While the government has protected CPEC (China Pakistan Economic Corridor) funding in its mini-budget, it has, however, indicated that it will re-evaluate projects to arrive at a win-win situation for both Pakistan and China, without undermining the strategic importance of Belt & Road Initiative (BRI) of which CPEC is a part. Some say that it has been done keeping in view the debt burden and current external account position, while others say that it is a move to appease the US, which hinted at blocking IMF funding for settling Chinese loans if Pakistan approached its window for the 13th time. The latter is to be seen in context of the recent tariff-wars between US and China.
The previous government touted CPEC as their achievement boasting of bringing Chinese investment into Pakistan, whereas in actual, the nature of CPEC could best be described as quasi-investment. Total outlay of $62 billion could be bifurcated into infrastructure and energy projects. While investment in roads might be relatively easy to recover through toll payments and developing facilities along the corridor, it is the energy projects that are the main concern for the present government as cost recovery in energy projects is linked with deeper issues in the sector such as tariff rationalization, power theft and line losses. Non-disclosure of these agreements by the previous government has further aggravated the issue.
The present government also accuses previous government of badly negotiating CPEC contracts giving unfair advantage to Chinese firms in the form of incentives like tax breaks etc. Secondly, Pakistani firms have been denied contracts for power and other projects; equipment and raw materials for the CPEC projects are being imported from China; labor (technicians, managers, engineers, etc.) too are coming from China. Since the labor mainly comprises of Chinese prisoners hence there is a societal impact to it as well which could be gauged from the fact that there has been an increase in ATM skimming fraud cases and reports of skirmishes between Chinese workers and local law enforcement agencies. The good thing is that the Chinese government has also shown readiness to changes in the BRI projects. The government seeks to buy more time through proposing extension in the timeline of completion of projects by 4-5 years.
The situation, however, is not gloomy altogether. The CPEC investments can be recouped many times over if they lead to increased trade and enhanced inflow of foreign direct investment (FDI) in the country. Evidence shows that incentives are not the primary drivers of investment and potential investors first look for policy stability, security and overall business environment. In fact, investment incentives if not designed carefully, can end up costing more than the benefits that they achieve, and have inadvertent consequences like tax evasion and rent seeking. Moreover, these benefits should be devised in such a way that these don’t put industries outside the SEZs at a disadvantage.
The existing industries at Landhi or SITE area in Karachi or in Faisalabad should not suffer because of the SEZs being created under the CPEC. Pakistan needs to devise and implement a trade policy that lays out an export-driven growth strategy and curb imports if it wants to have a strong manufacturing sector and be a large economy. Pakistan will never be a large economy and our exports and manufacturing industry will continue to stagnate unless we bring our focus back on export-driven growth and continue with our extremely liberal import policy. No country can make economic progress if it relies only on the domestic market.
There is little doubt that CPEC has the potential to become a vibrant trade route and the proposed SEZs can become investment hubs for manufacturers who wish to relocate closer to their markets. Yet this would need considerable work and that is where the present government should focus.