Monday, May 22, 2017

Campaign of Fear, Uncertainty and Doubt (FUD) About CPEC

An unrelenting campaign of fear, uncertainty and doubt (FUD) about China-Pakistan Economic Corridor (CPEC) has been unleashed in the media in recent weeks. This strategy harkens back to the aggressive marketing techniques used by the American computer giant IBM in the 1970s to fight competition.

Fear, Uncertainty and Doubt (FUD):

A definition of FUD that captures its essence is offered by Roger Irwin as follows: "Unable to respond with hard facts, scare-mongering is used via 'gossip channels' to cast a shadow of doubt over the competitors offerings and make people think twice before using it".

A number of articles in western and Indian media have attempted to use FUD against China-Pakistan Economic Corridor. Some Pakistani journalists and commentators, some unwittingly, have also joined in the campaign.   As expected, these detractors ignore volumes of data and evidence that clearly contradict their claims.

Part of the motivation of those engaged in FUD against CPEC appears to be to check China's rise and Pakistan's rise with its friend and neighbor to the north. Their aim is to preserve and protect the current world order created by the Western Powers led by the United States at the end of the second world war.

Growing Infrastructure Gap:

Development of infrastructure is essential for economic and social development of a country such as Pakistan. China-Pakistan Economic Corridor financing needs to be seen in the context of the large and growing infrastructure gap in Asia that threatens social and economic progress.

 Rich countries generally raise funds for infrastructure projects by selling bonds while most developing countries rely on loans from international financial institutions such as the World Bank and the Asian Development Bank to finance infrastructure projects.

The infrastructure financing needs of the developing countries far exceed the capacity of the World Bank and the regional development banks such as ADB to fund such projects. A recent report by the Asian Development Bank warned that there is currently $1.7 trillion infrastructure gap that threatens growth in Asia. The 45 countries surveyed in the ADB report, which covers 2016-2030, are forecast to need investment of $26 trillion over 15 years to maintain growth, cut poverty and deal with climate change.



Chinese CPEC Loans to Pakistan:

About 80% of the $55 billion of the Chinese money for CPEC is private investment while the rest is composed of soft loans to the government, according to Shanghai Business Review.

The Chinese soft loans for CPEC infrastructure projects carry an interest rate of just 1.6%, far lower than similar loans offered by the World Bank at rates of 3.8% or higher.

Chinese companies investing in Pakistan are getting loans from China's ExIm Bank at concessional rates and from China Development Bank at commercial rates. These loans will be repaid by the Chinese companies from their income from these investments, not by Pakistani taxpayers.

Rising Confidence in Pakistan:

Pakistani economy is already beginning to reap the benefits of the current and expected investments as seen in the 5.2% GDP growth in the current fiscal year, the highest in 9 years.

The World Bank's Pakistan Development Update of May 2017 says that "Pakistan’s economy continues to grow strongly, emerging as one of the top performers in South Asia".

Rapidly expanding middle class and rising demand for consumer durables like vehicles and home appliances attest to the positive impact of CPEC. Consumer confidence in Pakistan has reached its highest level since 2008, according to Nielsen.

US-based consulting firm Deloitte and Touche estimates that China-Pakistan Economic Corridor (CPEC) projects will create some 700,000 direct jobs during the period 2015–2030 and raise its GDP growth rate to 7.5%,  adding 2.5 percentage points to the country's current GDP growth rate of 5%.

Countering FUD:

Pakistani government should respond to the FUD campaign against CPEC by countering it with facts and data and increasing transparency in how CPEC projects are being financed, contracted and managed. It is particularly important in a low-trust society like Pakistan's where people can be easily persuaded to believe the worst about their leaders and institutions. 

Summary:

An unrelenting campaign of fear, uncertainty and doubt (FUD) about China-Pakistan Economic Corridor (CPEC) has been unleashed in the media in recent weeks. This strategy harkens back to the aggressive marketing techniques used by the American computer giant IBM in the 1970s to fight competition. Part of the motivation of those engaged in FUD against CPEC appears to be to check China's rise and Pakistan's rise with its friend and neighbor to the north. Their aim is to preserve and protect the current world order created by the Western Powers led by the United States at the end of the second world war.   Pakistani government should respond to the FUD campaign against CPEC by countering it with facts and data and increasing transparency in how CPEC projects are being financed, contracted and managed. 

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14 Comments:

Blogger Riaz Haq said...

Economic Survey of Pakistan 2016-17


http://www.finance.gov.pk/survey/chapters_17/overview_2016-17.pdf


Per Capita Income in dollar terms has witnessed
a growth of 6.4 percent in FY 2017 as
compared to 1.1 percent last year. The per
capita income in dollar terms has increased
from $ 1,531 in FY 2016 to $ 1,629 in FY
2017. Main contributing factors for the rise in
per capita income are higher real GDP, growth,
low population growth and stability of Pak
Rupee.

------------------

Real GDP growth was above
four percent in 2013-14 and has smoothly
increased during the last four years to reach
5.28 percent in 2016-17, which is the highest in
10 years.

----

The agriculture sector met
its growth target of 3.5 percent, helped by
government supportive policies and by
increased agriculture credit disbursements.
During 2015-16, the agriculture credit
disbursement was close to Rs 600 billion while
during 2016-17, the target was raised to Rs 700
billion. During July-March 2016-17, the
disbursement was observed to be 23 percent
higher as compared to the previous year. These
developments, along with the Prime Minister’s
Agriculture Kissan Package together with other
relief measures have started yielding positive
results.
The large-scale manufacturing output is
primarily based on Quantum Index
Manufacturing (QIM) data, which show an
increase by 5.06 percent from July 2016 to
March 2017. Major contributors to this growth
are sugar (29.33 percent), cement (7.19
percent), tractors (72.9 percent), trucks (39.31
percent) and buses (19.71 percent). High
growth of sugar is based on production of 73.9Million Tons of Sugarcane as compared to 65.5
million tons last year, which represents an
increase by 12.4 percent.
Large Scale Manufacturing growth has picked
up momentum and posted a strong 10.5 percent
growth in the month of March 2017 compared
to 7.6 percent in March 2016. The YoY growth
augurs well for further improvement in growth
during the period under review.
On average, the LSM growth stood at 5.06
percent during July-March FY 2017 compared
to 4.6 percent in the same period last year. The
sectors recording positive growth during JulMar
FY 2017 are textile 0.78 percent, food and
beverages 9.65 percent, pharmaceuticals 8.74
percent, non-metallic minerals 7.11 percent,
cement 7.19 percent, automobiles 11.31
percent, iron & steel 16.58 percent, fertilizer
1.32 percent, electronics 15.24 percent, paper &
board 5.08 percent, engineering products 2.37
percent, and rubber products 0.04 percent.
Pakistan is bestowed with all kinds of resources
which also include minerals. Pakistan possesses
many industrial rocks, metallic and nonmetallic,
which have not yet been evaluated. In
the wake of the 18th Amendment, provinces
enjoy great freedom to explore and exploit the
natural resources located in their authority, with
the result that they are currently undertaking a
number of projects using their own resources,
or in collaboration with the federal government
or with donors to tap and develop these
resources.
The services sector recorded a growth of 5.98
percent and surpassed its target which was set
at 5.70 percent. Wholesale and retail trade
sector grew at a rate of 6.82 percent. The
growth in this sector is bolstered by the output
in the agriculture and manufacturing sectors.
The share of Agriculture, Manufacturing and
Imports in Wholesale and Retail Trade growth
is 18 percent, 54 percent and 15 percent
respectively. The Transport, Storage and
Communication sector grew at a rate of 3.94
percent. Finance and insurance activities show
an overall increase of 10.77 percent, mainly
because of rapid expansion of deposit formation
(15 percent) and demand for loans (11 percent).

May 25, 2017 at 7:10 AM  
Blogger Riaz Haq said...

#Pakistan presents new $50 billion #development-heavy #budget for FY 2017-18 - ABC News - http://abcn.ws/2s271CJ via @ABC

Pakistan's Finance Minister Ishaq Dar Friday presented a $50 billion development heavy budget that also promised a seven percent increase in military spending, a growth rate of near 6 per cent and an appeasement for farmers who protested ahead of the budget announcement, clashing with police who used tear gas to disperse them.

The budget offered Pakistan's farmers $6.8 billion in loans, as well as fuel and electricity subsidies.

In poor Pakistan the budget promised $1.15 billion in subsidies, mostly to reduce electricity and fuel costs. In his speech to Parliament Dar said the annual per capita income in Pakistan had increased from $1,334 to $1,629 over the last four years of Prime Minister Nawaz Sharif's government. Tax collection which is notoriously low in Pakistan also increased nearly 80 percent in the same period, he said.

In addition to a seven percent increase in military spending, Pakistan's budget also gave every soldier a 10 percent salary hike for fighting terror. The defense budget was set at $9 billion compared to $8.4 billion last year.

Pakistan's defense budget is not open for debate by Parliament nor does it generally include pensions paid to military personnel. The cost of their pensions comes out of the current budget.

Pakistan has been in a protracted war against terrorists with most battles waged in the tribal regions that border Afghanistan.

Friday's budget was seen as business friendly, offering a 30 percent tax cut to the corporate sector. It also exempts industries from the country-wide rolling power cuts that afflict Pakistanis on a daily basis.

Of the $20 billion plus development budget, Dar said $1.8 billion will go toward financing projects linked to its multi-billion dollar China-Pakistan Economic Corridor scheme that includes a vast array of joint ventures including roads and power plants.

Opposition politicians slammed the budget, with Asad Umar of the Tehreek-e-Insaf (Movement for Justice) party saying it takes from the poor to give to the rich.

"Money is being snatched from the pockets of the poor and middle classes to enhance the wealth of the unproductive elite," Umar said in a statement.

In a country with a literacy rate of 69.5 per cent among men and 45.8 among women, according to the latest CIA country report, the education budget was set at $887 million, considerably less than the sums allocated for defense and development.

The health sector in Pakistan, often bemoaned by many Pakistanis as inadequate, was allocated $126 million according to the figures released by the government.

Pakistan's protesting famers timed their protest hours before Dar presented the budget for the next fiscal year before lawmakers on Friday.

Pakistani TV channels broadcast footage showing riot police dragging farmers away from the scene, as well as protesters throwing stones at the police.

May 26, 2017 at 9:32 AM  
Blogger Riaz Haq said...

THE EXPRESS TRIBUNE > OPINION
Debunking myths on CPEC

By Ahsan IqbalPublished: May 25, 2017

https://tribune.com.pk/story/1418270/debunking-myths-cpec/

A pointless controversy was created on the Long Term Plan (LTP) by a recent article featured in a local English-language newspaper. The report published as ‘LTP’ in that article was an initial draft by the China Development Bank (CDB) and not a part of the agreed LTP. That article basically cherry-picked information from different sources to present a distorted picture of the LTP. The fact is that the government of Pakistan has prepared its own plan after multiple stages of consultation with provinces, federal ministries and their respective technical groups. The LTP has been prepared to develop Pakistan in line with the seven pillars of Vision 2025 which are predicated on the notion of inclusive and sustainable development. The main pillars of LTP are connectivity, energy, industries and industrial parks, agricultural development and poverty alleviation, tourism, cooperation in areas concerning people’s livelihood and financial cooperation. It was shared with the Chinese authorities following approval by the cabinet.

The Chinese side has given its approval in principle, however, its formal approval is expected by the end of this month, as our Chinese counterparts were occupied by the Belt Road Forum. As soon as we get the official approval from the Chinese side, we will put the LTP on the CPEC website.
One of the biggest myths propagated on CPEC is that Pakistan might become a colony/province of China. Any historian would tell you that colonialism and imperialism are legacies of countries of the global north. China has never invaded any country nor harboured any imperial designs. Cynics point out towards rising trade deficit with China as a reason to show concern on CPEC. The reality is that China’s competitiveness in exports is universal and not idiosyncratic to Pakistan. Pakistan’s current trade deficit with China is $6.2 billion. In comparison, India’s trade deficit with China stands at $47 billion. The US trade deficit with China is $347 billion. Based on these trade deficit numbers, is it appropriate to infer that the US or India are becoming colonies/provinces of China? Certainly not. Similarly, it is ludicrous to make such claims about the Pakistan-China relationship. Both countries respect the sovereignty of each other and CPEC is based on the shared vision of both countries: Vision 2025 and OBOR.

At present, only a few thousand Chinese nationals are living in Pakistan and making a positive contribution towards our economy, the majority of them fall in the category of temporary labour migrants who will return back upon completion of the projects. In contrast, around 8 million Chinese are living in Malaysia, 400,000 in France; 600,000 in Japan; 900,000 in Canada and over 2.5 million are living in the US. Therefore, to say that Chinese are overtaking Pakistani society is nothing but a farce. Chinese nationals working in Pakistan are our national guests as they are helping us to build a developed Pakistan.

Another myth spread on CPEC is that China is dictating terms to Pakistan and the federal government is not consulting the provinces. The reality is quite the opposite. China and Pakistan work jointly in making an overall planning for a unified development of CPEC projects. In this regard, the Long Term Plan, Transport Monographic Study and respective MoUs guide the policy for CPEC.

All provinces have been consulted and invited to all meetings within Pakistan and abroad for their recommendations and review of CPEC projects. Earlier this month, the chief ministers of all four provinces under the leadership of PM Sharif attended OBOR Summit in China. On 29th December 2016, all CMs participated in the 6th JCC meeting which was held in Beijing.

Since the signing of the MoU in July 2013, six meetings of the JCC have been held. The highest officials of every provincial government are represented in JCC meetings.

May 28, 2017 at 10:11 AM  
Blogger Riaz Haq said...

Cambodia, Sri Lanka and the China debt trap


http://www.eastasiaforum.org/2017/03/18/cambodia-sri-lanka-and-the-china-debt-trap/


Sri Lanka’s growing economic engagement with China has also generated concern among scholars and policymakers. One side of the argument posits that China has made a positive contribution to the economic growth of Sri Lanka. China has provided Sri Lanka with over US$5 billion between 1971 and 2012. Most of this has gone into infrastructure development, with China investing US$1 billion into a deep-water port at Hambantota and billions into the Mattala Airport, a new railway and the Colombo Port City Project.

As a small country emerging from civil war, infrastructure is crucial in facilitating Sri Lanka’s trade and foreign investment sectors. The World Bank forecasts that Sri Lanka’s GDP growth is likely to grow from 3.9 per cent in 2016 to around 5 per cent in 2017.

Yet opponents see flaws in the China–Sri Lanka bilateral relationship. First, Sri Lanka has borrowed billions of dollars from China in order to build domestic infrastructure. Sri Lanka’s estimated national debt is US$64.9 billion, of which US$8 billion is owed to China. This can be attributed to the high interest rate on Chinese loans. For the Hambantota Port project, Sri Lanka borrowed US$301 million from China with an interest rate of 6.3 per cent, while the interest rates on soft loans from the World Bank and the Asian Development Bank (ADB) are only 0.25–3 per cent. Sri Lanka is very deep in a debt crisis or ‘debt trap’ as some scholars describe it.

Second, Sri Lanka is currently unable to pay off its debt to China because of its slow economic growth. To resolve its debt crisis, the Sri Lankan government has agreed to convert its debt into equity. But the recent Sri Lankan decision allowing Chinese firms 80 per cent of the total share and a 99 year lease of Hambantota port caused public outrage and violent protests in Sri Lanka. In addition, Chinese firms have been given operating and managing control of Mattala Airport, built by Chinese loans of US$300–400 million, because the Sri Lankan government is unable to bear the annual expenses of US$100–200 million.

According to Brookings Institute visiting fellow Kadira Pethiyagoda, having access to the Hambantota port and Mattala airport provides Beijing with a strategic military position in the event of an Indian Ocean conflict and is also key for its ‘Belt and Road’ initiative. The growing Chinese influence may also compel Sri Lanka to support China’s position on the South China Sea dispute and ‘One China’ policy.

May 29, 2017 at 5:09 PM  
Blogger Riaz Haq said...

OBOR will spur growth in Asia, says UN official

https://www.nationalheraldindia.com/interview/2017/05/17/one-belt-one-road-silk-road-cpec-will-spur-growth-in-asia-says-un-official-china-india-economy



A statement by the (Indian) Ministry of External Affairs (MEA) last week had said the OBOR would create “unsustainable debt burden for communities”. However, Sebastian Vergara, Economic Affairs Officer at the United Nations’ Department of Social and Economic Affairs (DESA), says the project would benefit Asia, in an interview with National Herald.

However, achieving productivity growth must be a government policy priority if India wants to continue to grow above 7%. India must encourage public private partnership (PPP) projects in key sectors, especially infrastructure. Business structural reforms should be vigorously pursued. The health of the public banking sector is a big worry for India, and the government needs to tackle the level of debt with sound policies.

May 29, 2017 at 5:11 PM  
Blogger Riaz Haq said...

Moody's: Pakistan shows strong growth and reduction in fiscal deficits

https://www.moodys.com/research/Moodys-Pakistan-shows-strong-growth-and-reduction-in-fiscal-deficits--PR_366262


New York, May 07, 2017 -- Strong growth performance, fiscal deficit reduction and improved inflation dynamics underpin the Government of Pakistan's B3 rating with a stable outlook, says Moody's Investors Service.

At the same time, credit challenges include a relatively high general government debt burden, weak physical and social infrastructure, a fragile external payments position, and high political risk. In particular, the government's very narrow revenue base weighs on debt affordability. Meanwhile, exports and remittance inflows have slowed and capital goods imports have risen, resulting in renewed pressure on the external account.

Moody's conclusions are contained in its annual credit analysis of Pakistan, "Government of Pakistan -- B3 Stable". The analytical factors that are used in its Sovereign Bond Rating Methodology are: economic strength, which is assessed as "moderate"; institutional strength "very low (+)"; fiscal strength "very low (-)"; and susceptibility to event risk "high".

Moody's notes that prospects for growth have improved following Pakistan's successful completion of its three-year Extended Fund Facility (EFF) program with the International Monetary Fund (IMF) in September 2016 and the launch of the China-Pakistan Economic Corridor (CPEC) project in 2015.

Moody's notes that the implementation of the CPEC project has the potential to transform the Pakistani economy by relieving infrastructure bottlenecks, and stimulating both foreign and domestic investment. However, headwinds to further fiscal consolidation and renewed pressure on the external account present downside risks to the rating.

"Since 2013, implementation of economic reforms and increased foreign investment flows have contributed to macroeconomic stability and higher GDP growth. However, government debt remains elevated and pressure on the external account continues. " said William Foster, a Vice President and Senior Credit Officer at Moody's.

The stable outlook represents balanced upside and downside risks to the sovereign credit profile. Support from multilateral and bilateral lenders has bolstered Pakistan's foreign currency reserves and fostered progress on economic reforms. Meanwhile, implementation of the CPEC project has the potential to transform the Pakistani economy by relieving infrastructure bottlenecks, and stimulating both foreign and domestic investment. However, headwinds to further fiscal consolidation and renewed pressure on the external account present downside risks to the rating.

Upward triggers to the rating would stem from sustained progress in structural reforms that would significantly reduce infrastructure impediments and supply-side bottlenecks. This would improve Pakistan's investment environment and eventually aid a shift to a sustained higher growth trajectory. A fundamental strengthening in the external liquidity position and meaningful reduction in the government deficit and debt burden would also be credit positive.

Conversely, Moody's would view a stalling of the government's post-IMF program economic reform agenda, material widening of the fiscal deficit, a deterioration in the external payments position, withdrawal of multilateral and bilateral support, or a more unstable political environment as credit negative.

May 29, 2017 at 5:22 PM  
Blogger Riaz Haq said...

Why #India's zombie #debt imperils #Modi's plans? McKinsey: #Indian bank's bad #loans exceed #assets https://www.bloomberg.com/politics/articles/2017-05-30/why-india-s-zombie-debt-imperils-modi-s-plans-quicktake-q-a … via @bpolitics

The economy in India is growing faster than just about anywhere else. But there’s a threat to that expansion, one that the authorities are struggling to address: the mountain of bad debt at the nation’s banks. Those soured loans have contributed to a $191 billion pile of zombie debt that’s cast the future of some lenders in doubt and curbed investment by businesses. In the latest push for a solution, the central bank has been handed extra powers over lenders.

1. How big is the problem?

The amount of stressed assets at India’s state banks exceeds the value of the banks themselves, according to a McKinsey & Co. report. Provisions made for bad debt by all banks -- private and state -- undershoot by $93 billion the total of stressed assets (which mostly are bad loans and restructured loans). As McKinsey put it, “as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk.”

2. How’s this impacting the economy?

Credit growth in Asia’s third-largest economy has dropped to a 25-year low. In other words, the quantity of new loans that over-leveraged businesses are willing to take and that under-provisioned banks are willing to give, is slowing. Investment by private companies actually started to shrink in the year through March and will, by the government’s estimate, contract by more than 7 percent this financial year. That’s threatening to derail Prime Minister Narendra Modi’s much-vaunted economic plans.

3. Why is India growing so fast then?

It’s true, India’s gross domestic product is forecast to expand about 7 percent this year, the fastest rate among the world’s major economies. (Although some question the numbers.) Unlike in the U.S., where the pre-financial crisis boom was fueled by housing, India was plowing its money into productive assets such as power plants. That’s allowed the $2 trillion economy to prosper even as the banking sector got bogged down. Extra government spending has also cushioned the impact of that declining private investment.

4. How did the debt problem arise?

Among the reasons for the surge in bad loans: a slump in commodity prices, a lack of appropriate legislation and regulation and a rapid buildup of excess capacity in industries such as telecoms and cement. Four industries account for nearly 80 percent of stressed assets: power, steel, textiles and engineering/procurement/construction. About 70 percent of the bad debt is held by state-owned lenders, the legacy of an investment spree that soured after the financial crisis.

May 30, 2017 at 6:52 AM  
Blogger Riaz Haq said...

#Ramadan #power outages in #Pakistan pile pressure on PM #NawazSharif. #loadshedding #electricity https://www.ft.com/content/bee89ccc-4458-11e7-8519-9f94ee97d996 … via @FT


Nawaz Sharif has ordered power companies not to cut electricity supplies in the hours before or after the daily Ramadan fast, as outages in the first few days of the Muslim holy month threaten to embroil Pakistan’s prime minister in a political crisis.

As the fasting period began on Sunday, residents of Karachi, the country’s largest city, were unexpectedly plunged into darkness. The national distribution company blamed a line fault that caused two power stations to fail.

But the outage has highlighted the fragility of Pakistan’s electricity network — a problem that threatens to undermine the country’s economic recovery and which is set to become a significant political issue in the run-up to next year’s general election.

Recent power cuts have already prompted widespread protests, during which two people reportedly died.

“These power cuts in Ramadan will severely undermine the government’s reputation further,” said Hasan Askari Rizvi, a political commentator. “If the government fails to manage the electricity situation, the risks for Nawaz Sharif will mount.”




Pakistan has endured an energy shortfall for years, but this summer the gap between supply and demand at peak hours has reached six gigawatts — equivalent to the output of 12 medium-sized coal-fired power stations.

Ministers hope that $35bn of Chinese investment in the country’s power sector, part of the China-Pakistan Economic Corridor, will help close the gap.

Unscheduled cuts during Ramadan have particularly angered residents. During the month, Muslims fast during daylight hours, putting extra importance on having power to cook just before dawn and just after dusk.

Usually the government keeps the lights on during religious festivals by paying independent companies to restart expensive mothballed power plants. But it has not done so this year because Ramadan has fallen close to the end of the financial year and the government does not want to exacerbate the fiscal deficit just before it reports its final figures, according to analysts.

The power crisis threatens to undermine Pakistan’s improving economic growth, which has been boosted by a few years of relative political stability. Figures released last week alongside the budget show annual output growth for the year to the end of June are projected to exceed 5 per cent for the first time in a decade.

The other factor that might threaten economic stability is Pakistan’s increasing current account deficit, which is depleting its stock of foreign currency, analysts warn.

Last week’s data show that alongside faster growth, the current account deficit is projected to more than treble from $2.5bn in the last fiscal year to $8.3bn this yearas Pakistan begins to pay Chinese companies for work carried out as part of the CPEC project.

Abid Hasan, a former World Bank economist who has worked in Pakistan, said: “The higher current account deficit will eventually turn into a crisis. This situation has to be managed before it gets out of control.”

But the solutions — whether allowing the rupee to devalue to boost exports or making people pay their electricity bills — are politically unpalatable just a year away from a general election, say officials and analysts. “Reforming Pakistan is tough business,” said one western diplomat.

May 30, 2017 at 8:48 PM  
Blogger Riaz Haq said...

THE EXPRESS TRIBUNE > OPINION
CPEC: calling the shots

By Yasir MasoodPublished: June 2, 2017


https://tribune.com.pk/story/1425075/cpec-calling-shots/


To counter the nefarious narratives of the critics against CPEC, let’s first understand that the inflow of the funds from China, now estimated to be $62 billion: (a) $36 billion as Chinese investment in power projects which will add up 7,000-11,000 MW to the national grid by 2018. This sum will have no direct financial implications on Pakistan’s external payment obligations and; (b) $26 billion in a Chinese government loan, dedicated to building infrastructure. Since the inflow of funds as loans and FDI has dissimilar financial implications; therefore, a separate evaluation is direly needed to compute some of the major benefits as under.

Pakistan’s economy has severely suffered because of the energy crisis over the last decade or so. A much-needed uptick in power generation under CPEC will help revitalise the worst-affected industrial sectors. And particularly the cotton textile production and apparel manufacturing, which are the country’s largest industries, accounting for about 66 per cent of the merchandise exports and almost 40 per cent of the employed labour force. It will also help rejuvenate the remotely located cottage industry, small size manufacturing, agriculture and mining industry businesses to become commercially viable and contribute its due share of the GDP, on the one hand, and create more job opportunities in the far-flung areas on the other.

It is a misgiving that the Chinese power companies would be availing higher tariff rates. The National Electric Power Regulatory Authority (Nepra) has not mentioned any such concessions or exemptions and has to act according to its jurisdiction to maintain uniformity. Similarly, other regulatory bodies will also look after the environmental hazards, avert abuse of dominant positions, ensure recovery of other levies, implementation of labour laws, and above all, the vibrant and robust courts can swiftly act to protect the constitutional rights of the general public as per laws of the land.

The second part, which will be an interest-bearing loan, that constitutes about 40 per cent of the total $62 billion chunk under the CPEC framework will not overburden Pakistan’s ballooning current and future foreign payment liabilities, as dreaded by some critics unfamiliar with repayment dynamics. Pakistan has been borrowing from the IMF at an interest rate ranging from 5 to 10 per cent just to avert the default on external payments in time. Whereas CPEC loan will be carrying an aggregate interest rate of not more than 1.9 per cent per annum and even below, repayable in a period stretched over 25-30 years and even more.

Reimbursement of the loan with markup, which is estimated to be around $1.5 billion per annum, will start in 2019 and after gradual increase would remain within the range of $4.5 to $5 billion even in the peak years. This additional burden on account of CPEC’s loan would be quite nominal when compared with its eventual upshots — briefly calculated below.

Pakistan’s existing transportation network is quite dilapidated and causing a huge loss of around 3.5 per cent of the country’s annual GDP as estimated by the government. According to the IMF, Pakistan’s total GDP in 2016 was around $285.153 billion of which 3.5 per cent amounts to $9.98 billion. Improvement in the transportation network under CPEC will considerably cut down such losses, thereby reducing Pakistan’s oil import bill and related transport equipment. Similarly, Pakistan’s national exchequer will be earning around $6 to $8 billion a year under toll tax revenue, etc.

Put together, the above two explained sources of income and savings alone will be substantially higher, when matched with the disbursement of loan and debt service liability to China and that too insignificantly spread over a period of 25-30 years and even more.

June 3, 2017 at 6:56 PM  
Blogger Riaz Haq said...

Keeping the lights on in Pakistan will drive growth, save lives by Afshin Molavi

http://www.arabnews.com/node/1110696

Last week, Pakistan achieved a quiet milestone, returning to the prestigious MSCI Emerging Markets Index after losing its status in 2008. Joining 23 other countries on the index, from high-growth Asian economies to large Latin American and rising Eastern European ones, Pakistan has now returned to the “premier league” of emerging markets.

Long-term, this will mean a steady flow of global capital entering Pakistan’s equities markets. It will also offer a confidence boost for foreign investors. But Pakistanis can be forgiven if they are hardly in a mood to celebrate, as widespread electricity shortages wrack the country once again.

Peshawar residents face cuts of six to eight hours per day, and violent protests broke out in the northwest province of Khyber Pakhtunkhwa over the cuts, leaving at least two dead. Even the commercial metropolis of Karachi has not been spared, losing electricity in several parts of the city last week, prompting protests.

Electricity shortages are bad enough under normal circumstances, but during the holy month of Ramadan — when stomachs are growling, and the need for electricity to cook food ahead of the breaking of the fast becomes even more urgent — it becomes a combustible mix.

For Prime Minister Nawaz Sharif, the electricity shortages present a serious embarrassment for a leader who placed the issue at the center of his election campaign in 2013. Whether or not Pakistan can keep the lights on could determine his future as prime minister.

Enter China. One of the most impactful elements of the much-vaunted, multibillion-dollar China-Pakistan Economic Corridor (CPEC) will be Beijing’s investments in Pakistan energy projects. Last month, Pakistan inaugurated a Chinese-financed, coal-fired power plant in Punjab, completed after 22 months of work, while announcing the launch of a plant in electricity-starved Baluchistan province.

From wind and solar to coal and hydro, China’s energy projects across Pakistan are dizzying in scope and potentially transformative to the future of the South Asian country of some 200 million people. According to the CPEC website, there are at least 18 active projects in various stages of development.

As with all projects, some will materialize and be delivered on time, others will be delayed or fall off the map, but even if China delivers on half of the proposed projects, Pakistan’s future will be, well, brighter.

Numerous studies have demonstrated the direct causal link between access to energy and economic growth. Economists need not have spent so much time constructing graphs and testing the thesis. It is common sense. Imagine an industrial revolution without regular access to energy?

Pakistan has become something of a darling in the emerging-markets investment community of late. Pakistan’s Global X MSCI exchange traded index was up 18 percent over the past 12 months, though it took a sharp dive after officially entering the MSCI Index last week. It seems traders had been buying the rumor, so to speak, and sold the fact.

Over the past three years, Pakistan has issued a successful Eurobond as well as sukuk bonds, heavily oversubscribed by yield-hungry international investors betting on the Pakistan growth story. The World Bank projects a healthy 5.2 percent growth rate for 2017.

Moreover, consumer companies are harvesting growth by targeting the country’s rising middle class. Former governor of the State Bank of Pakistan, Ishrat Husain, told me that companies such as Nestle and Proctor & Gamble are seeing impressive 25-percent rates of return. Some investment strategists are even touting a new post-BRICs (Brazil, Russia, India and China) acronym: VARP (Vietnam, Argentina, Romania and Pakistan).

June 5, 2017 at 5:29 PM  
Blogger Riaz Haq said...

Financing burden of CPEC
Ishrat Husain

https://www.dawn.com/news/1313992

The total committed amount under CPEC of $50 billion is divided into two broad categories: $35bn is allocated for energy projects while $15bn is for infrastructure, Gwadar development, industrial zones and mass transit schemes. The entire portfolio is to be completed by 2030.

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The entire energy portfolio will be executed in the IPP mode —as applied to all private power producers in the country. Foreign investors’ financing comes under foreign direct investment; they are guaranteed a 17pc rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost). The loans would be taken by Chinese companies, mainly from the China Development Bank and China Exim Bank, against their own balance sheets. They would service the debt from their own earnings without any obligation on the part of the Pakistani government.

Import of equipment and services from China for the projects would be shown under the current account, while the corresponding financing item would be FDI brought in by the Chinese under the capital and finance account. Therefore, where the balance of payments is concerned, there will not be any future liabilities for Pakistan.

To the extent that local material and services are used, a portion of free foreign exchange from the FDI inflows would become available. (Project sponsors would get the equivalent in rupees). For example, a highly conservative estimate is that only one-fourth of the total project cost would be spent locally and the country would benefit from an inflow of $9bn over an eight-year period, augmenting the aggregate FDI by more than $1bn annually. This amount can be used to either finance the current account deficit or reduce external borrowing requirements. Inflows for infrastructure projects for local spending would be another $4bn over 15 years.

Taking a highly generous capital structure of 60:40 debt-to-equity ratio for energy projects, the total equity investment would be $14bn. Further, assuming the extreme case that the entire equity would be financed by Chinese companies (although this is not true in the case of Hubco and Engro projects, where equity and loans are being shared by both Pakistani and Chinese partner companies) the 17pc guaranteed return on these projects would entail annual payments of $2.4bn from the current account.

CPEC’s second component, ie infrastructure, is to be financed through government-to-government loans amounting to $15bn. As announced, these loans would be concessional with 2pc interest to be repaid over a 20- to 25-year period. This amount’s debt servicing would be the Pakistan government’s obligation. Debt-servicing payments would rise by $910 million annually on account of CPEC loans (assuming a 20-year tenor). Going by these calculations, we can surmise that the additional burden on the external account should not exceed $3.5bn annually on a staggered basis depending on the project completion schedule.

As a proportion of our total foreign exchange earnings of 2016, this amounts to 7pc. These calculations do not take into account the incremental gains from GDP growth that will rise because of investment in energy and infrastructure. As the loan amounts would be disbursed in the next 15 years and repayments would be staggered, the adding of the entire $15bn to the existing stock of external debt and liabilities is not an accurate representation. The more realistic approach would be a tapered schedule, with $2bn to $3bn getting disbursed in the earlier years and slowing down in the second half.

June 12, 2017 at 8:57 PM  
Blogger Riaz Haq said...

In Pakistan, China presses built-in advantage for 'Silk Road' contracts

https://www.reuters.com/article/us-china-silkroad-pakistan-insight-idUSKBN19503Y

By Drazen Jorgic | ISLAMABAD
Last year, Pakistan held informal talks with General Electric, Siemens and Switzerland's ABB to build the country's first high-voltage transmission line. Chinese power giant State Grid committed to building the $1.7 billion project in half the time of its European counterparts – and clinched the deal.

This is a familiar tale in Pakistan and many other countries.


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As China makes its "Belt and Road" initiative – a massive project to connect Asia with Africa and Europe through land and maritime routes – a policy priority for the next decade, Chinese companies are taking the lion's share of infrastructure projects across the region.

Just last year, Chinese firms won project contracts in Belt and Road countries worth $126 billion, state media reported.

In Pakistan, whose geographical position makes it central to Beijing's "Silk Road" plans, contracts have been awarded for projects worth more than $28 billion – all by Chinese companies working together with local firms. More than $20 billion in new investment is likely in the next few years, Pakistan's Planning Minister Ahsan Iqbal told Reuters this week.

Last month, Pakistan's government took out full-page newspaper advertisements on the first China-Pakistan project completed under the plan, a 1,300 mw coal plant that it said was constructed in 22 months, a record time for such a facility. The plant is owned by China's state-owned Huaneng Shandong and the Shandong Ruyi Science & Technology Group.

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But two officials at two Chinese state-owned banks that direct government funding, China Development Bank (CDB) and Export-Import Bank of China (EXIM), told Reuters that they have been instructed by the government to favor lending to Chinese firms for Silk Road projects.

The officials also said that the two banks prefer that companies working on infrastructure projects across the region import raw materials or purchase equipment from China.

There is some criticism in Pakistan that the awarding of the contracts to Chinese companies – while speeding up projects – is also costing the country more money.

In the transmission line project deal, for example, General Electric estimated it could make one key part of the line – the converter stations – for about 25 percent less than what State Grid was charging, according to a Pakistani government official and two power sources familiar with GE's projections. By awarding the contract to State Grid, Islamabad paid a higher price, they said.

An official at Nepra, Pakistan's independent energy regulator, said State Grid was also given a tax break not on offer to other investors.

Pakistani government officials declined to comment on tax issues regarding the deal.

China Electric Power Technologies Company Limited (CET), the State Grid subsidiary that will build the line, said the price it asked for was fair. "It's a very reasonable cost," said Fiaz Ahmad Chaudhry, managing director of Pakistan's National Transmission & Despatch Company (NTDC) referring to the overall State Grid contract.

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POWER LINES

The transmission line project was conceived as a government-to-government contract to build a 878-km (545-mile) connection between soon-to-built power plants near the coastal town of Matiari and Pakistan's industrial heartland by the eastern city of Lahore.

According to Pakistani officials, no formal competitive bidding was sought for the project, which was finally awarded in December last year.

June 14, 2017 at 4:50 PM  
Blogger Riaz Haq said...

By some measures, the MDBs today are not only existing
but thriving, with demand for their financing and services
growing. But this picture belies a critical need for reinvention
if they are to rise to meet today’s pressing challenges effectively.
In particular, the legacy MDBs—the World Bank, the InterAmerican
Development Bank (IADB), Asian Development
Bank (AsDB), African Development Bank (AfDB), and European
Bank for Reconstruction and Development (EBRD)—
have been slow to adjust to many of today’s realities, starting
with the increasing economic role and growing capability of
their borrowers. For example, their major shareholders have
agreed to only minimal adjustments in corporate governance
systems and leadership selection, creating tensions with major
borrowers who want more voice and influence over their policies
and operations. With age, MDBs have become bogged
down in bureaucracy, increasing delays and raising costs to
borrowers, particularly for major infrastructure projects. Perhaps
in frustration, China and other major borrowers have
taken leadership in creating two new MDBs focused heavily
on infrastructure: the Asian Infrastructure Investment Bank
(AIIB) and the New Development Bank (NDB).

Beyond business-as-usual on
concessional financing. Shareholders should commit to
maintain current levels of concessional support across all
MDBs, implying at least $25 billion in concessional lending
annually over the next decade (and possibly more given
the possible additional amounts the AIIB might provide on
concessional terms). As a growing number of countries graduate
from concessional assistance to non-concessional borrowing
and other forms of engagement with MDBs, this baseline
commitment should allow for increased support in the remaining
poor countries, and for allocation of concessional funding
to countries in crisis and to post-conflict reconstruction,
especially at the World Bank (see Recommendation 4). In
addition, given the expected concentration of poor countries
in Sub-Saharan Africa, there should be a shift in concessional \

-------------

Why the slowness to adapt? One reason is that age and
bureaucratic growth have taken their toll, particularly at the
World Bank, where political pressures and the close scrutiny
of NGOs have affected its operations by making traditional
donors very—and perhaps excessively—risk averse to stories
of corruption, waste, human rights abuses, and environmental
injustices.10,11 In response to these pressures, the legacy MDBs
have gradually become burdened with a proliferation of rules
and processes that are meant to eliminate corruption and
safeguard legitimate aims such as environmental and social
protection, but that often fail to do so effectively or to serve
the institutions’ broader development mission. The result is
widespread borrower frustration with the hassle factor that
increases the costs and delays of major infrastructure projects.
Another reason is that adjustments in the legacy MDBs’
governance have been modest, with the largely western donor
“creditors” dominating the official governance arrangements.
Slow adjustments in governance, especially at the World
Bank, have frustrated the political ambitions of emerging
markets to assume greater leadership at the global level—
through increased capital participation, voting power, and
influence on these and other operational issues that affect
them as borrowers.
The initiative of China and other emerging markets to set
up their own institutions—the AIIB and the NDB—reflects
these two factors.

https://www.cgdev.org/sites/default/files/multilateral-development-banking-report-five-recommendations.pdf

June 15, 2017 at 4:38 PM  
Blogger Riaz Haq said...

China is staking a claim to supplanting the U.S. as a Pakistan’s most influential ally with tens of billions of dollars of investment, an embrace that promises Pakistan economic benefits and saddles it with debt—ensuring the relationship will last.

http://www.cetusnews.com/views/BklEbNyNXb?cat=news&title=China-Pushes-U.S.-Aside-in-Pakistan---
By
Saeed Shah



ISLAMABAD—Pakistan’s ruling power structure has long been summed up with the saying “Allah, Army and America.”
China is now staking a claim to supplanting the U.S. with tens of billions of dollars of investment, an embrace that promises Pakistan economic benefits and saddles it with debt—ensuring the relationship will last.
Chinese President Xi Jinping has made Pakistan his flagship partner in a program to spread Chinese-built infrastructure—and Beijing’s sway—across Asia and beyond. Pakistan has so far signed on to $55 billion in Chinese projects, many of them guaranteeing China a high return on its investments and granting tax breaks to Chinese companies.
Former President Barack Obama’s “Asia pivot” is giving way to Mr. Xi’s infrastructure juggernaut, in a model that could be replicated across the region.
“China came in when no one else was willing to invest,” said Commerce Minister Khurram Dastagir. The U.S. missed its chance, he said.

Beijing calls its program “One Belt One Road,” referring to the ancient sea and land Silk Road trade routes that China seeks to revive. Pakistan Prime Minister Nawaz Sharif inaugurated the program’s first big completed project here in late May, a Chinese-built, coal-fired power plant in his home province of Punjab.
China is building roads, railways, power plants and a port, and has lent Pakistan $2 billion in under two years to shore up its foreign-exchange reserves.
A promised $1 trillion Chinese splurge hasn’t yet materialized for many countries. But in Pakistan, $18 billion in projects are under construction in what is known as the China Pakistan Economic Corridor.
The centerpiece is Pakistan’s Arabian Sea port at Gwadar, under expansion and run by a Chinese company to enable trade in goods from China’s southwest.
Pakistan calculates that the Chinese investments will add 2 percentage points to growth in the next few years by providing infrastructure needed to kick-start industrialization.
President Donald Trump has abandoned what was viewed by the Obama administration as a counterbalance to China, a trade deal with nations in the region called Trans Pacific Partnership. An American official said civilian aid to Pakistan, a longtime ally, remained substantial but “getting our message out is a challenge.”

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“We want to move away from geopolitics, to geoeconomics, from fighting wars for others,” said Ahsan Iqbal, Pakistan’s planning minister, who oversees the Chinese investment. “Our vision is to place Pakistan as the hub of trade and commerce in this region.”
China’s expenditure isn’t aid. With transport projects, Pakistan incurs debt; power plants come with an obligation for Pakistan to purchase the electricity produced.
Tahir Mashhadi, a senator from the opposition Muttahida Qaumi Movement, compared China to the East India Company, the commercial enterprise that colonized India before the British government took over.
“Here’s the danger: the banks are Chinese. The money is Chinese. The expertise is Chinese. The management is Chinese. The profits are for China. The labor is Chinese,” said Mr. Mashhadi.
Nadeem Javaid, chief economist at Pakistan’s planning ministry, said Pakistan would be paying $5 billion a year to China by 2022, but that the debt should be easy to manage as Pakistani exports rise, electricity prices fall, and toll revenues are generated from trade from China to Gwadar.
“The fears,” he said, “are not genuine.”

June 19, 2017 at 9:59 AM  

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