rate and by collecting toll money on a trade route which will be primarily used by China. Pakistani policy makers can only see dollars and they cannot see dangers and dark shadows moving towards their country and economy.
What little money they will make from the CPEC will be eaten away by security related facilities; and the Chinese goods will flood the Pakistani markets. So who will suffer? Those Pakistanis who complain that P in CPEC represents Punjab and not Pakistan have reasons for saying that because Punjab gets lion’s share in everything. Just look at the data below which gives details of the loans from Zarai Taraqiati Bank Limited.
In simple English name of the loan provider is Agricultural Development Bank Limited; and it has provided the following loans:
· Loans for Punjabi farmers 81%;
· For Sindhi farmers 13.4%;
· For KPK farmers 4.2%;
· For Baloch farmers 0.3%;
· For farmers of Azad Jammu Kashmir 0.3%, and
· For farmers of Gilgit-Baltistan 0.4%. 12
If one complains or points out a wrong doing then that person is promoting regionalism and is anti Pakistan; and in some cases agent of India.
Good thing about the Chinese loans is that they don’t interfere in politics of the country, unless it becomes absolutely necessary and lives of their nationals are under threat, as was the case during Red Masjid crises in Islamabad. Loans from the US or European companies come attached with conditions to protect human or labour rights.
What this means is that with the Chinese loans Pakistan can continue to do what they are doing in Balochistan, FATA, Gilgit Baltistan, Azad Kashmir and some other places of Pakistan; and China will not even raise an eye brow. In some cases, China will encourage Pakistan to be harsher with people in Gilgit Baltistan and Balochistan that they don’t create any problems for the CPEC.
Chinese investment always has two objectives: short term and long term. The short term is trade and immediate profits, whether the project is economically viable or not, it is not their headache. The loan taking country has to repay the loans; and if they struggle to pay as is the case with the Sri Lanka, then the long term objective kicks in. The country concerned will gradually lose its sovereignty to China, as is the case with Sri Lanka which has lost sovereignty to massive tracts of land south of the port area. It is believed this area is under control of Chinese security and is a no go area even for Sri Lankan security forces. Sri Lanka cannot object how that territory is used because a new agreement was signed after Sri Lanka failed to repay the loans.
This is also the case in parts of Gilgit Baltistan which is illegally occupied by Pakistan, but Pakistan is generously giving it way to China. Pakistan gifted around 2000 sq miles of Shaksam Valley area to China. Apart from that there are large tracts of land in various parts of Gilgit Baltistan which are leased by the Chinese for exploration and they are under control of China for the duration of the lease; and are no go areas for Pakistanis and the local people who have lived there for centuries.
CPEC will link China with Europe through Central Asia and ensure a safe passage of China’s shipping through the Indian Ocean and the South China Sea. CPEC is presented as an economic project, but it has great political strategic and military aspects as well; and that is a great cause of concern to those countries which have interests in Arabian Sea and the Indian Ocean.
China has already started buying important assets of Pakistan, for example, they have just purchased 40% of the Pakistan Stock Exchange. Also they have expressed interest in buying a stake in a Pakistani cement company. Thinking people wonder what China will demand when Pakistan will be unable to pay off the high interest loan of billions?
Writer is a political analyst, TV anchor and author of many books and booklets. Also he is Chairman South Asia Watch and Director Institute of Kashmir Affairs. Email:firstname.lastname@example.org
4. CPEC cost build up, Khurram Hussain, Dawn December 15th, 2016
9. Daily Dawn, 15/12/16 CPEC cost build up, Khurram Hussain, comments
12. Daily Times, Pakistan, 28 Nov 2016 - http://dailytimes.com.pk/islamabad/28-Nov-16/ztbl-loans-only-for-punjabi-farmers?utm_campaign=shareaholic&utm_medium=facebook&utm_source=socialnetwork