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Are Chinese debts going to kill CPEC?


News Analysis |

Despite assurances by the government of Pakistan that Islamabad is completely on board with Beijing vis-à-vis the China-Pakistan Economic Corridor, some in the higher echelons of government seem to be wary of a debt trap, critics of CPEC warn about. The Prime Minister of Pakistan, Imran Khan, in his inaugural address to the nation, said that the country needs to get out of the debt trap.

Austerity measures, such as auctioning off of cars at the PM house are also meant to convey the message that the government takes the issue of debt seriously. Many experts have predicted that Pakistan will ultimately have to go to the International Monetary Fund for a bail-out package of nearly $8 billion. That, however, will not be without preconditions. The IMF will demand spending cuts on its own terms.

Saudi Arabia becomes part of the China Pakistan Economic Corridor and finances some projects under CPEC. The two sides inked an agreement worth $ 16.1 million at the offset.

The Minister of Finance, Mr. Asad Umar, said in a speech in Parliament that going to the IMF is not feasible. He also indicated that the government of Pakistan will look for other options. Some experts have pointed out that these options may include incentivizing overseas Pakistanis to buy government debt in the form of bonds or look for alternative sources of investment.

To this end, the visit of Prime Minister Imran Khan to Riyadh may prove to be highly significant. The PM made his first overseas visit to Saudi Arabia for a two-day tour at the invitation of King Salman. He was accompanied by the foreign minister, the minister for finance and the advisor to the Prime Minister on commerce.

Read more: Government introduces new dimensions to broaden CPEC

Taking along cabinet members responsible for finance and commerce to the Kingdom of Saudi Arabia shows the purpose of the visit seems to have been successful. He proposed that Saudi Arabia becomes part of the China Pakistan Economic Corridor and finances some projects under CPEC. The two sides inked an agreement worth $ 16.1 million at the offset. Indeed, a Saudi delegation reached Islamabad on Sunday.

The delegates from Riyadh may sign up to four MoUs with the government of Pakistan. Islamabad is looking to secure deferred payments for crude oil from Saudi Arabia. In return, KSA will get to set up an oil refinery at Gwadar, invest gold and copper mines in Baluchistan. The delegation is led by the Minister for Energy, Industry and Mineral Resources, Khalid Al-Falih. The refinery at Gwadar is expected to produce up to 110,000 barrels per day (bpd).

Islamabad rejected the funding of the Diamer Bhasha dam under the economic corridor because the terms were not favorable enough.

Crude oil imports form a major part of Pakistan’s import bill. Deferring payments should allow relief to Islamabad as far as the balance of payments is concerned. Saudi Arabia has allowed Pakistan to defer payments for crude oil before as well. After the nuclear tests in May 1998, Riyadh was one of the few countries that aided Pakistan when it was isolated internationally towards the end of the millennium. The Saudi delegation is set to visit Gwadar and Reko Dik in Baluchistan during their four-day visit.

The fact that the Prime Minister of Pakistan asked Saudi Arabia to become part of CPEC has evoked mixed reactions. To many, it shows flexibility and foresight by the new government in Islamabad. However, critics of CPEC take it as further evidence that the economic corridor will result in the country getting mired in debt and that the government is slowly beginning to realize this.

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They point towards to the fact that China acquired a 99-year lease on a strategic port in Sri Lanka after the government in Colombo failed to pay back Chinese loans. The Prime Minister of Malaysia, Mahathir Bin Mohammad, also walked back several projects that were supposed to be financed by China.

A report by the UK daily, the Financial Times, even suggested that a 9-member committee will ‘think through’ CPEC, quoting a senior government official as saying, “The previous government did a bad job negotiating with China on China-Pakistan Economic Corridor-they did not do their homework and did not negotiate correctly so they gave away a lot.”

Renegotiation under CPEC does not mean the government of Pakistan will cancel entire projects the way the Malaysian Prime Minister did.

The official in question, Abdul Razak Dawood, is the advisor to the Prime Minister on commerce and textile, rejected the claims made by the Financial Times report. The foreign office of Pakistan also completely rejected any insinuations against CPEC. Once again, speculations in the media suggest that the government might be ‘re-thinking’ CPEC.

The Minister for Planning, Development, and Reforms, Khusro Bakhtyar said in a press briefing recently, “We are seeing how to develop a model so the government of Pakistan wouldn’t have all the risk.” The revamping of the 1872 kilometer long ML-1 railway line has been promised under CPEC at a cost of $8.2 billion. It connects the Arabian Sea to the base of the Hindu Kush.

Read more: Can Pakistan’s policymakers respond to much-hailed CPEC?

Critics of CPEC point out that since the government might be reconsidering terms of finance under CPEC for this vital railway line, this shows the project is not good for the country. However, the fact of the matter is that CPEC is ultimately a business transaction. It is hoped that it will prove to be mutually beneficial to both China and Pakistan, not unlike how the Marshall Plan proved to be beneficial to both Western Europe and the United States.

Islamabad rejected the funding of the Diamer Bhasha dam under the economic corridor because the terms were not favorable enough. This does not mean that the friendship between Islamabad and Beijing is getting strained. Nor does it mean that the $60 billion infrastructure investment project is likely to fail. Debates around this issue in the media usually tend to lack nuance and depth.

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Renegotiation under CPEC does not mean the government of Pakistan will cancel entire projects the way the Malaysian Prime Minister did. It shows that there are enough flexibility and trust between Islamabad and Beijing that both are willing to find ways to make this project work best for both parties.

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