Recently International Monetary Fund (IMF) agreed to sanction the 13th IMF bailout package of $6 billion to the cash strapped Pakistan. However, the sanctioned amount is to be given in installment subject to the Pakistan implementing and adhering to all the conditions laid down for approval of the said package.
But will this money be enough for the country to keep its wheels of the economy moving? Will it be enough to come out of the balance of payments crisis and insufficient FOREX reserves which as of now may not afford even three months of imports?
IMF Bailout Package
The thirteenth loan in the last thirty years from the IMF, speaks a lot about the governance system and the economy of a country. Interestingly, Imran Khan, the current Prime Minister, blamed the previous governments for such condition and termed it as begging. This was one of his major agenda during the election campaign and he had even publically announced that he would commit suicide rather than going to IMF or any other country with a begging bowl. He managed to form the government but had to do a U-turn about begging, as very soon, he was visiting various countries asking for financial help. IMF was at the last on the list, though he knew, how important it was for Pakistan to get assistance from IMF as it could then facilitate other agencies coming forward for the help.
So, the IMF agreeing for the loan did bring some smiles back but it quickly vanished in the backdrop of World Bank arbitration court slapping a fine of $5.8 billion in damages to a multinational mining company, which discovered gold and copper deposits at Reko Diq in Balochistan only to have its mining lease arbitrarily canceled. In yet another setback Pakistan lost another arbitration case against the asset recovery firm Broadsheet LLC. $33 million is to be paid in damages and costs to the company hired by Pakistan’s National Accountability Bureau to search for the hidden assets of former Prime Minister Nawaz Sharif’s family whose contract was terminated without regard to international contract law.
Will the Slide Continue?
How much Pakistan’s debt-ridden economy can afford further bleeding? Not much. And what can help stop this bleeding? CPEC maybe? A $62 billion project touted as the ultimate source to bring back the economy of Pakistan on the tracks. But, once viewed as Pakistan’s great hope for job creation and economic development, in Pakistan’s latest budget, this leg of China’s Belt and Road Initiative is likely to have an estimated 60% cut in spending. Cynicism around CPEC is on the rise as investment projects seem to be failing to adequately address underlying obstacles to sustainable development and their questionable commercial viability have exacerbated Pakistan’s already severe fiscal and financial problems.
So, the question being asked is ‘Can CPEC still offers a Pakistan viable development path which can help the country tide over the existing economic crisis?’ Some stay optimistic but the majority feel otherwise. In the long-run, new network of roads, ports, and power plants may spur development and improve Pakistan’s fortunes but given to the Chinese lending practices vis-à-vis weak economy of Pakistan, CPEC may do more harm than good to the latter.
Reasons why CPEC may not Achieve its Envisaged Goals
Pakistan has pinned all its hope on CPEC to improve the plunging economy of the country. But there seem to be certain challenges which can adversely affect the ambitious project which in turn may further harm Pakistan.
First of the reason is the harsh terrain especially in the Karakoram ranges which will enforce very expensive and uncertain transportation from Gwadar to Shanghai. Transportation, in an area exposed to harsh weather conditions, as per the rough estimates, is going to cost almost sixteen times more than China’s current route through the Strait of Malacca.
Secondly, as per ‘Build-Operate-Transfer’ financing scheme, Pakistan has to pay 91% of all the profits made by the Gwadar port to China for the next 40 years. This will keep the debt graph for Pakistan going northwards.
Thirdly, is the reason why China was shielding Masood Azhar, the chief of Jaish-e-Mohammed (JeM), a terrorist outfit operating from Pakistan? Because China is apprehensive that JeM terrorists will pose a threat to the security of the corridor. Also, the Baloch insurgents will further threaten the economic viability of the project. Frequent attacks on the Chinese personnel and their establishment are just a few indicators.
Fourthly, so far, CPEC projects, promising almost 1.5 million jobs every year to the Pakistanis have only provided jobs to mere 75000 people, resulting in very little economic value to the provinces. On the contrary, China is using its own workforce which he thinks is better skilled and more economical.
Fifthly, absence of the much-promised inexpensive energy supply from the various powerhouses planned under the CPEC. Prior to CPEC, many portions of the country had long, unscheduled power outages which adversely impacted the growth. And the situation is unlikely to improve as many CPEC projects have been canceled due to commercial viability.
China’s Lending Practices and its Consequences
It has always been suspected and questioned. Affected parties now feel that apart from having dubious commercial viability, CPEC projects are marred with non-transparent Chinese financing terms which have exacerbated Pakistan’s pre-existing debt and balance of payment crises. The impact of expensive Chinese loan, in absence of greater financial clarity, may not be a very happy situation for Pakistan. And other terms and condition of CPEC are bound to relegate the Pakistani interests to that of Dragon nation.
It is known that Pakistan’s economy has suffered mainly due to the short-sightedness of its leaders and of the itch to live beyond own means. This urge forced the government to resort to overvalued rupee, artificial low-interest rates, and pervasive tax evasion. In such a scenario, CPEC debt obligations may just prove to be the final nail in the coffin. Since CPEC’s inception in 2015, Pakistan’s current account deficit has increased nearly 700 percent taking the overall external debt obligations to more than $100 million.
So it will not be incorrect to say that rather than financially reviving the economy, the CPEC astride the notorious Chinese lending practices may prove otherwise for Pakistan. CPEC investments have entangled Pakistan into a debt trap which may not have an escape route for the country.
20 Jul 19/Saturday Written by Azadazraq