There are two points to consider when discussing Pakistan’s reliance on CPEC. First, what other options do you have? For example, if you want to go to other lenders, seeking help for infrastructure development, because you want to build roads and railways and energy sector; Well, other lenders have not been that forthcoming lately.
Hence, you are right, unfortunately, we must rely on Chinese funding. Second, Chinese funding is still in terms of interest rate and debt servicing, lower than traditional donors, like the IMF, the World Bank and the ADB, who would have charged much higher for these energy generation projects and even the road, railway and port projects which you are getting financed by China.
Pakistan will have to make sure that energy reforms are in place. Growth will continue if we have a solid energy sector.
Another way to look at this is what would have been the macroeconomic position of Pakistan if CPEC had not existed? If you put this as an alternate question, then the answer becomes interesting. Without CPEC Pakistan’s economy was running at under a 3 percent growth rate, there was no growth in economy, FDI was well below $1 billion, exports were on the decline, business confidence and consumer confidence were at an all-time low.
Whatever growth has come into the economy, whatever has been the increase in private consumption, it has been at the back of CPEC. CPEC has also encouraged non-Chinese investment to come into Pakistan. For example, the Dutch have invested, UK companies have come in and auto-companies are coming into Pakistan.
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After more than a decade, economy has finally hit the 5% growth rate. If we one takes this into account, then the IMF has also realized that CPEC is possibly the only story Pakistan has to demonstrate as a turnaround, which has come at the macro level. When we reap the dividends entirely depends on us and how much fiscal discipline Pakistan shows. Two things are important for Pakistan.
Electricity position has improved, but we still need to bring down the unit cost of electricity.
First, Pakistan will have to make sure that energy reforms are in place. Growth will continue if we have a solid energy sector. Electricity position has improved, but we still need to bring down the unit cost of electricity. Second, growth in government revenues is crucial and it is only possible if the government wholeheartedly undertakes tax reforms.
Reform in tax policy and administration can help Pakistan build its repayment capacity to repay the interest payment. Finally, most of these loans must be paid in foreign currency. Ultimately, for years leading up to 2023 to 2025, much depends on the increase in exports, remittances and FDI for repayment of loans.
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The dividends of CPEC are already there, Pakistan must repay whatever China has given, it is only possible if Pakistan can use CPEC assets; energy, powerhouses, roads and railway infrastructure to its advantage. This can improve Pakistan’s exports, the private sector, only then, Pakistan will be able to repay.
With a good energy program in place, with good tax reform program, we can hope that the next government set-up will continue to reform the path. It can be a game changer but, if the next government fails to keep the fiscal discipline, it could become a burden.
As for now, CPEC has resulted in GDP growth. Finally, exports have shown growth 12.2%, remittances are up 3.5% and FDI has improved 5%, so yes, for now, it is a sort of a game changer.
Dr. Vaqar has served in the UNDP as an Advisor and has undertaken assignments with the Asian Development Bank, the World Bank, and Ministry of Finance, Planning and Commerce, Pakistan.