Notes

Executive Summary
The China Pakistan Economic Corridor (CPEC) is envisioned to expedite regional economic
integration and transform Pakistan into a Central and South Asian economic hub. It offers Pakistan
with a once in a life time opportunity to make itself count amongst developed nations of the world.
It is being viewed as a transcontinental project linking more than 64 countries, the reason why CARs,
Afghanistan, Turkey, Saudi Arabia, Iran and reportedly UK and France are vying to become a part of
the project.
Costing over $ 54Bn, CPEC encompasses a ~3,000km long road corridor from Gwadar in Pakistan to
Kashgar in China and a host of energy and infrastructure projects. CPEC strives to eliminate
Pakistan’s power shortages plaguing its economy for the past many years, develop Gwadar as a port
of international standard and importance, upgrade Pakistan’s industrial and human resource base,
and reduce travel time and costs to its ports in the south.
From China’s perspective, CPEC is a strategic part of its ambitious One Belt, One Road (OBOR)
project that attempts to provide regional connectivity facilitating potential trade with 4.4Bn people
through a network of roads. It is expected to save $ 2Bn annually on its oil supplies from the gulf
countries while for non-oil trade, CPEC would be providing a cost saving trade route from China’s
western and central regions to its export markets in the Middle East and North Africa (MENA).
Of primary importance in the CPEC plan is China’s Xinjiang province in Pakistan’s immediate
neighborhood. Xinjiang is China’s top cotton growing area, producing ~60% of China’s cotton
production. Previously under-developed, the province is undergoing rapid industrialization under
China’s plan of developing it into a major textile exporting hub. It is putting in $ 27Bn investment in
Xinjiang’s transport infrastructure for better regional connectivity in 2017 alone, while a $2.8Bn
fund is being utilized for investment in standard garment factory constructions. By 2020, Xinjiang is
expected to produce about 500Mn garments annually.
Here is where CPEC becomes an important strategic proposition for China; it provides a cost and
time effective route for its heavy textile exports from Xinjiang to markets in the MENA region. But
how does it bode for Pakistan? Pakistan’s exports are already facing a decline in the global markets
owing to a host of factors, two of which are high production costs and lack of govt. incentives in the
sector. Although a $1.7Bn textile package has recently been announced by the govt., it is no match
with the incentives provided to textile exporters in Xinjiang. Augment this with China’s high
production technology and levels of value addition, and it becomes evident that Pakistan would
simply not be able to compete with its Chinese counterparts in competitive markets.
It is therefore inevitable for Pakistan to not only improve on the competitiveness and breadth of
textile production but also diversify its exports in other sectors even if it is to sustain the current
levels of exports. Capitalizing on the humungous opportunity presented by CPEC entails a marked
improvement in national production capability and business environment. Infrastructural improvement will encourage greenfield industrial setups, but it is the focus on high tech and value
additive industries that will provide the real platform for competitive trade in the global economy.
Pakistani markets are already awash with hordes of low cost Chinese products; items produced in
Pakistan as well, but at higher costs. Add to this the decades long smuggling and dumping problem
which Pakistan has been facing due to Pak-Afghan transit trade and the likelihood increases that
Pakistan would be experiencing a similar influx of goods under China’s transit trade, and that the
Pakistan market would be made a dumping ground for Chinese products, effectively kicking local
Pakistan producers further out of competition. Further to this, the government’s unabated efforts to raise tax revenues by imposing further taxes
and doing away with exemptions wherever possible has further squeezed manufacturers’ capacity
to face the intense global competition not only in the export market but even in their home ground.
China has times and again proved to be a better negotiator of the terms its agreements with
Pakistan, as observed in the case of the FTA put in place in FY07. Since then, trade deficit with China
has continued to widen further year after year. Under CPEC, Pakistan faces yet higher risk of
broadening its trade deficit with China, unless new investments in manufacturing increase levels of
domestic productivity.
Proposed joint ventures with the Chinese in Special Economic Zones (SEZ) under the CPEC umbrella
bode well for domestic industrialization, yet such incentivized investments pose threat of crowding
out the already struggling mainstream export industry.
Financing structures for CPEC differ on the basis of sectors and projects. Almost all of the power
projects have debt to equity ratio of 80:20, which signifies that the inflows into the country
represent debt financing rather than equity investments. The markup on debt and return on equity
would not only imply a higher electricity rate for the next many years, but profit and principal
repayments in dollars - expected to jack up after 2021- would inevitably be putting incessant
pressure on the PKR and forex reserves in the years to come.
Power projects having total capacity of 10,400 MW are expected to be completed by 2018. Pakistan
currently faces a shortfall of 5,000MW, implying surplus power generation of 5,400 MW from 2018.
While this may not seem bad at the moment, it is the long term electricity purchase contracts which
are problematic. Sovereign guarantees have reportedly been issued to power sector investors for
electricity purchase meaning that end-consumers will have to pay for the excess electricity whether
it is utilized or not. However, not all is lost and we may still have time to negotiate some of our
power purchase agreements to allow enough incentives for rapid commercial operation
commencement, yet provide cost compatibility with our regional competitors.
All being said, CPEC has already seen the first trade convoy from China dispatching goods via Gwadar
port to onward destinations in Sri Lanka and the MENA region. Important questions that arise here
are how much Pakistan would gain in terms of transit fee from the project and who is to bear the security cost of the project? Whether it will be made part of the CPEC account, or the tax payer is
to eventually bear it? Here Pakistan’s foremost priority should be to smartly negotiate and exploit
CPEC to achieve maximum economic strategic depth for Pakistan, and to make all transactions
transparent to the hilt. Transit fee with China and all partnering countries needs to be prudently
negotiated as such a fee would be a major earning source for paying off CPEC related debt and other
associated costs.
Long term continuity of CPEC-related policies is essential to the success of the project keeping in
view the fact that only a year remains in the next general elections. Pakistan’s Chambers of
Commerce provide the ideal platform for stakeholder participation as regards industrial
development in SEZs and hence should be included in core decision making.
The emerging shift in regional trade patterns in the wake of CPEC and other corridors has made it
critical for Pakistan to promote and protect its own industries. Chinese investments in Pakistan, while boosting its economy will also be fuelling dependency on China in all respects. It remains to
be seen how Pakistan utilizes China’s propositions and its growth story for its own advantage while
maintaining diversity in its relationships with other world powers.
CPEC is widely being publicized as a game changer in the region; Pakistan can only be successful if
it remains an active part of this game.