Vyom's Musings : The Illusion of CPEC Prosperity - The Debt Trap

[GURU DUTT]

That was the catch.

well trolling to mai kerta nahin but thinking serouslli about it

 

[Manindra]

Exactly what China wanted Pakistan to do.... you guys are following the Angola model of Chinese "investments". They will buy your resources (ores and minerals not finished products) dry and give you money for it.... then take it back through sovereign guarantee. In effect it gets everything for almost a fraction of what it would cost.

You are seriously wrong here .
It is our old lady United Kingdom model.
remember cheap cotton & indigo import & costly fabric export.

 

[Vyom]

Pakistaniyon se Amreeki e aise tang ni aye Thora sabr karo china ko hum yahan gawadar mein shift karain gey

dekh bhai, dimag walon ke liye likha tha... apko padh kar hansi aayi hai ... maafi chata hoon ... gustakhi meri...

 

[Shot-Caller]

Keep writing self pleasuring articles. Only shows how much you think about CPEC.

 

[Vyom]

You are seriously wrong here .
It is our old lady United Kingdom model.
remember cheap cotton & indigo import & costly fabric export.

Neo colonialism, brader. but Brits were overt, the countries are sovereign and they will fully fall in this trap. amazing shrewdness actually. got to admire the Chinese.

Keep writing self pleasuring articles. Only shows how much you think about CPEC.

I need to know about the Chinese investment model, and your Economy. and I am good with numbers. not self pleasuring but an observation free to let go... I am not keeping you on gunpoint to understand, try economics lessons in college nearby.

 

[Manindra]

Neo colonialism, brader. but Brits were overt, the countries are sovereign and they will fully fall in this trap. amazing shrewdness actually. got to admire the Chinese.

They are as much sovereign as Nawabs of Bengal during de facto rule of East India Co.
All are crazy dictators or corrupt & keep in line with bribe, fear of coup, revolt or blackmail or others meanings.
Even Government of India is also not very far.
Our Aid data breakup by region give you a hint.

 

[Vyom]

Excellent write up and wonderful analytical skills. Have you thought about joining the govt think tanks?

Anyway, while its a sound write-up, I don't believe the Pakistanis are that naive to not hold any trump cards and let themselves be used. Maybe they see it as infrastructure development and strategic co-operation more than an economic one? Only time will tell. Hopefully, it works out for all parties.

I don't think that much. as long as my tanks are full I am happy. Bourbon rocks

They are as much sovereign as Nawabs of Bengal during de facto rule of East India Co.
All are crazy dictators or corrupt & keep in line with bribe, fear of coup, revolt or blackmail or others meanings.
Even Government of India is also not very far.
Our Aid data breakup by region give you a hint.

A little more than Nawabs but that's about it. total resource exploitation. That Aid went to NGOs that's why Government rightly banned them. Yes, we need to be careful and better this game otherwise we will end up as sitting ducks.

 

[Shot-Caller]

I need to know about the Chinese investment model, and your Economy. and I am good with numbers. not self pleasuring but an observation free to let go... I am not keeping you on gunpoint to understand, try economics lessons in college nearby.

If only the world was revolving around your numbers and economic lessons.

 

[Alpha BeeTee]

So I have been reading through some literature regarding CPEC and this is what I found how Pakistan is getting itself into a circular debt cycle. which I hope will not turn into a spiral dept trajectory. also interestingly I found Pakistani negotiators missing on obvious points like they did on the FTA with China that resulted in decimation of local Pakistani Manufacturing as it could not compete with prices of Chinese products.

So Here are my observations.

1. It doesn't fit the definition of an Economic corridor. An economic corridor [sic] “connects hubs or nodes of economic activity along a defined geography” (Asian Development Bank). Hence, an empty road through a barren landscape connecting strategically important point A with strategically important point B 3,000 kilometers away does not fit the description. To be truly an economic corridor, the envisaged roads will need to connect demand (markets) with supply (production centers and clusters). The markets as well as production centers can be per-existing ones, or new ones that will spring up as the ‘network effects’ of the economic corridor take root. The Question is will the proposed China-Pakistan Economic Corridor will truly be an ‘economic’ corridor, or will it be a string of strategically important roads and a bunch of power projects. The Power projects are almost equal to the domestic demand that will be there when its implementation is over. When envisioning the future it is always a thumb rule to have surplus installed capacity. Further there are no domestic Power plant equipment manufactures in Pakistan that make Steam generators and Turbines (500 MW+ capacity). (Would be great if you guys could get some JVs with the Chinese, but alas)

Given the timeline for completion, these power projects could possibly add reasonable generation capacity to the Pakistan national grid by 2017-18, but they would hardly provide any relief in terms of the fast-growing demand for electricity. And there is no silver lining for consumers as far as the cost of the electricity is concerned.

2. It won't create local employment and capacity building. Chinese documents have already stated that the projects would cost more than a similar project in China because of the increased cost of bringing Chinese labour to Pakistan. Means all the wages and machinery deployment costs will flow back to Chinese pockets. The same way they have been doing it in Africa.

3. The corridor's main purpose is to grant Chinese access to the Gulf as an alternative to the vulnerable sea route in the South China sea. Rest is all add on. No worthwhile investment can come in the Balochistan KP stretch. Punjab and Sindh may imagine an export based strategy but can anyone produce cheaper than China? Further, export led growth is dicey in a world where major economies are in the doldrums [Eurozone, USA and even China is becoming sluggish].

4. The Karakorum Highway Route is Seismically active, snow laden for a little less than 6 months, and is very very very far away from China's consumption centers which lie in the far east. Its way cheaper to import via Ships to those areas, as for its energy requirements, China has gas pipeline links with central Asia, is making a super massive one from Russia. It is not going to be as dependent on gulf oil in the near future. So if the Chinese have any sense of economics and cost vs risk analysis, they will only keep this route as a fire escape. Highly expensive and risk laden.

Pic 1 China population centers. :

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Pic 2 China-Central Asia Oil&Gas Pipelines

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5. So how is proposed "investment" planned. it could have been made sweeter by allowing Pakistan to trade in rupees and then arrange fro currency swaps that would help in Pakistan in increasing its Forex and increase trade footprint at the same time. Whereby Pakistan gets to pay in rupees rather than in US dollars or renminbi. Interestingly it has already been agreed that payments will be in US Dollars.

6. The idea of becoming a 'trading' hub already has a competitor, its Dubai that allows trans shipments to all countries and is already established a business hub. For Gwader to become a competitor it will have to provide services at par with Dubai and better it, from day one. good luck. In view of the economic landscape cities have become prosperous like Singapore and Dubai is their location on sea trading routes which they have cultivated over decades. In view of the Iran Deal, West will get trading access to Central Asia Via Bandar Abbas and other Iranian ports (Chahbahar is not even in question here) by circumventing the instability, and insurgency of Afghanistan which they might go to... at a later date if the dust settle downs there. All possible from Iran.

No country has become prosperous by converting itself into a big toll booth. good luck.

7. China is making investments on which Pakistan has given sovereign guarantee of 18% return, meaning on investment of Rs 100 Pakistan will pay them back Rs 118 (that's in Compounded interest). In some cases its about 27.2 %.

Example :-
Sinosure is charging a fee of 7pc for debt servicing, which will be added to the capital cost of a project. For instance, the capital cost of a 660MW project at Port Qasim is $767.9m. But it goes up to $956.1m by adding Sinosure’s fee of $63.9m, its financing fee and charges of $21m, and interest during construction of $72.8m; a 27.2pc return on equity is guaranteed. Ironically, interest during construction is allowed at the rate of 33.33pc for the first year; 33.33pc for the second; 13.33pc for the third; and 20pc for the fourth year.

How exactly this helps Pakistan? Beside the projects will be run on turnkey basis by Chinese companies who will employ Chinese manpower to accomplish it. Pakistan on the other hand will have to provide the Chinese security at its own cost. And all this is promised on whether the investments will materialize in the first place.

I think Pakistan is better off running these projects by itself only then it will derive the benefit of the investments. If China can not provide aid money then it should provide loan, let Pakistan execute these projects. Also the interest should not be 18% it should be 5%. Apparently domestic lending rates in Pakistan is Cheaper than that of being given to that to China, If the government gave this incentive to local banks and businesses the benefit would have been much greater.

In the end with 2016 of the repayment of International loans coming up. and with these debts to pay back Pakistan's coffers don't give much of a confidence.

@GURU DUTT @Bang Galore @SpArK @Srinivas @Chanakya's_Chant

Seems a legit analysis.
However it can't be as dark as you paint it.
It will good if someone from our side gives a sane reply.
I'm no economic expert so the likes of me can be downplayed by your analysis.
Taking it with a pinch of namak.

 

[Vyom]

If only the world was revolving around your numbers and economic lessons.

Nope, not mine, numbers are everyone's... its just that it's like electricity in Pakistan... not everybody gets it.

I suggested a college nearby. Verify yourself. if proved wrong I'll withdraw the article.

 

[Manindra]

A little more than Nawabs but that's about it. total resource exploitation.

Only thing difference is Eat India Co. maintain large army on expense of Nawabs & Chinese currently not but in future maintain base by high margin profit in Africa.

That Aid went to NGOs that's why Government rightly banned them. Yes, we need to be careful and better this game otherwise we will end up as sitting ducks.

You misunderstood. We gave aid to African Governments.

 

[Alpha BeeTee]

Nope, not mine, numbers are everyone's... its just that it's like electricity in Pakistan... not everybody gets it.

I suggested a college nearby. Verify yourself. if proved wrong I'll withdraw the article.

Nope ..
I think a counter analysis should prevail here.

 

[Alpha BeeTee]

Nope, not mine, numbers are everyone's... its just that it's like electricity in Pakistan... not everybody gets it.

I suggested a college nearby. Verify yourself. if proved wrong I'll withdraw the article.

Nope ..
I think a counter analysis should prevail here.

 

[Vyom]

Seems a legit analysis.
However it can't be as dark as you paint it.
It will good if someone from our side gives a sane reply to your analysis.
I'm no economic expert so the likes of me can be downplayed by your analysis.

Yeah these is the dark part , the bit much is a bit of word play, yet the risks exist. But make no mistake it will take a masterstroke of financial and economic policy maneuvering from your planners for Pakistan to become a Partner with China and not a colony. Nawaz doesn't have the intellectual capital to do it (in my view, and I can be completely wrong in it.)

 

[Spectre]

Thank You

However, but aren't finances and viability import to keep up the show ? You cannot just buy an elephant and hope to feed it with perception. Slowly it will grow frail if not fed properly. eventually will succumb as it happened with FTA with China. Yes the perception can be managed but for how long at 18% returns I doubt even if the GoP will be able to spend on the maintenance of roads and powerplants.

To give you an Idea how dire the situation is the budget spending of Pakistan has fallen by 0.7% YoY,in absolute terms couple inflation and that gives a different picture. This indicates a fall in revenue generation. while its (direect) defence spending has increased to 20% of Federal Budget. This means high expenses and falling income. along with All round High debt.

High debt is not a bad thing as long as you can pay back. borrowings and payments are a part of it. But defaulting on payments has a severe blow. Falling exports are a trend. The CAD has reduced in Pakistan's case but on overall basis there the volume of trade has reduced too (-3.5%).

China is Mercantile state it gives no concern to such trivial thing. if it wants to get back at India it can very well sans Pakistan.

Agreed to all above points but debt as such is meaningless as you have said as long as entity retains ability to service that debt. Infact from a banker's point of view there is nothing better than perpetual debt

Now the question arises if Pakistan can service that debt as default would essentially make it Pariah state among investors, bankers and multilateral institutions like ADB/WB/IMF.

There is a very simple answer to that; left on its own Pakistan cannot service that debt without major reductions in defense and social sector spending. It essentially services its debt with more debt which is a debt trap/ponzi scheme however you look at it. The joke is that this phenomenon is not a secret. Everyone is in on it and still financing Pakistan further to keep it in a relatively stable that as no wants a nuclear capable and bankrupt state which would lead to nuclear proliferation for revenue among many other evils.

So essentially the case is not about feeding an elephant with perception but buying an elephant with leprechaun's gold and then buying it's food with leprechaun's gold and then performing a circus show where audience pays you back with the same leprechaun's gold

Your point about China is marginally true as it certainly has the capability to put road blocks in India's path to progress itself w/o Pakistan ; however things are not so open and shut. Pakistan is to China to what LeT is to Pakistan - Hope you get my point