"CPEC is not a
game - changer it’s game over”
Shahzada Irfan Ahmed, September
2, 2017
Interview: Kaiser
Bengali
Kaiser Bengali is a
senior economist who has served as advisor to the chief minister Balochistan as
well as consultant/national coordinator for Benazir Income Support Programme
(BISP), Government of Pakistan. Besides, he has headed research institutions including
Social Policy and Development Centre (SPDC), Karachi, and Sustainable
Development Policy Institute (SDPI), Islamabad. He has done his Masters in
Economics from Boston University, USA, and has a PhD from Karachi University.
He has vast experience in the fields of teaching, research, publications and
finance.
Here he talks to The
News on Sunday (TNS) about the country’s economic policies, the priorities of
those managing the economy, the economic challenges faced at local and
international levels, the China-Pakistan Economic Corridor (CPEC) and its
relationship with Gwadar, development of the social sector, our falling exports
and foreign reserves and other related topics. Excerpts of the interview
follow:
The News on Sunday
(TNS): The sitting government regularly boasts of robust growth figures. Are
these real?
Kaiser Bengali (KB): I
would simply say Ishaq Dar, who had been heading the team, follows a
revenue-based approach to show growth and his focus is on increasing taxes. The
result of this is that those already in the tax net get further burdened. The
World Bank is also pressuring the government to increase revenue collection. We
can call it a neo-liberal economy. The policies are nothing but patchwork and
are quite similar to those pursued by Shaukat Aziz.
Shaukat Aziz would
probably claim Pakistan was becoming a services-oriented economy. But my point
is that for a country of 200 million, it is not a good choice to have
two-thirds of it unskilled. This country needs jobs for which the manufacturing
sector will have to be strengthened. Even Donald Trump is talking about
reviving manufacturing and creating jobs this way.
The growth figures
shared with us do not have any credibility as there is no reliable data to back
them. In fact, the calculations are based mainly on the revenue collected and
not on other important indicators that should have been considered.
As I said earlier, the
World Bank is a party to all this so it does not question the credibility of
these figures. Here I would quote the example of the livestock survey presented
by the government which is completely flawed and based on estimates. Much after
the results were revealed, we found that no proper ground work was conducted to
reach the conclusions they were claiming.
The government just
paints a flowery picture: so while sharing the attractive growth figures, they
do not share that the manufacturing and agricultural sectors are nosediving. The
growth of manufacturing should be around eight per cent but in Pakistan it is
just four-and-a-half per cent per annum. Similarly, the growth of agriculture
sector has hovered around one per cent per annum on average and there have been
times when it has experienced negative growth as well. The government must
explain why this is happening; especially why a purely agriculturally country
cannot even feed its agro-based industry properly. It is common knowledge that
the cotton crop has suffered in the past couple of years. The growth of the
manufacturing sector is vital as it helps reduce unemployment but unfortunately
it is not a priority here.
“I think our economy
can best be described as a casino economy. This means that we are investing in
real estate, stocks etc. in anticipation of high returns within a small span of
time; there are no long-term goals in sight. Manufacturing is constantly on the
decline so the domestic demand is fulfilled by importing products from abroad.”
TNS: In the current
scenario, what do you think are the driving forces of our economy?
KB: I think our
economy can best be described as a casino economy. This means that we are
investing in real estate, stocks etc. in anticipation of high returns within a
small span of time; there are no long-term goals in sight. Manufacturing is
constantly on the decline so the domestic demand is fulfilled by importing
products from abroad. Even in this process, easy and quick money is made by
importers by under-invoicing and evading duties in collusion with the Federal
Board of Revenue (FBR) officials.
There is hardly any
realisation about how dangerous this practice can be for the country’s economy
and its manufacturing sector. It’s pitiful that while importers are being
facilitated, manufacturers are getting crushed. The cost of doing business
is too high and it’s a fact that they have to pay different taxes whose value
adds up to around 51 per cent.
Even worse is the
government’s habit of seeking expensive loans and raising funds through
floating financial products such as Euro Bonds and Sukuk Bonds in the
international market. The promised rate of return is too high when compared to
similar products launched by other countries. After launching such products,
the government claims success, stating these have been oversubscribed in the
international market. It’s a matter of common sense to understand that buyers
rush for products that offer an exorbitant rate of return. The real test of the
government will be when these mature and it has to pay dividends to the buyers.
TNS: The PML-N
government promised an end to the power crisis. How successful have they been?
KB: Yes, it’s true
that they capitalised on this promise and got political mileage out of it. They
are pursuing several projects but my point is that the basic issues persist and
are yet to be resolved. For example, the circular debt is once again out of
control and close to Rs800 billion.
When the incumbent
government came into power, it printed currency notes to pay off the circular
debt. This solved nothing. You see the problem is still there and it will
remain there till the structural issues of the power sector are resolved. It is
not possible to produce expensive electricity and sell it for less than its
cost, and at the same time offer preferential tariffs to certain sectors. Power
theft and line losses further add to the burden.
The Chinese companies
play smart and get excellent returns on their investments. It has proven
difficult to extract much from them. China has a 10-year control of the
Saindak Copper and Gold Project and gets gold as a by-product of the mining.
TNS: A lot of hopes
are pinned on CPEC. Do you think it can really be the game-changer?
KB: I do not think
Pakistan will gain a lot from the CPEC initiative which is still shrouded in
mystery. There are no details available and the government is not ready to
answer any questions. Instead of a game-changer; CPEC may signify a game over.
I see the Corridor creating threats for local businesses and fear that it won’t
be a win-win situation for both countries.
For example, since
Chinese companies are tax-exempt they will bring everything from China and
hence they will have no reliance on Pakistani businesses to fulfil their
demands. This has shattered the dreams of many local companies that planned to
expand their production facilities in anticipation of receiving orders from these
Chinese companies. The association of cable operators in Pakistan is one
such entity that was expecting a big boost in its sale volumes, but now they
are struggling to sustain their existing sale figures.
The Chinese
companies play smart and get excellent returns on their investments. It has
proven difficult to extract much from them. China has a 10-year control of the
Saindak Copper and Gold Project and gets gold as a by-product of the mining.
Also, China does not share how much ore it is taking from Pakistan or how much
copper it is extracting or what is the quality of gold obtained as a
by-product. And nobody can ask them these questions.
They will definitely
watch their interest this time also, so it becomes the duty of the government
to secure the country’s interests. I raised this issue and presented 12
questions on CPEC to the government but it has not provided any answer except
one “yes” to the question about whether any feasibility has been conducted on
CPEC. However, they have no documents or figures to support this claim.
Furthermore, there is no document on how the toll money, if at all, will be
shared between the provinces through which the CPEC routes passes.
And one more thing;
people believe all the money is coming from China. This is not so. Pakistan
is spending a lot from of its own resources without calculating what it stands
to gain or lose. All the CPEC roads are being built by Pakistan. Besides, the
cost of providing security to the CPEC-related Chinese workforce and
infrastructure falls on us. There are reports that NEPRA has allowed
transferring this security cost to the citizens of Pakistan. This will be done
by adding it to our electricity bills just like the PTV license fee that
they have to pay.
Those celebrating it
must know that the above USD 50 billion loans and Foreign Direct Investments
(FDI) will ultimately impact the country when there will be an outflow of
loan payments and profit remittances to Chinese companies. This will put
immense pressure on foreign reserves which are already dwindling.
Unfortunately, Pakistan has done no planning on how funds and revenues will be
generated for these payments.
Another fear is that
the trade imbalance with China will further widen. The Free Trade Agreement
(FTA) between Pakistan and China has already resulted in trade imbalances with
Pakistani exports being far less than its imports from China.
This is about formal trade; the flooding of Pakistani markets with Chinese
products is in addition to it. You will be surprised to know that many
Pakistani manufacturers have stopped production at their units. Instead, they
import products from China and supply them to the market in Pakistani
packaging. Buyers think the product is manufactured in Pakistan which is not
the case.
The environmental cost
of CPEC will also be big. One reason is that no EIAs have been done to offset
this. Several coal-powered projects based on imported raw material have been
launched. This dependence on imported fuel will increase pressure on rupee. The
effective rate of US dollar is already Rs120 but it has been kept between Rs104
and Rs106 artificially. Just imagine what will be the situation when Pakistan
will have to honour the payback commitments.
TNS: How much does
Pakistan stand to gain from the development of Gwadar?
KB: I have said it
earlier and will say it again that Gwadar cannot become Dubai. It is a seaport
built for the purpose of re-exporting Chinese products brought into Pakistan
via a land route. I think it is not possible to establish industrial zones and
a mega city in Gwadar because there is no water available to support this
development.
The environmental cost
of CPEC will also be big. One reason is that no EIAs have been done to offset
this. Several coal-powered projects based on imported raw material have been
launched. This dependence on imported fuel will increase pressure on rupee.
If we recall, Gwadar
came into the spotlight after the Kargil war because a need was felt to have a
port for naval purposes. India tried to blockade the port at Karachi and sent
ships but this plan failed. As the sea is rough in the summer, the crew got
sea-sick and returned. The Karachi-Gwadar Road (Coastal Highway) was also
constructed during that time, mainly for defence reasons. Till then it had been
completely neglected and its economic potential had not come under discussion.
I am not against building infrastructure for security reasons; my point is that
we must acknowledge it was for defence reasons and not to exploit its
economic potential.
Can one believe it is
for the first time that Gwadar and Quetta have been connected via a direct
road?
The issue is that one
tanker of drinking water brought from as far as Mirani Dam (150 kilometres away
from Gwadar) costs around Rs25,000. You will be amazed to hear that water theft
from houses in Gwadar is quite common. What happens is that thieves enter
houses and walk away with household containers carrying drinking water. They
won’t steal motorcycles or other belongings, it’s water that they want.
The government does
talk about the option of setting up a desalination plant but I do not think
it is workable because of its huge fixed and operational costs. It is estimated
that it will cost Rs750 million a year to run such a plant. China is
apparently not ready to give funds, so Pakistan will have to cover the cost. I
do not think Pakistan will be able to take this responsibility because its
share of revenues from Gwadar Port is only 9 per cent while China has 91 per
cent of the share.
TNS: The government
talks of increasing the tax net but this has not happened. Why?
KB: I think this is
because the moral legitimacy to demand taxes has been lost and the reason for
this is that people do not recieve anything in return. In developed countries
with a high tax-to-GDP ratio, people are motivated to pay taxes because they
get services and privileges in return. They believe they are paying taxes that
are ultimately being spent on their welfare and well-being, but in Pakistan
there is a strong mistrust among citizens and the state. In Canada, the tax
rates are high but people pay happily because facilities like education and
health are free and of high quality.
In Pakistan this is
not the case. Take the example of Sindh Industrial and Trading Estate (SITE)
and the Korangi industrial area in Karachi. The owners of industrial units set
up here pay billions of rupees in tax but the government cannot even provide
proper roads to them. They have to pay bribes to have their petty issues
resolved and are harassed by the state machinery.
The government is only
interested in having a good budget to show and for this it plays with figures
and deviates and digresses from original plans. It is quite common to find
block budgetary allocations made for certain sectors without going into
specific details. Besides, as I mentioned earlier, it takes further loans to
pay off earlier loans and build up foreign reserves —- although this helps
paint a pretty picture, it has severe repercussions in the long run. Similarly,
the government of Pakistan received USD1.5 billion to maintain its reserves.
This is just like borrowing money from someone to show a healthy bank statement
at the time of applying for a visa and later on returning it to the lender.
Without a doubt,
well-planned, comprehensive and sustainable policies with long-term objectives
are the need of the time. We will have to do away with patch-work and
short-lived quick fixes.
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