by abi

By ignoring CPEC and Let Pakistan go into the debt trap.

7 years ago | Posted in: Business, India, Latest Politics News, Pakistan, World | 1989 Views

With this article we have tried to expose many interesting facts and figures about current Economic Crisis in Pakistan with relevant references. We have collected the information by referring only and only Pakistani News sites.

CPEC Explained Official Way – During the state visit to Pakistan in 2015, Chinese President Xi Jinping and Prime Minister of Pakistan Nawaz Sharif signed an agreement to commence work on the multi billion dollar agreement of CPEC[1], which will be developed as a regional route of China’s One Road One Belt project. The CPEC is based on a $46 Billion (now it is $62 Billion[2]) that China has loaned Pakistan under Sovereign Guarantee. From the original allocation the $11-billion amount is for infrastructure purposes and is a Chinese loan whereas the $35-billion is an investment for the power sector. Infrastructure investments offered by China for CPEC are to be paid back as Return on Equity (ROE) which is guaranteed at either 17% or 20% under Pakistan’s Sovereign Guarantee.[3]

CPEC, the China-Pakistan Economic Corridor, or the road that nobody in Pakistan can seem to stop talking about. The fact is CPEC is not a multi billion gift from Beijing to the Pakistani economy, but rather a complicated set of infrastructure investments that will be paid for mostly by Pakistani investors, consumers, and taxpayers in the form of commercial loans from Chinese banks paid back by Pakistani power generation companies and the government, and electricity tariffs paid by ordinary Pakistani consumers. China is not losing money through CPEC, it is making money at every step of the way.[4]

Convulted Economics – Consider this example which shows hidden devil in CPEC Projects. With a substantial portion of the Chinese investments focused on power projects, the viability of the projects has been closely examined, based on interest rates charged by the China Development Bank and the China EXIM Bank. Official documents have revealed that with an estimated debt-equity ratio of 80%-20%, and these investments guarantee a 17% to 20% rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost).[5] China will recover its investment in less than 26 months and bleed Pakistan for the 25 years of contract period.[6] Not only that, hugely expensive electricity will cripple their economy, making them a basket case.

Sri Lankan Precedent – To put the things in perspective, Sri Lanka is one of the Prime Example of Chinese ruthlessness. Unable to repay its debt to China, Sri Lanka is handing over the power plant, Hambantota port and possibly the airport to Chinese control in a debt/equity swap. China would then achieve a major objective of its ‘One Belt One Road’ project, that of having a strategic presence on Sri Lankan soil by professing to offer ‘economic aid’ with no strings attached. Thanks largely to such Chinese ‘aid’, Sri Lanka now spends 90 per cent of all government revenues to service debts.[7]

Venezuela Disaster – Check one more example of Venezuela, politically and financially high risk country in which China has invested over $55 billion from 2008 and it went to $120 Billion to pay back till 2016, the other biggest Chinese investment in any single country so far–may hold the answers. It created a win-win scenario for the Chinese by marrying off, low-wage Chinese labour, to long-term infrastructure projects, in exchange for secure and continuous supply of oil and commodities. All the Chinese loans to Venezuela were commodities-backed, under which Venezuela was obliged to keep supplying to China millions of barrels of oil to feed the Chinese economic boom.[8] [9]

Chinese gets maximum benefits – Because of contracts for direct investments in CPEC, almost all the bids awarded to Chinese companies and Pakistani subcontractors getting the leftovers that the Chinese would leave in their plates.[10] There are also reports that some of the projects have been awarded to black listed companies in China[11] , and substandard construction of Chinese Companies leaves everybody unsure of the quality. Khanpur and Nandipur hydroelectricity Power Plants are prime examples of this.[12][13]

China is now having huge under-utilised capacity of industrial production and workforce. In CPEC majority of workers, goods & materials are Chinese. China is constructing quarters for their own work forces in Pakistan.[14] No assurances could be given that Pakistani labour would be recruited to work.[15] So the money China is investing comes back to China and with interest. The official documents also revealed that by including the cost of insurance, also paid to a Chinese insurance company, the cost of borrowings would surge to 13%.[16]

Pakistan is providing Tax Exemptions to the Chinese firm managing and developing Projects under CPEC for 23 years.[17][18] The Federal Board of Revenue (FBR) also granted exemption from duty and taxes on import of materials and equipment for construction and operation as well as capital goods to be used in CPEC projects.[19] The Chinese will be granted long-term leases at concessional rates to set up in Special Economic Zones where they will also enjoy 20-year tax holidays, water, power and effluent treatment facilities and where trade union activities will be suspended.[20][21]

Hell for FDI – Pakistan is facing lot of internal security problems because of internal instability and terrorism, that’s why Foreign Direct Investment besides China is very low.[22] Transparency International’s Corruption Perceptions Index (CPI) shows how Pakistan is a very corrupt country.[23] Pakistan’s ranking has also fallen in the Doing Business report published by the World Bank, ranking 116th out of the 176 economies surveyed.[24] Reko Diq is the classic example how how Pakistani establishment treats Foreign Direct Investments.[25][26]

High Taxation and Electricity Costs – Already Pakistan has highest electricity rates in South-East Asia. Because of high taxation and high Electricity rates Industries in Pakistan cannot compete with products of other countries. For example Pakistan’s struggling textiles sector, which account for 60 percent of the country’s exports because they cannot compete with competing industries in China, India and Bangladesh which are providing concessions to decrease their production cost.[27] With adding surcharges, GST and other taxes electricity bills are very heavily charged[28] and the funniest part is whether you have TV or don’t have or don’t watch, Government is additionally charging 35 Rupees as PTV charges.[29] Another big reason is China to whom Pakistan is providing favourable terms like Free Trade and Low Tariff on products imported from China makes them cheaper is the other major reason behind falling Industries in Pakistan.[30] China is offering vast incentives and ploughing billions of dollars into the Western region of Xinjiang to build a textile industry, which will rely on CPEC road and rail links to export goods.[31]

Electricity Problems – There are a lot of Power Shortage, called load-shedding, sometimes last up to 8 to 14 hours a day and hamper economic activity , particularly affecting the country’s textile industry, and leave people across a wide socioeconomic spectrum in sweltering heat.[32] Many factories are not able to manufacture or produce and that means that the owners have to pay workers for doing nothing.[33] This affects the economy badly and has resulted in a severe energy crisis. It has become so bad that textile importers have shifted to Bangladesh and India.[34] Pakistan Govt is praising CPEC with promise of removing shortfall of electricity generation, the fact is Pakistan has surplus Power generation capacity. In April 2017, because of poor transmission infrastructure and non-payments to independent power producers (IPPs) and Power Plants they are not generating sufficient electricity in Pakistan.[35] The country could not pay only $26 Billion to leave their countrymen to suffer heat waves in summer, it shows how financially capable Pakistan is.[36]

Falling Exports – Pakistani goods and services that they can offer to the world are not growing. This is well evident by their trade deficient where exports are much lower compared to their imports. Pakistan’s exports have fallen by 15.4% in the last three years from $24.58 billion in 2012-13 to 20.8 billion in 2015-16 which is compared to $44.8 billion imports causing $24 billion trade deficit which is very huge as 215% more than its exports.[37] Owing to slowdown in exports, Pakistan’s external debt to export ratio has been projected at 441.8% by 2019-20, which is highly unsustainable.[38] By that year, Pakistan will consume 40% of its export earnings to service the external debt in 2019-20.[39]

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source: quora.com

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