Why Pakistan needs to look beyond
CPEC, Jazib Nelson
Chinese
net FDI has witnessed almost a 100 percent surge in FY16. Do we really need to
worry about this trend? Yes, we do. It is the matter of simple principle. We
are not putting our eggs in many baskets. Rather, it is just one and that is a
Chinese bask
The China-Pakistan Economic Corridor (CPEC) has become the mother
of all foreign investments in Pakistan. And there is truth to this. What
started as a $46 billion set of projects has now increased to $51 billion as
China has recently also committed to fund Karachi-Lahore rail line under CPEC.
This price tag alone places it on par with all foreign investments to Pakistan
put together.
Every talk show on
Pakistan’s economy has this segment about CPEC. Every seminar or conference on
any issue of Pakistani economy that any cabinet minister turns up at, there are
talks of CPEC. As a nation, we are investing way too much in this silk
handshake. But then, it makes sense. What else do we have at the moment other
than CPEC? It is true what they all say: CPEC is a game-changer for the
country.
Still, I believe our
obsession is going way too far here. What really convinced me towards this
realisation was that Pakistan has witnessed net outflow of foreign investment
worth $130.5 million during FY16 (July-September) from the United States of
America (USA). Such outflows of different scales were also observed from
Turkey, South Africa, Saudi Arabia, Qatar, Philippines, Luxembourg, and Germany.
Interestingly, some of these countries have always been among major investing
countries to Pakistan. Chinese net FDI, on the contrary, has witnessed almost a
100 percent surge in FY16. Do we really need to worry about this trend? Yes, we
do.
It is the matter of simple
principle. We are not putting our eggs in many baskets. Rather, it is just
one and that is a Chinese basket. To me, as much as it can strengthen Pakistan,
it can make us increasingly vulnerable as well.
There are precedents to
this. China has made massive investments in Latin American economies. Just
like CPEC they were heavy on the infrastructure side. As much as these
countries imported merchandise from China, they also imported aftershocks of a
Chinese slowdown. This was followed by inflation increasing by 700 percent in
Venezuela. Stock markets of Brazil, Chile, and Peru tumbled as negative
sentiments took hold. Exports also skidded in Latin American economies.
Similarly, any future slowdown in Chinese economy can have negative bearings on
our economy as well given our increasing future connectivity with China through
CPEC. In the same vein, our foreign direct investment flow will also become
susceptible to Chinese money.
But these can be offset by
boom years of Chinese growth. So where can major risks come from that can have
widespread and sustained implication for Pakistan? To me, the biggest of them
all can come from energy projects.
Most of the CPEC energy
projects are coal-based, which are being built under build-own-transfer
principle. Any Chinese company building a power plant will own it once it is
completed,
and after securing an agreed-upon profit margin will transfer the power
plant to the government of Pakistan. So what can the government do with
such a large scale of power infrastructures? It sure can’t run them all by
itself. One option can be to contract them out to foreign investors. But given
that world economies are moving away from fossil-fuels based energy —
particularly coal-based — to renewables, government may find it hard to rope in
many foreign investors.
This shift towards
renewable source of energy is based on efforts to contain global warming
through curbing carbon dioxide emissions. Energy produced through fossil fuels
like coal, oil, and gas are high in carbon content, while energy produced
through renewable sources like solar, wind, and nuclear are virtually
carbon-free. Based on this premise, not many international banks are going to
finance a purchase of a coal-based power plant.
The result? These power
plants can become a fiscal liability. A liability worth billions of dollars. Ideally,
in this scenario, Pakistan should look to hedge against such potential risks by
investing its time in other opportunities as well. Pakistan should look beyond
CPEC.
One way to accomplish this
is to ensure that policy incentives shouldn’t just be a Chinese prerogative
only; these incentives should be accorded across the board to all foreign
investors. It is like following the famous dictum in finance of putting ones’
eggs in many baskets, and not just one. Pakistan should also put its eggs in
many baskets wrapped in different colours not just red.
The writer is a research associate at the Policy Research
Institute of Market Economy
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