CPEC has financial arrangements on South-South Cooperation model which don’t just depend on giving aid like the North-South Cooperation
Under this Cooperation, China has made use of four major tactics: investment, aid/grants, joint ventures and equity ratio
And when BOT (build-operate-transfer) is not possible, the next best alternative is opting for soft loans
These loans are comprised of three categories: preferential buyer’s credit, concessional loans and interest free loans
Loans are not given to the government of Pakistan, so, by no means do they burden Pakistan’s economy
The loans are being given to the companies that are involved in CPEC related projects
For example, if a company wants to undertake a project, it has to take loan from China’s Bank
How does that burden Pakistan’s economy when the country has nothing to pay back? There is no need to worry about repayment obligations either
Here is why: Firstly, all energy projects are investments which are based on Independent Power Producer (IPP) mode
They are required to have some equity ratio
The equity ratio, basically, is a debt ratio that is meant to access a company’s leverage, a figure calculated by dividing the company’s total liabilities by its stockholders’ equity
Some projects are directly invested in by the Commercial Bank of China and Import-Export Bank of China, whereas others are joint ventures like the Port Qasim power plant, with an approximate investment of $2
085 billion
The equity ratio of this project is 25%, while the rest has to be arranged by the sponsors through debt financing from the Import-Export Bank of China (China EXIM Bank)
Some are financed by the International Finance Corporation (IFC) of the World Bank Group and The Silk Road Fund such as Karot hydropower station
So, the financial arrangements of CPEC’s energy projects do not burden the government of Pakistan, but the companies involved in it
Secondly, these are not only loans that the IMF has been giving us, but a mega-investment under the guise of loans meant to ensure the smooth functioning of CPEC projects – it’s a somewhat cautious investment
Pakistan has $65 billion in debt
What have we been utilising this huge amount of debt for? To my readers’ surprise, we have been utilising it for meeting day-to-day expenses and paying consultants, hence it adds little to the benefits of Pakistan
On the contrary, CPEC, which is not a complete debt based project, adds a lot in the long-term value
It means huge benefits in terms of port access, transit corridor, trade hub, Foreign Direct Investment (FDI), and internal development
Let’s get back to the past for a while
A few years ago, Pakistan was declared a ‘failed state’
No country was willing to invest in Pakistan
Investors, if there were any, used to sit in Dubai to negotiate
American Stock Index Provider, Morgan Stanley Capital International (MSCI), categorised it as a frontier market, which was an indicator of the poor state of Pakistan’s economic affairs
But, with China’s investment, Pakistan’s economic prospects are becoming brighter
MSCI has included it amongst the 10 most emerging economies of the world
It also listed the KSE-100 share index as the world’s fifth best market
Another American international ratings agency, Atlantic Media Company (AMC), has ranked Pakistan as a comparatively stronger economy of South Asia which is bound to flourish in the coming years
AMC believes that the investment in infrastructure, coupled with the relative political stability, has accelerated the country’s GDP
So, what are investors looking for in an emerging economy like Pakistan? The companies that invest in emerging markets, in fact, look for increasing their profits and dividends rapidly
Arthur Kwong, the Hong-Kong based head of Asia-Pacific equities at BNP Paribas Investment Partners that oversees around €552 billion ($619 billion), has answered that, “Basically people are looking for alternatives, finding markets that are less correlated to the US interest rate-cycle and the China macro-slowdown
Pakistan, no doubt, is one of the outstanding spots
” In that regard, a reference is being made to the recent IMF report on the monetary issues of CPEC
If you read the language of the report, it is very careful and defensive
Even more, it endorses the fact that CPEC is good, but there is no guarantee
Pakistan’s industrial sector needs to be competitive enough lest its imports outweigh its exports
The issue of current account deficit is on the list, but it shouldn’t be blown out of proportion
No country has, so far, been bankrupted by an FDI
And no country has been bankrupted by a current account deficit either
There are many concerns over CPEC
The Pakistani industry should equally benefit from the project and there must be transparency regarding CPEC related projects
There are no two ways about it
Are we expecting CPEC to be a zero-risk economic package? Has there ever been such an economic package? Even the Marshall Plan wasn’t altruistic in nature
There are no economic projects that involve zero-risks
There is no free lunch either
Pakistan needs to strike a smart bargain and initiate long-term institutional reforms and internal development packages, which will take decades to bring fruits
In academia, think-tanks and policy circles, these issues have been taken under consideration
There must be assessments, recommendations, positive criticism and drafting a roadmap for the way ahead
But we must be realistic and stop looking into CPEC in terms of absolute gains
If we think so, we are clearly mistaken
| Date: | 30-Oct-2016 | Reference: | View Original Link |
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