China didn’t cause Pakistan’s financial crisis but it should play a role in helping to solve it
Arif Rafiq says Pakistan’s economic woes have been caused by poor policymaking, not its projects with China, but how Beijing reacts will be a lesson to its other belt and road partners
Pakistan’s economy grew by 5.7 per cent in the previous financial year, but has been unbalanced. A rise in fuel and machinery imports has overlapped with a net decline in exports in the past five years. Pakistan’s foreign exchange reserves have depleted quickly since August 2016.
Many projects selected by Pakistan’s previous government were ill-timed. For example, it rushed to complete a commuter rail line for Lahore before this summer’s elections, when such projects could have been deferred in favour of those that would boost exports more quickly. And the economic corridor should have been paired with an aggressive export incentive programme to offset the outflow of dollars.
Beijing should agree to allow power purchasing agreements to be renegotiated between Chinese producers and the Pakistani government’s transmission and distribution company. Presently, the electricity is too expensive.
A cut in the electricity purchasing price would make long-term contracts more viable and create space for additional waves of Chinese investment with higher rates of return. More affordable electricity would increase the ability of Pakistani consumers to pay bills to local power companies which, in turn, have to pay Chinese independent power producers.
This would ease the task of reforming Pakistan’s electricity industry, enhancing Chinese companies’ opportunity to purchase state-owned distribution companies through privatisation.
Lower electricity costs would also open up opportunities for Chinese investment in the corridor’s special economic zones and enable Pakistani exporters to better compete with global peers.
However, some projects are unlikely to pay for themselves any time soon (or, with public transport, ever) and their loans should be restructured. These include the Orange Line metro rail project in Lahore, the Karakoram Highway realignment, and the proposed main railway line project.
Beijing could extend their maturity periods to 30 or 40 years, reduce interest rates to 2 per cent or below, and extend their grace periods to 10 years. This would give Islamabad and Pakistan’s provincial governments a cushion to responsibly pay back Chinese creditors.
Islamabad could end up taking over US$2 billion in loans from Beijing to upgrade the Karakoram Highway, which would only see a return on investment through overland trade with Xinjiang.
The China-Pakistan Economic Corridor can specifically serve as proof that Beijing can effectively provide public goods, match infrastructure development with job-generating foreign direct investment, and provide a new model of development in frontier markets.
This is possible in Pakistan, despite the growing cynicism toward the project and alarming developments in Xinjiang. But it will require China to adjust the terms of its aid and investment, with an emphasis on export markets. This is by no means an impossible task.
Arif Rafiq (@arifcrafiq) is a non-resident fellow at the Middle East Institute and president of Vizier Consulting, LLC, a political risk advisory company focused on the Middle East and South Asia. He is author of The China-Pakistan Economic Corridor: Barriers and Impact