Pakistan: Unrealistic hopes from China

Prime Minister Imran Khan’s upcoming visit to Beijing ostensibly for
attending the Beijing Winter Olympics (February 3-5), is also expected to
be used to seek a USD 10 billion loan from China, request for RMB
payments for trade and revival of Pak-China Investment Company Ltd.
The Pak PM would try to leverage his trip to seek funding for tangible
improvement in social and priority sectors and industrial development to
window dress his achievements before the upcoming elections in the
country. Pak economy is currently facing severe financial crisis, inflation
and depreciation of its currency and the government is fast losing its public
appeal with dwindling foreign exchange reserves. The government, which
is overwhelmingly dependent on CPEC and Chinese assistance, is also
facing credibility crisis as Chinese assistance in CPEC is not bringing the
economic and social transformation in the country as had been projected.
It is expected that PM Khan would urge Chinese authorities for relocation
of Chinese industries to Pakistan in the fields like semi-conductors, smart
phones, Agri-tech, venture capital, data centre/cloud technology, defense
technologies, satellites and drones and biotechnology, to create
employment opportunities and bring in much needed investment
However, given Pakistan’s limited market, poor financial situation and
uncertain security environment, Chinese investors remain reluctant to
invest. Other constraints including lack of infrastructure in Pakistan like
poor connectivity, scarcity of water, power cuts, lack of communication,
apart from administrative bottlenecks like increasing corruption also deter
foreign investment.
Experts view that there may be some scope for furthering cooperation in
agriculture and animal husbandry especially R&D in high yield disease
resistant seeds for cotton and other agriculture products, creating AgriZones and Foot and Mouth Disease Free Zone in Badawalpur (Punjab).
However, prospects for technology infusion and mechanisation remain
poor given disruptions in power supply and weak economic recovery post
the Covid-19.
Pakistan also faces a paradoxical situation in the electricity sector. Through
the CPEC projects, Pakistan has generated enough capacity and has
surplus power, but the country is still facing power outages due to
distribution bottlenecks. This has led to a situation where independent
power producers (IPP) seek compensation from Pak government under
sovereign guarantee for their loss of revenue due lack of demand as
incentives for power generation are linked to the generation capacity and
not on power consumed. While Islamabad wants to sell excess power to
China/Afghanistan, Gwadar area is still running on electricity imported from
Iran. Since power grids are not inter-connected, Islamabad cannot sell
power right away to China / Afghanistan. Thus, CPEC investment has not
transacted into ground level development.
Islamabad also faces the difficult problem of foreign debt repayments,
including principal and interests, worth over USD 12.3 billion during the
current FY 2021-22, of which the country paid USD 3.78 billion during JulyNovember 2021 period. According to State Bank of Pakistan, forex
reserves declined to USD 17.03 billion by January 14 2022, a decrease of
USD 562 million from the previous week. Islamabad now has to manage
USD 8.63 billion for the remaining period of current FY. Despite receiving
generous dollar inflows of USD 3 billion from Saudi Arabia, the IMF (USD 2
billion), and International Eurobond (USD 1 billion) in the first half (JulyDecember 2021) period, the forex reserves held by the State Bank of
Pakistan (SBP) till December 31, 2021 was just USD 17.6 billion. The debt
service ratio to exports had already crossed 35% in 2019 itself.
Against this backdrop, even if China gives an assurance to oblige Pakistan
with USD 10 billion of additional loans, it would only add to Pakistan’s debt
stock and service obligations. Many observers believe that these moves
were part of PM Imran Khan’s strategy to shift the increased debt liability of
around USD 2.5 billion per year to the next government as his chances of
re-election remain uncertain.