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GVS: Will an over reliance on CPEC pay-off or will it hurt the Pakistani economy?
There are two points here. First, what other options do you have. For example, if you want to go to other lenders, seeking help for infrastructure development, because you want to build roads and railways and energy sector; well, other lenders have not been that forthcoming lately. Hence, you are right, unfortunately, we must rely on Chinese funding. Second, Chinese funding is still in terms of interest rate and debt servicing, lower than traditional donors, like the IMF, the World Bank and the ADB, who would have charged much higher for these energy generation projects and even the road, railway and port projects which you are getting financed by China. So, in the end, the response to your question is a yes and no.
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GVS: Amid deteriorating economic indicators-twin deficit and ballooning debt, can CPEC turn Pakistan’s fate around?
I think, it’s a big question mark! And you are absolutely right in asking this question. The IMF is also right in its preposition. I will take an alternate view of this. What would have been the macroeconomic position of Pakistan, if CPEC had not existed?
If you put this as an alternate question, then the answer becomes interesting. Without CPEC Pakistan’s economy was running at under a 3 percent growth rate, there was no growth in economy, FDI was well below $1 billion, exports were on decline, business confidence and consumer confidence were at an all-time low. Whatever growth has come into the economy, whatever has been the increase in private consumption, it has been at the back of CPEC.
CPEC has also encouraged non-Chinese investment to come into Pakistan. For example, the Dutch have invested, UK companies have come in and auto-companies are coming into Pakistan. After more than a decade, economy has finally hit the 5% growth rate. If we take this into account, then the IMF has also realized that CPEC is possibly the only story Pakistan has to demonstrate as a turnaround, which has come at the macro level.
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GVS: When will the true dividends be realized? Can Pakistan create a repayment capacity by 2022-23?
It entirely depends on us and how much fiscal discipline Pakistan shows. Two things are important for Pakistan. First, Pakistan will have to make sure that energy reforms are in place. Growth will continue, if we have a solid energy sector. Electricity position has improved, but we still need to bring down the unit cost of electricity.
Second, growth in government revenues is crucial and it is only possible, if the government whole heartedly undertakes tax reforms. Reform in tax policy and administration can help Pakistan build its repayment capacity to repay the interest payment. Finally, most of these loans must be paid in foreign currency. Ultimately, for years leading up to 2023 to 2025, much depends on increase in exports, remittances and FDI for repayment of loans.
The dividends of CPEC are already there, Pakistan must repay whatever China has given, it is only possible, if Pakistan can use CPEC assets; energy, power houses, roads and railway infrastructure to its advantage. This can improve Pakistan’s exports, private sector, only then, Pakistan will be able to repay.
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GVS: Â In the past bulk of the loan for investment purposes is used for debt servicing, will Pakistan be able to utilize them on asset building?
I think we have the capacity. After the Musharraf period, we lost the capacity to retire debt, particularly to Paris club and non-Paris club members and the IMF. But, we managed to pay off these loans in 7 to 8 years. Unfortunately, the loans have come back, what we need is to stay on course.
With a good energy program in place, with good tax reform program, we really hope that next government set-up will continue to reform the path.
GVS: Why did government not go to the IMF and asked China for loans instead? Is it a realistic solution to Pakistan’s debt problems – taking on favours from another country even if it is a friendly one?
It is the choice of the government to go to IMF for loans or to go to China, or any other lender. In this case, government found Chinese more suitable in November and then again in January. Had the Chinese not given the loan in these two periods, Pakistan would have most likely gone to the IMF.
In the post FATF political landscape, the IMF and the World Bank have became more reluctant to extend support to Pakistan, therefore China is Pakistan’s last resort. Another part of my answer will be, has this position ever come in recent history; let’s say the last three decades, when the US did not bail us out.
We were on the grey-list between 2009 and 2012, then again between 2012 and 2015, during the 90’s we had an all-time low relationship with the US and were almost declared a rogue state. But, history shows that the US required Pakistan for certain objectives which were enough to convince the US to bail Pakistan out. If that point comes, Pakistan will have to be bailed out, if history is to be an indicator, US will reattach stringent conditionalities, but will bail us out.
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GVS: Can we declare CPEC a game changer for Pakistan?
It can be a game changer but, if next government fails to keep the fiscal discipline, it could become a burden. As for now, CPEC has resulted in GDP growth. Finally, exports have shown growth 12.2%, remittances are up 3.5% and FDI has improved 5%, so yes, for now, it is a sort of a game changer.
Dr. Vaqar is the Joint Executive Director at the Sustainable Development Policy Institute. He has served in the UNDP as Advisor, and has undertaken assignments with Asian Development Bank, World Bank, and Ministries of Finance, Planning and Commerce in Pakistan.