Can Pakistan pay CPEC loans?

Published: December 14, 2017
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Planning Commission deputy chief promises to end load-shedding next year. PHOTO: FILE

Planning Commission deputy chief promises to end load-shedding next year. PHOTO: FILE

Planning Commission deputy chief promises to end load-shedding next year. PHOTO: FILE The writer has experience in Forex G10 spot currency trading with Citigroup ICG and financial consulting with Royal Bank of Canada. He tweets @thehouseofsaad

You are Pakistan. You make textiles. Meanwhile, Country X grows avocadoes. If you sell Country X textiles worth Rs1,000, but buy avocadoes worth Rs1,500, you will have a Rs500 trade deficit. This is not necessarily a bad thing. Without trade deficits, the world market would not be able to function. Deficits only become an issue when you sell barely any textiles but still buy a lot of avocadoes again and again.

Let’s say a friend of yours sees this chronic deficit problem you have and lends you some money because they are afraid if you default on all of your payments then you might get angry. Let’s call this friend the IMF. You might be a little upset that the IMF has put you on a list with Afghanistan, Sierra Leone, Greece and 37 other countries that require these ‘bailouts’. But at least you never made a decision as fiscally cancerous as, say Britain did via its inane Brexit.

Pakistan rejects use of Chinese currency

Your situation is dire, so you swallow your pride and accept the money (a dozen times since 1988). In return, you are told to start making strides to resolve your spending habits by hitting a few metrics that they get to assign you. For example: they do not like the way your currency is overvalued by about 20% via a managed float regime. A managed float regime (or dirty float) is a complex bit of high finance jargon which describes a system of economic management where Ishaq Dar yells at enough people so that, economically, things look good. Reality only comes knocking post-election cycle when the duct-tape starts peeling.

What could go wrong with someone being lent money? It is not as if the IMF consists of nation-states that are drowning in debt themselves. It is not as if the IMF’s largest contributor by far, the United States, has a Federal Reserve System chairman who recently expressed an intense anxiety over its $20 trillion national debt. It is not as if the said nation is now run by a man whose race-baiting antics bounce wildly around the walls of the White House, sending its staffers into panic attacks galore. Sad! All this to say that the plug could be pulled on future loans for a great number of reasons. Who is going to bail you out then?

Enter China. What principle does China adhere to more than ‘love your neighbour as yourself (apart from India)’? China likes you. You are like the little brother that Hong Kong never was. China even agrees to build you a nice corridor. An economic corridor! That sounds like exactly the kind of thing that makes money.

But the math on CPEC is grim. About 65% of the early project loans (some $28 billion) are not on the same terms as those provided by the IMF. They have a roughly 7% interest rate attached. If you think you may somehow manage paying back $28 billion, then I regret to inform you that a little less than $40 billion more at similar rates are on the way. You are the nation-state equivalent of an overdrawn credit card and, over the last decade, the Chinese have shown that they are as skilled at debt-collection as they are at power-plant construction. Monetary compensation is optional since surrendering small chunks of sovereignty is payment enough. Just ask Sri Lanka. You may be reminded of sunny days when the IMF never really bothered you when you could not make payments. They chide your lack of structural reform and how obvious your tactics to enact superficial actions are, but they are so used to disappointment that they just ask you to try your best next time. They point out that at least you did not abandon the eurozone in a fit of petulant, populist protectionism like, say, Britain did via its ridiculous Brexit.

As we head towards further rupee volatility, we need to have transparent checks and balances in place that can prevent finance ministers from artificially propping up the currency by pressuring the State Bank and others.

As another IMF, eurozone, and/or the World Bank bailout looks less likely than ever before, we need to create some degree of meaningful, long-lasting economic reform via a series of ambitious but necessary measures. They include wiping out the obvious corruption in our stock exchanges and corporations to promote  Capital Markets investments, setting ablaze any and all rent-seeking subsidies (which would be most of them), and dismantling state-owned corporations. That would be a start.

‘Currency closer to equilibrium’ as rupee hits record low

As our nation continually accepts high-interest rate commercial loans from the Chinese, we should create an independent and objective third party that is able to not only track every aspect of the CPEC deal, but also keep the citizens informed of its details in layman terms. The government has done a poor job of promoting the transparency of the process, although they have fought off the yuan’s encroach into Gwadar… for now.

The Pakistani economy is not beyond saving — because it never did anything as foolish as, say Britain did via its mad Brexit. It is not even in dire straits. But without proper drainage, its worst elements will continue to eat its most promising ones.

Published in The Express Tribune, December 14th, 2017.

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Reader Comments (21)

  • Milind
    Dec 14, 2017 - 11:28AM

    Excellent article.. lays out all the aspects in detail. Thank you…Recommend

  • Bunny Rabbit
    Dec 14, 2017 - 12:02PM

    As long as you dont politicse this issue yes CPEC can be the next silk route . Recommend

  • tatvavetta
    Dec 14, 2017 - 12:17PM

    Pakistan has already small chunks of sovereignty in Kashmir in 1958 when a parts of Kashmir were handed over to China. Now parts of Balochiran will have to be handed over.. CPEC is advantage China minus Chabahar.Recommend

  • rk singh
    Dec 14, 2017 - 12:47PM

    CPEC loans? They are not AID????Recommend

  • sanjeev
    Dec 14, 2017 - 2:45PM

    Saad – Congrats ! Very informative and balanced article. You commented on BREXIT. also. I am student of economics and very much interested in such matters. Can you throw light on BREXIT too as to why you consider it mad move by Britain ? Thanks !Recommend

  • stevenson
    Dec 14, 2017 - 2:50PM

    @rk singh: It’s fine to say CPEC loans should be analysed in a transparent manner and the best rates obtained but in reality, who was prepared to invest in such a big way? CPEC is the future for Pakistan despite the high interest rates and a flourishing economy and tax base can pay it off – in its absence, there is no such opportunity so look at the real benefit.Recommend

  • JJ
    Dec 14, 2017 - 3:15PM

    One must not forget that these loans from china have been invested on solid infrastructure, rather then buying military equipment or food or medicine. Even at 7% interest they are payable. Deal is not bad at 7%. Yes I agree that there should be more transparency in early phases for scrutiny. But keep in mind that some time transparency may not work, considering that Pakistanis most of the time see negative side of every event/thing and outsiders that want to spoil every thing within Pakistan for their own sake.Recommend

  • Sajid
    Dec 14, 2017 - 3:51PM

    Can America pay its debt in trillions – if YES! Then Pakistan can pay its debts in billions…Recommend

  • Rahul
    Dec 14, 2017 - 9:21PM

    I feel Pakistan will be the real winner here. China can bully countries like Sri Lanka, Myanmar, Ethiopia and Kenya but nobody collects their debts from the Islamic world’s sole nuclear power.Recommend

  • Komal S
    Dec 14, 2017 - 10:25PM

    @JJ:
    Nobody gets 28 billion at 7% rate. Also that would be in dollars. We all know how the rupee depreciates. So in Pakistani rupee terms the burden is a lot more. Good luck Pakistan.Recommend

  • Sami Baloch
    Dec 14, 2017 - 10:28PM

    Pakistan should be worried for the $82b it has to payback to IMF along with interest rate. Chinese are not giving us $60b loan. Some of it is investment, some of it is loan with no interest rate & some of it is with a very low interest rate. Pakistan should increase its exports to Russia and Saudi Arabia & promote foreign tourism.Recommend

  • cuban
    Dec 14, 2017 - 10:54PM

    @Sajid: Can America pay its debt in trillions – if YES! Then Pakistan can pay its debts in billions…
    .
    Suggest you take a logic class. USA economy generates about $19 Trillion dollars annually, has substantial growth, considered the cornerstone of the World economy and funds the IMF rather than borrow from it. Recommend

  • hamza khan
    Dec 15, 2017 - 12:49AM

    while the points are not invalid, the author fails to appreciate the massive amounts of tolls, royalties, and other payments it will be collecting, not to mention the massive amounts of economic activity the SEZ’s are expected to generate. this should lead to higher tax payments to GOP. i would expect tax receipts should increase by nearly 200% over the next 4-7 years. Recommend

  • Muhammad Imran
    Dec 15, 2017 - 8:16AM

    I agree with the author regarding questioning the transparency of the CPEC Projects loans. However, for Chinese CPEC is approximately 0.1% of its Belt and Road Initiatives (formally called One Belt One Road Project).
    The government of Pakistan really need a transparent system not only for CPEC but all the ongoing mega projects. I blame the bureaucracy. They are the one who need to implement a proper system, the political regime came and go for 4 or 5 years at the most. The Technocrat and Bureaucrat need to implement their power for the citizen of Pakistan. Recommend

  • skp
    Dec 15, 2017 - 9:17AM

    China took over sri Lankan pork for 99 year lease after Sri Lanka was unable to pay Chinese loan. Same is going to happen with Pakistan also , wait for some timeRecommend

  • MIK
    Dec 15, 2017 - 9:42AM

    A good article on CPEC loan implications and our country’s critical financial situation. Hope our Govt and people take heed of this inevitable and impending catastrophe,
    However what Brexit and Pr Trump has to do with it? This strange reference has nothing to do with Pakistan’s economy and its ability to repay loans. Seems the writer had a case of sudden mental seizure. Btw, as far as economy and financial health of both UK and USA is concerned : UK’s economy is rising with new low unemployment rate ever since the Brexit announcement. And US economy is booming and its Stock markets are breaking all previous records in history (Dow Jones Average is now now more 24,500 points, unheard figure), lowest unemployment rate of 4.1% in 17 years, and recent GDP growth rate of 3.2% (was 1.7% under Obama) since Trump became President. Recommend

  • Sajjad
    Dec 15, 2017 - 12:03PM

    Chinese are our iron brother. They wont ask for the money. It is investment.Recommend

  • Sanjeev
    Dec 15, 2017 - 12:25PM

    @Sajid: US$ is a world currency and accepted all over the world. So they have to only run printing press to pay debt. If some one wants some goods and services in exchange of US$ from USA, they will have to buy it from USA at the prices dictated by USA. Hence there is no question of USA being not able to pay any debt. But in case of Pakistan, their currency is not accepted all over the world or outside of Pakistan. They cannot pay debt by running a printing press because it will only make their currency to devalue and become worthless like Zimbabwe. Read what happened to Zimbabwe and understand why your idea is not workable.Recommend

  • Sanjeev
    Dec 15, 2017 - 12:40PM

    @stevenson: Has any transit trade made any country prosperous ? What happened to the countries with Panama and Suez canals ? How CPEC will be any different than Panama canal ? CPEC is only for creating alternative route for transporting Chinese goods in case of Naval blockade by powers like USA. It is only a stop-gap arrangement and a backup which is created for China at the expense of Pakistan. It is 8 times costlier than present route. And China won’t pay even toll for 40 years till their loan, capital, interest and marked up profit are fully paid up. By that time this infrastructure will become unusable and depleted. Pakistan economy will not flourish because China will never allow competition to its goods. It is like saying economy had flourished due to British colonial exploitation. As long as the country was under colonial yoke, its economy never prospered and people were only cheap service providers and clerks sustained on subsistence wages. Pakistan is going from British colony to Chinese colony and the new world order will squeeze last drop of energy from its economy. China is shifting only polluting industries which they have to close down very soon. So the junk will be sold to Pakistan. Pakistan cannot repay in cash but they will repay by way of agricultural lands and infrastructure like Stock exchange, railways, ports, airports and SEZ. India knows CPEC will bankrupt Pakistan. It is a danger because then Paki nukes will find its way in the terrorist black market or USA will have to preempt and capture them. It will make the region very volatile and dangerous and we will see increase in jihadi terrorism in Pakistan, Afghanistan, Iran and India and Uighur province of China.Recommend

  • Sanjeev
    Dec 15, 2017 - 12:46PM

    @JJ: : Have you ever seen any capitalist paying money to create competition to its goods ? Don’t you realize Pakistan will not be allowed to manufacture and export goods that China can manufacture and export ? Pakistan will be making only those goods that Chinese find economically unviable and unattractive. Recommend

  • Sanjeev
    Dec 15, 2017 - 12:46PM

    @JJ:
    @JJ: : Have you ever seen any capitalist paying money to create competition to its goods ? Don’t you realize Pakistan will not be allowed to manufacture and export goods that China can manufacture and export ? Pakistan will be making only those goods that Chinese find economically unviable and unattractive. Recommend

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