CPEC Turns into a Chinese Albatross on Pakistan’s neck

On Nov. 24, a federal minister told Pakistan’s Senate that 91 percent of revenues to be generated from the US$62 billion Gwadar port and the China-Pakistan Economic Corridor that would transport the port’s imports would go to China.

Pakistan faces repaying US$16 billion in loans obtained from Chinese banks for its development, the free-trade zone surrounding it, and all communications infrastructure, at annual rates of more than 13 percent, inclusive of 7 percent insurance charges. The Pakistan government obviously has no answers on how it will repay the loan over the next 40 years out of the 9 percent of revenues the government will retain. China expects to recoup its own cost of development of the CPEC from the first four years of earnings.

Understandably gun-shy over the one-sidedness of China’s generosity, on Nov. 15 the Pakistani government turned down an offer of assistance by Beijing for construction of the US$14 billion Diamer-Bhasha Dam in Pakistan-Occupied Kashmir and said it would remove the project from the CPEC. The cost of the dam project has zoomed from US$5 billion to US$14 billion, with international lenders linking serious conditions with the provision of funding.

Pakistan thus is just one of several nations, including Sri Lanka, to have discovered the exorbitant conditions China is attaching to its massive One Belt, One Road bid to

“The real issue will come when some of those countries, particularly in central Asia, have to pay back some of the loans that were acquired in the Belt and Road Initiative,” Steve Tsang of London’s School of Oriental and African Studies told the Voice of America radio network. “And most of those countries will have problems paying back those loans.”

Given past practice, Pakistan will either look to the West and particularly the International Monetary Fund for loans to re-pay Chinese loans – or it will rely on Beijing for soft loans to repay the CPEC loans, thus getting caught in a vicious cycle.

In addition, what is likely to cause a lot more damage to Pakistan’s potential earning is the tax concessions and tax holidays over 20 to 40 years that Pakistan has granted to contractors and sub-contractors associated with the Chinese state-run China Overseas Port Holding Company for imports of equipment, material, plant, appliances and accessories for port and special economic zone.

According to reports, the 923-hectare free zone, which is to include factories, logistics hubs, warehousing facilities and display centers, will all be exempt both from customs duties and from provincial and federal taxes.

On the contrary, no comparable tax breaks and incentives have been provided to Pakistan’s local companies. This is likely to naturally reduce the demand for made-in-Pakistan goods because these goods, compared to Chinese goods, will be much costlier.

Even outside the free-zones, the Chinese companies’ activity amounts to disguised looting of Pakistan’s natural resources. The reason for this looting, in part, is Pakistan’s own ill-preparedness to protect its interests and revenues.

For instance, Pakistan doesn’t have a regulatory framework to oversee the export of the country’s natural resources, for example marble, allowing the Chinese companies to bypass Pakistan’s processing industries, which could otherwise be a major contributor to the country’s fast-falling value-added exports.

According to a report by the State Bank of Pakistan, Marble and Marble Products, “China is the biggest importer of marble from Pakistan; however, the marble exported to China also includes semi-processed marble, which is then re-exported from China after value addition, which is hurting Pakistan’s marble industry to a significant extent.”

It isn’t surprising therefore that Pakistan’s share in bi-lateral trade with China stood at, in 2016, US$41.9 billion as against China’s share of almost US$ 17 billion. Pakistan’s exports to China have actually fallen in value while China’s exports have increased, raising concerns that the 1,300-km Karakoram Highway linking the port to the Chinese border is a one-way street.

Besides the fact that the Chinese companies are almost operating in Pakistan as if they were operating in China, another startling concern is that these companies are bringing in shiploads of Chinese workers, and thus only rarely form genuine partnerships with Pakistani companies. Consequently, there is little or no transfer of skills or technology, which is one reason why Pakistan cannot prevent the import of marble to China as China has the right technology to process marble while Pakistan doesn’t.

That Chinese companies are bringing in their own workers is an illustration of the internal logic of CPEC whereby China is not only expanding its industrial reach, establishing new markets but also re-locating its excess labor as well. This, according to Pakistani economist Farrukh Saleem, is how China’s labor problem connects with CPEC and Pakistan: “China produces 60 percent of the global cement output. [But] domestic demand has gone down sharply, and the CPC would have to cut roughly 390 million tonnes of cement capacity. And that would mean unemployed cement workers.” Hence the imperative of re-locating this excess labor to countries like to Pakistan.

Similarly, China’s metal smelting and rolling industry, which employs 3.63 million workers, has annual production of at 800 million tonnes as against domestic demand of 400 million tonnes, indicating the need for a sharp cut in the industry and relocation of the excess labor.

As such, by 2023, the city of Gwadar alone is expected to see 500,000 Chinese workers and professionals. Accordingly, the China Pak Investment Corporation (CPIC) announced last month a partnership with Top International Engineering Corporation (TIEC), a Chinese state-owned company, to develop China Pak Hills, the first Chinese built Master Community in Gwadar that will accommodate about 500,000 Chinese by 2023.

Therefore, with Pakistan all set to take a deep plunge into ‘Chinese communism’ and create many mini-Chinas in Pakistan, hopes of reaping the benefits out of the ambitious project have largely been misplaced and a result of misguided and misperceived policy of the Pakistan government.

But Pakistan has little to no strength in its economy to refuse the Chinese capital. With its foreign exchange reserves standing at US$19 billion and with its external debts standing at US$78 billion, there appears little to no choice for Pakistan other than to jump on the Chinese bandwagon. Still, it all depends upon what Pakistan can extract out of its partnership with the Chinese. So far, however, it is the Chinese who seem perfectly placed to benefit both strategically and economically.

Salman Rafi Sheikh (kingsalmanrafi@gmail.com) is a Pakistani academic and long-time contributor to Asia Sentinel