China’s belt and road trade plan bypasses Pakistani banks

Of the US$6 billion to US$7 billion worth of projects ongoing in South Asian country, local lenders have provided just US$470 million, analyst says

PUBLISHED : Friday, 27 October, 2017, 2:16pm
UPDATED : Friday, 27 October, 2017, 11:07pm

China’s ambitious US$55 billion infrastructure project that is under way throughout Pakistan is in danger of becoming a non-event for the South Asian nation’s banks.

President Xi Jinping’s multibillion-dollar economic corridor, part of his “Belt and Road Initiative”, has been viewed as a game-changer for Pakistan. Yet while local banks are keenly waiting to get their share of the pie, holding more than US$20 billion for potential financing, much of its has already been filled by the Chinese, with Pakistani lenders getting little look in.

So far, local funding amounts to only about US$470 million, according to Saad Hashemy, research director at Karachi brokerage Topline Securities. “As of now around US$6 billion to US$7 billion worth of projects are likely going on,” Hashemy said. “Out of that, 10 per cent, or around 50 billion rupees (US$470 million), can be local financing.”

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The lack of Pakistani input into the China-Pakistan Economic Corridor, which the government said would drive economic growth to a targeted 6 per cent this financial year, adds to concerns that its benefits might not be as widely distributed as initially thought. It runs the risk that Pakistan will be left paying interest on loans to Chinese banks way into the future.

“It seems the lion’s share of CPEC financing will come from China itself,” Bilal Khan, a senior economist at Standard Chartered, said.

At US$3.5 billion, the Thar coal mine is one of the most expensive energy projects China is financing in Pakistan and is expected to generate 1.3 gigawatts of electricity in coal-fired power stations. China has also agreed to lend US$5.5 billion for a significant upgrade of the nation’s rail system.

Bankers, including Standard Chartered’s chief executive Bill Winters, who visited Pakistan in March, are eager to finance Chinese projects. Meanwhile, local lenders, both Islamic and conventional, are keen to deploy funds after parking much of their advances in government securities, holding 82 per cent of the total 9.26 trillion rupees of local securities.

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Shaukat Tarin, a former finance minister and an adviser to Silkbank, said conventional Pakistan banks lenders could lend as much as 1.7 trillion rupees to the projects. Islamic banks are also holding surplus liquidity of about 500 billion rupees, according to Ahmed Ali Siddiqui, head of product development at Meezan Bank, the nation’s largest sharia-compliant lender.

“They have that surplus liquidity and need such avenues,” Tarin said. “The question is how much are we involving the private sector at the government level in it, let alone the local banks? We aren’t.”

That means that Pakistan’s banks will have minimal opportunities for direct financing in CPEC projects, Amreen Soorani, a senior analyst at Karachi-based JS Global Capital, said.

Still, Pakistan’s central bank governor Tariq Bajwa is positive about its impact. “As a developing country, do we have the space within our budget or would we have to borrow?” he said in an interview in Washington earlier this month.

“I think if you want to jump the curve you have to borrow and here is money that has been made available to us.”

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When the project was announced in Islamabad two years ago by Xi and Pakistan’s then Prime Minister Nawaz Sharif, it was anticipated it would mostly be funded with Chinese money. Pakistan was not in a position to deploy the necessary capital after taking an International Monetary Fund bailout in 2013.

The Industrial and Commercial Bank of China – the nation’s biggest lender – signed deals worth more than US$4.5 billion in 2015. Meanwhile, China Development Bank is providing US$7.9 billion, according to a report by the state-run China News Service on Tuesday, and Bank of China said it had lent more than US$80 billion as of the end of June.

The financing demand has since increased from more than US$40 billion in 2015 to US$62 billion this year, and most of the funding so far has come from Chinese banks, Norman Sze, national leader of the government affair unit of Deloitte China, said.

“The finance sector in Pakistan is not very advanced and mature,” he said. “They could participate in the projects but it would be difficult for them to meet such a huge financing demand.”

There has also been criticism of China’s decision to import goods and labour for the projects at the expense of the local market, using a similar model to some of its investments in countries across Africa.

“CPEC, if it’s not exports-focused, cannot succeed for Pakistan,” Mushtaq Khan, chief economist at Bank Alfalah, said.

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In a bid to stem these complaints, Chinese engineers at power plants being constructed along the trade corridor are working side-by-side with Pakistani counterparts who, with their increased expertise, are expected to eventually take the helm.

And while they may not be directly distributing loans for the new infrastructure, Pakistani banks are positioning themselves to service demand for credit that will flow as economic growth quickens.

For now they are still hopeful and looking to increase ties to China. National Bank of Pakistan is one example – it will open branches in Beijing and Shanghai by mid-2018, and is looking to finance agriculture and export projects around the trade corridor.

“We are all set for infrastructure financing,” Saeed Ahmad, chief executive of National Bank, said. “Local businessmen should get the opportunity, so not only Chinese investors” benefit from the CPEC.