CPEC Projects: An Overview
CPEC stands for China-Pakistan Economic Corridor (CPEC), and it is the culmination of decades of exemplary diplomatic ties between Pakistan and China, which have finally entered the economic domain.
CPEC aims to connect the Chinese city of Kashgar in Xinjiang province and Pakistan’s Gwadar port while stimulating economic growth within Pakistan and China’s landlocked western region.
This connectivity will reduce China’s dependence on the 12,000 km long sea routes along the Strait of Malacca, substituting it with a land route of just 2,700 km between Xinjiang and Gwadar.
CPEC lays out a network of regional connectivity that will benefit Pakistan and China and has the potential for regional integration with Iran, Afghanistan, India, and Central Asian Republics.
CPEC linkages will build road and rail transportation systems, allowing greater accessibility and free movement of people and goods as well as exchanges of academic, cultural, and regional knowledge.
This fits with the Chinese mantra of a “win-win” model for collective growth, development, and “shared destiny and prosperity.”
Table of contents
1.1 Current Economic Situation
Pakistan’s economy has faced several challenges during the last decade. It had witnessed a “volatile growth pattern” with regular “boom and bust cycles” impeding “long-term and inclusive growth.”
Structural problems include unsustainable debt, including circular debt in the energy sector, loss-making public sector entities, chronically low FDI levels, low and restricted exports due to regular energy shortfalls, and consistently poor tax revenue generation.
1.1.1 GDP Growth Rate
The economic growth rate at the time of the signing of CPEC, i.e., in 2014, was 4.67%. By 2018, it increased to 5.83%, primarily due to CPEC-related investments and other macroeconomic stability measures.
However, it dropped drastically to 0.98% in 2019 and further to 0.5% in 2020 due to the Covid-19 pandemic. In 2020-21, Pakistan’s GDP growth rate increased to 3.94%.
1.1.2 Pakistan And IMF
The balance of payments crisis led Pakistan to enter an Extended Fund Facility (EFF) program with IMF in 2018 for a $6 billion bailout.
While Pakistan has received the first two tranches, Covid-19 and other factors delayed the clearance and receipt of the third tranche.
In April 2020, Pakistan borrowed an additional $1.3 billion from IMF under the Rapid Financing Instrument (RFI) for urgent support to Covid-19-affected economies.
Pakistan-IMF negotiations are stalled due to conditionalities on revenue generation, stricter tax reforms, energy sector reforms, and independence of the State Bank of Pakistan.
Recently, IMF authorized an additional $2.8 billion for Pakistan as a revised global SDR allocation.
1.1.3 Macroeconomic Reforms
The current government embarked upon an ambitious economic reform agenda that included tax reforms and efforts towards addressing economic imbalances with improved fiscal and external account balance performance, led by a market-based exchange rate.
However, the economic shock of the Covid-19 pandemic created serious issues in FY2019-20. The government’s timely corrective measures, i.e., an $8 billion stimulus package, construction sector stimulus, expanding social safety net to vulnerable populations, and adjusting monetary policy, helped restore economic stability while maintaining the foreign exchange reserves balance.
High remittance levels also contributed to early economic recovery. Pakistan’s GDP growth rate recovered to 3.94% in FY2020-21, and the economy is now on a V-shaped recovery path.
1.2 Pakistan’s Public Debt
In June 2020, Pakistan’s total public debt (domestic and external) amounted to Rs. 36.399 trillion, about 87.6% of the GDP, representing a very high debt-to-GDP ratio.
This represented an increase of 1.7% from pre-Covid levels — one of the smallest recorded increases compared to the global average of 13%.
1.2.1 Debt Sources
Out of Rs. 36.399 trillion total debt, Pakistan’s domestic debt constitutes Rs. 23,283 trillion, whereas external debt amounts to Rs. 13.116 trillion.
Domestic debt is mainly borrowings by the government from within the country, including through prize bonds, treasury bills, savings schemes, bank borrowings, etc.
In the past, the government used to borrow heavily from the State Bank of Pakistan; however, now, it can no longer do so.
External debt is primarily accumulated through amounts borrowed from bilateral and multilateral international lenders and commercial credit through Eurobonds, sukuk, etc., floated by the government in international markets from time to time.
1.2.2 Debt Sustainability
Although the FY2020 debt-to-GDP level of 87.6% is alarmingly high, the IMF remains confident that Pakistan’s economic reforms are going in the right direction and that the debt levels remain “sustainable” provided Pakistan continues to undertake the agreed reforms agenda of the EFF program.
In fact, the IMF projections indicate that Pakistan’s debt-to-GDP ratio is likely to decrease to 73% by 2025.
1.3 China: Pakistan’s Largest Bilateral Creditor And Investor
A recent study by the US Institute of Peace (USIP) states that China is now Pakistan’s largest bilateral creditor.
The Ministry of Finance reported that in June 2013, Pakistan’s total external debt was $44.35 billion.
Chinese loans accounted for only 9.3%. In April 2021, Pakistan’s external debt had increased exponentially to $90.12 billion, with China’s share rising to 27.4%, i.e., $24.7 billion.
1.3.1 Currency Swap Agreement
Contrary to the narrative of the “debt trap,” China has been helping Pakistan repay its foreign debt for many years now.
As recently as December 2020, China expanded the bilateral Currency Swap Agreement (CSA) from its original amount of $1.5 billion (10 billion yuan) at the time of signing in 2011 to a revised amount of $4.5 billion (20 billion yuan) in 2020.
This was done to repay the $2 billion debt to Saudi Arabia in two tranches of $1 billion each in December 2020 and January 2021.
CSA is a Chinese trade finance facility used by Pakistan since 2011 to repay foreign debt and keep its gross forex levels steady while avoiding the issue of reflecting it as a loan or added external debt.
1.3.2 Chinese Loans under CPEC
The Chinese Embassy in Pakistan made a public statement in January 2020 that conveyed that the total loan liability for Pakistan out of CPEC is around $5.8 billion.
This makes up 5.3% of Pakistan’s total foreign debt of around $110 billion, with a repayment tenure of 20 to 25 years and around a 2% interest rate.
Repayments will commence in 2021, with annual repayments of about $300 million.
According to Pakistan’s Ministry of Planning, CPEC does not impose an immediate burden of loan repayment or energy sector outflows.
The CPEC outflows will commence in 2021 and spread over 20 to 25 years, with the maximum in 2024 and 2025.
1.3.3 Chinese Investments In Pakistan Other Than CPEC
Chinese investments are not limited only to the Chinese government. It was in 2016 when a Chinese consortium bought Pakistan Stock Exchange’s 40% shares.
Then, in 2018, Ant Financial, affiliated with China’s Alibaba Group, purchased 45% shares in Telenor Microfinance Bank through an investment of $184.5 million.
In November 2020, two Chinese companies concluded a contract to establish a mobile phone manufacturing facility in Faisalabad.
Another Chinese textile manufacturer, Challenge, will invest $150 million in a sportswear export manufacturing facility in Lahore with a target market in Western countries.
There is even news of Hui Coastal Brewery and Distillery Limited considering setting up operations for beer production in Balochistan.
1.4 Potential Economic Growth And Employment Opportunities
There are various estimates about the potential economic growth from the CPEC projects.
These range from exaggerated estimates given by the political leadership of Pakistan to swing public opinion or to claim credit for CPEC’s success to the independent assessment of multilateral institutions such as the World Bank.
1.4.1 Pakistan’s Estimates
According to the government of Pakistan’s official website, a decade-high growth rate of 5.3% was achieved in 2017, and subsequently, the growth rate was expected to rise to 7% by 2020.
While the Covid-19 pandemic and some delays in CPEC activities prevented Pakistan from achieving the target growth rate, Pakistan’s economy rebounded in FY 2020-21.
Nevertheless, Pakistan remains confident that CPEC will yield big economic dividends in the long run that will more than compensate for any loan repayments.
A $13 billion GDP growth is expected by 2025, and 800,000 direct jobs will be generated due to CPEC activities in the next 15 years.
1.4.2 Chinese Estimates
A statement by the Chinese Embassy in Islamabad in January 2020 stated that the CPEC projects were on track and there were no delays.
It said that 32 projects had “achieved early harvests” in the last five years, which had led to significant improvements in local transportation infrastructure and power supply, “creating 75,000 jobs directly and contributing between 1% and 2 % of GDP growth in Pakistan.”
1.4.3 World Bank Estimates
A World Bank report examining the socio-economic impact of BRI concluded that Pakistan would have the highest welfare gain among all BRI countries, i.e., 10.5% by 2030 (relative to the baseline).
These gains would be due to reduced cost of trade due to the improvement of Gwadar port’s connectivity, through road and rail network under CPEC.”
Regarding infrastructure investment, Pakistan’s GDP could increase by 6.43% until 2030. The CPEC could help 1.1 million people escape extreme poverty while boosting employment opportunities.
Pakistan may also see the creation of four million new jobs, and trade may increase by 9.8%, provided Pakistan can fully implement and operationalize CPEC projects and carry out the necessary reforms.
1.4.4 GDP Growth Projections
An extrapolation of the GDP growth rates under various scenarios reveals the likely fiscal space that CPEC may generate if it can spur consistent economic growth for Pakistan’s economy over a long period.
There are five different GDP growth Scenarios tabulated below, i.e., annual GDP growth at 2%, 3%, 4%, 5%, and 6%.
In each scenario, an incremental GDP growth indicates that for every 1% increase in GDP growth, at least $59 billion to as much as $89 billion can be created by harnessing the economic dividend of the CPEC projects, i.e., from $374 billion (at 2% growth) to $666 billion (at 6% growth).
TABLE 2
1.5 Effect Of CPEC On Pakistan-China Trade
In 2020, Pakistan’s exports to China were $2.33 billion. The China-Pakistan Free Trade Agreement (CPFTA-II), effective January 1, 2020, provides Pakistani exporters and manufacturers zero duties on over 1,000 products.
Leather, agriculture, confectionary items, biscuits, and textile, surgical and seafood items, constitute major exports which could increase to $9.73 billion by 2035.”
