• Friday, November 15, 2019

CPEC and the economic condition of Pakistan

Discussion in 'Pakistan Economy' started by sikander., Oct 13, 2018.

  1. sikander.

    sikander. FULL MEMBER

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    Note: The examples and analogies are kept deliberately simple for people understanding; it does not reflect the complexity of real scenario but is a good representation to understand the topic.

    Pakistan economy is the 25th largest economy of the world with more than 1 trillion dollar GDP PPP, this is a great achievement when Pakistan is the 6th largest by population and 36th largest by area, meaning more people and less resources.

    The average Pakistani is living in a livable condition, Pakistan is 75th on the happiness index while India is at 133.

    That being said, the only problem with the Pakistan economy is it’s gold and foreign reserves, it is simply not able to pay off its debt and import bills. SO this is where CPEC comes.

    To understand where we went wrong, let’s take an example

    A country has no foreign exchange and it gets a loan of $1 billion for 5 years at an interest rate of 5%, the money enters the economy. It is deposited in the bank, let’s say banks A which than loans it to persons A, that persons A deposits it in there Banks, Banks B. which than loans it to persons B and so on. It’s called the multiplier effect and the value of multiplier is calculated by a simple formula using bank cash ratio also called statutory liquidity requirement or SLR. The current SLR in Pakistan is 19.5% and the multiplier effect formula is

    Liquidity creation = liquidity ( 1/slr)

    So let’s calculate

    Liquidity creation = $1 billion (1/19.5%) = $5.128205 billion

    So by loaning $1 billion the country creates $5.13 billion. Here it has $1 billion and the rest of $4.13 is in PKR whatever the exchange rate be as it is not important. This money is than invested keeping in mind that the country has to pay as per following in foreign exchange,

    Year 1 $50 million
    Year 2 $50 Million
    Year 3 $50 Million
    Year 4 $50 Million
    Year 5 $1.050 Billion

    So the country invest the initial $1 billion dollar in projects which it knows will generate more than $50 million foreign reserve by increasing exports or decreasing imports, let’s say the country invests in construction of railway line which will reduce the cost of transportation for textile industry and increase their export by $60 million annually.

    Scenario A: to construct the railway line, the country spends all the money in PKR and completed the project in 0 month (for the sake of simplicity). This started generating $60 million each year and the company foreign reserves over the next 5 years are as following,

    Year inflow Outflow Balance

    0 $1 Billion $0 $1 Billion
    1 $60 million $50 Million $1.01 Billion
    2 $60 million $50 Million $1.02 Billion
    3 $60 million $50 Million $1.03 Billion
    4 $60 million $50 Million $1.04 Billion
    5 $60 million $1.05 Billion $50 Million

    So by taking loan and investing it in a well thought plan the country actually pays back the loan and increases its revenue by $60 million each year, it now also have an extra railway track. The $4.13 billion in PKR is with the people that is also working to increase the GDP of the country.

    Scenario B: to construct the railway line, the country spends half the money in PKR and imports other half and spends $500 million; completed the project in 0 month (for the sake of simplicity). This started generating $60 million each year and the company foreign reserves over the next 5 years are as following,

    Year inflow Outflow Balance
    0 $1 Billion $500 $500 Million
    1 $60 million $50 Million $510 Million
    2 $60 million $50 Million $520 Million
    3 $60 million $50 Million $530 Million
    4 $60 million $50 Million $540 Million
    5 $60 million $1.05 Billion -$450 Million

    Here everything is kept the same except that the country allowed the $500 million to go out of the country. By simply making the mistake of allowing the money to go out of the economy the country, it now has to take more loan to pay the previous loan and possibly with higher rate of interest. Let’s also calculate the multiplier effect,

    Liquidity creation = liquidity ( 1/slr)
    Liquidity creation = $500 million (1/19.5%) = $2.564 billion

    The people now also have $2.564 billion less money as a result of the multiplier effect. Doesn’t matter if the country still has a railway track, doesn’t matter if the increased revenue is still the same, the GDP will also see a considerable increase because money did come into the economy but the country defaulted on its loan due to one mistake.

    The CPEC project is the same actually worse than this, china is not sending any money to Pakistan otherwise we would’ve seen considerable increase in our foreign reserves. China is paying the chines companies for the completion of all the projects and we have to pay back the money that never came to Pakistan. Our GDP will increase, we will have more infrastructures but we will default on our payment not once but many times unless we renegotiate the CPEC deal or stop it completely.

    Renegotiating CPEC and China Response: OBOR initiative of china is a $1 trillion initiative, china is only spending $60 billion on CPEC. It has Sri lanka Hambantota port on lease due to failure of payment from sri lanka. Similarly Djibouti is also looking to exchange of leasing port for loan option. Malaysia has already stopped various projects funded by Chinese. There is a growing concern around the world about china’s debt trap. Pakistan as being the closest friend of China, if refused to continue CPEC, will cause a strategic blow to the chines interests and might cause the whole 1$ trillion OBOR to stop. This is why the United States through pressure and back door diplomacy is asking Pakistan to stop CPEC. Which puts Pakistan is a very good situation. China is pushed will do anything to not stop CPEC and the United States will still be very happy if Pakistan reduced the CPEC from $60 Billion to suppose $50 Billion. For decreasing the investment under CPEC Pakistan can easily secure various trade deals from US. On the other hand to not stop CPEC altogether, china will be willing to change the terms of the agreement. Remember by initiating CPEC, china is actually increasing its export by more than $60 billion in a single year. Renegotiating the deal is something that Pakistan should do as quickly as possible. If china is not happy with the situation than so be it, a $12000 billion economy should not ask a $300 billion economy to sacrifice for it.
     
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  2. Offshore

    Offshore FULL MEMBER

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    truth to be told, 90% project in CPEC should be scrap.
    not profitable for China.
    China should focus building normal port in gwadar along with infra to western region.
    that's it.
     
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  3. Śakra

    Śakra SENIOR MEMBER

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    How is this a great achievement?
     
  4. EpiiC

    EpiiC FULL MEMBER

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    It's not.... maybe he meant to write this is not a great achievement?
     
  5. Śakra

    Śakra SENIOR MEMBER

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    He believes it to be true if you take in to consideration his second paragraph

    “The average Pakistani is living in a livable condition, Pakistan is 75th on the happiness index while India is at 133.“

    He also thinks ranking higher on the happiness index means living standards are better.
     
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  6. Indus Pakistan

    Indus Pakistan ELITE MEMBER

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    We managed to make 200 million babies. I know when you guys have scored nearly 1,400 million [soon to grab number one slot by outpumping China] this figure looks abysmal but cut us some slack, will yeh?
     
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  7. Śakra

    Śakra SENIOR MEMBER

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    [​IMG]

    Look closely at this map. You see that peninsular thing sticking out of Asia? Thats the poorest region on the continent. Its closer to Africa in living standards, development, and overall achievement than it is to the rest of Asia. Hell, there are a lot of African countries better than the Subcontinent. Our itihaas is, regardless of religion and ethnicity, an unbroken chain of failure and disappointment.
     
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  8. Indus Pakistan

    Indus Pakistan ELITE MEMBER

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    Well said.
     
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  9. Hakikat ve Hikmet

    Hakikat ve Hikmet ELITE MEMBER

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    Tragedy, however, is that once it was the richest part of the world...
     
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  10. omaromar

    omaromar FULL MEMBER

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    Fool me once, shame on you. Fool me twice, chop my head!
     
  11. BATMAN

    BATMAN ELITE MEMBER

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    If bloody idiot politicians of Pakistan only give protection to the overseas Pakistanis from Pakistanis, it will bring 10x12 $billions annually, but thinking like this is either bigger than their brains or either they are jealous of seeing their relatives overseas.

    Any person with clean heart and common sense can revolutionize Pakistan overnight, because its all policy matter, make clever policy and sit back and enjoy the show.

    What do you think how many people voted PTI out of 200 million... ? Pakistani Democracy is a system to legalize dictatorship.
     
  12. omaromar

    omaromar FULL MEMBER

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    The only solution is to shake the Pakistani deep state out of its slumber. Every country worth its salt has a deep state that is always cautious and on guard. Elections and the democratic system provides the needed and required license to carry out the deep state activities.

    Scum like Nawaz Sharif, Showbaz, Zardari and their supporters should have been hanged yesterday.

    What my point was that something is a foot here. Things aren't adding up. There is no way Pakistan would openly side against China in favour of the USA.
     
  13. sikander.

    sikander. FULL MEMBER

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    The rankings are based on answers to the main life evaluation question asked in the poll. This is called the Cantril ladder: it asks respondents to think of a ladder, with the best possible life for them being a 10, and the worst possible life being a 0. They are then asked to rate their own current lives on that 0 to 10 scale. The rankings are from nationally representative samples, for the years 2015-2017. They are based entirely on the survey scores, using the Gallup weights to make the estimates representative. The sub-bars show the estimated extent to which each of six factors - levels of GDP, life expectancy, generosity, social support, freedom, and corruption - contribute to making life evaluations higher in each country than they are in Dystopia, a hypothetical country that has values equal to the world’s lowest national averages for each of the six factors.
     
  14. BATMAN

    BATMAN ELITE MEMBER

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    That's exactly shouldn't be the top priority, but if your ministers have empty head than this is the obvious choice.
     
  15. sikander.

    sikander. FULL MEMBER

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    I never looked at it from china's perspective but now that I think about it, I totally agree with you. China can only benefit from the western route. The rest of the whole project was forced by Pakistani politicians for their political gain.