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Xi Visit to Pakistan & Investment Accord – A Possibility

April 24, 2015

Chinese President Xi Jinping’s 2-days historic visit to Pakistan was without any doubt confirmation of the long history of deep rooted Pakistan China friendship.

Interestingly during his two-day visit the level of expectation for economic support has reached such a height that majority of the print media posts and Tv channel coverage was in lyrical mode without assessing the pros and cons. The real truth is that nothing is clear about the Chinese investment because of tight lipped government policy on country’s large financial deals,

What is the celebration about? If we are celebrating on Xi’s comments, “Coming to Pakistan isn’t like coming to a foreign country. It is in fact like coming to my brother’s home”. Then there are no second thoughts, as our relationship with China has climbed to unimaginable heights.

On economic corridor, Xi has clearly said that to help Pakistan is to help ourselves.

But looking from another perspective, China will also be a huge beneficiary if larger parts of the plans are implemented because of geographical advantages.

Certainly, USD 46 billion assistance is huge in size that also partly covers development and infrastructure, which includes power generation, transportation connectivity and probably naval equipment.

The crux of economic corridor is linked between Gwadar to Xinjian in the North-West of China, which is expected to be completed by 2030. This will also assist both the countries to increase its presence in Gulf of Oman and the Arabian Sea resulting economic/business opportunity. This is a strategic decision in nationa interest and is not debatable.

However, it is imperative to know the nature of Chinese President’s visit and commitment that will make the future transaction possible.

Though details are not made available to the public, but initially information available in the press suggests that 32 projects have been signed, estimated to be costing roughly USD 28 billion.

It is important to understand that apart from few expectations, the whole part of it is not an agreement. It is only a Memorandum of Understanding (MoU), which is considered first stage. At a later stage if the terms and conditions are finalized/negotiated then only further transactions will be made possible under the head of commercial loan, which is said to be on softer terms.

Unless more funding clarification is provided, my understanding is that it is going to be a non-resident offshore loan based on loan agreement that has certain risk attached, such as Credit and USD/Rupee exchange risk.

I strongly believe that Central Bank’s high discount rate policy, which is in negation of inflation trend, should be brought in line with the data at par or else project funding will be very costly and difficult to execute.

More importantly, on the energy side government claims to add 10.000 megawatt electricity by 2018 raise few questions for its wishful thinking.

But let us assume that it succeeds to add 10.000 mw of electricity, then the bigger question that needs to be answered is that what will be its domestic source of funding to operate the units at home and to increase production and how does it plan to arrest rising circular debt, which is roughly about or over 30 pct caused by lines losses that amounts to Rs 300 billion annually in shape of circular debt. Because doubling of energy production means surge in circular debt at same proportion or Rs 600 billion, unless line losses is brought down to a desired level, which is a daunting task and not attainable due to political interference.

Furthermore, for the government, the questions that needs to be answered is that what would be the investor’s terms and condition? Is this pure loan? If this is a loan on soft condition, then what would be the settlement terms and if this a foreign investment, then at what proportion ? To know the annual profit outflow.

However, this will only address one offshoot of our problem that has many strings attached. Country’s financial problems are uncountable that will continue to grow in size, if the economy remains undocumented and chosen few remains the preferred beneficiaries.

@asadcmka

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