Pak China Economic Cooperation

Pak ChinaChina has expressed its support for Pakistan by signing 51 MoUs that can culminate into investment worth US$28 billion in energy and infrastructure projects. This is part of an ambitious plan of US$46 billion projects to be undertaken over the next fifteen years. The power sector emerged the biggest attraction for China, with nearly 30 MoUs signed relating to power projects that promise to add 10,400MW to Pakistan’s energy grid over the next 3 years, of which projects with 8370MW capacity have said to reach financial close. MoUs for infrastructure projects, relating to the development of the China-Pakistan Economic Corridor (CPEC) were also signed which are likely to be completed by September 2016. The CPEC can spur economic growth by attracting further foreign investments in Pakistan. However, one just can’t ignore some of the threats that can mar swift completion of these projects, security being the biggest concern..

The energy sector remained the biggest contender for funds promised by China likely to add 10,400MW to Pakistan’s energy grid (current installed capacity at 24,375MW) over the next 3 years. Of these, projects with planned generation of 8,370MW are ready to be rolled out as announced by the Planning Commission financial close have been achieved. Most power project MoUs relate to financing agreements, with Chinese banks (primarily EXIM Bank of China and Industrial and Commercial Bank of China Limited (ICBC)) lending to these power projects.

Out of a total of US$46 billion, allocations for infrastructure projects are estimated around US$10 billion, primarily relating to development of the Pak-China economic corridor route. Four projects highlighted include Karakorum Highway, Karachi-Lahore Motorway, Gwadar Port East Bay Expressway and the Gwadar International Airport. The completion date for these projects has been set for September 2016, which seems highly ambitious but critical keeping in view the operational importance for the eastern route of the corridor. As per the agreements, Pakistan will remain eligible to receive concessional loans for the projects, mark-up for which was earlier said to be subsidized by the Chinese Government.

While the CPEC and its associated projects are being touted for their potential to spur economic growth and foreign investments in Pakistan, one has to keep in mind some potential threats. Recalling the failure in complete implementation of MoUs signed in 2004 (China’s share in FDI slipped from 1.5% in FY04 to 0.03% in FY05) as well as Pakistan’s inability to derive the potential benefits (slow pace in realizing benefits of the FTA (US$15 billion mark achieved last year against target of FY11), analysts remain conscious of possible impediments to the implementation of projects emanating from security threats and any administrative bottlenecks due to any change in policies. However, some optimism can be derived for the initiatives, particularly infrastructure projects, given the strategic importance CPEC route for China as part of its broader ‘One Belt, One Road’ program (easy accessibility to Middle-Eastern imports with route reduction by 12,000km).

Fully cognizant of the potentials risks, one can’t abstain from highlighting opportunities for economic benefit to be yielded through the CPEC agreements. While the holding structure of the said power plants remain to be clarified, Chinese firms such as China Three Gorges Corp (CTG), China Power International Holding (CPIH), Huaneng Group, and Zonergy Corporation are said to be investing in the form of commercial ventures, which could provide impetus to the country’s ailing foreign direct investment (FDI) flows.

Moreover, the influx of investment in infrastructure can prove to be potential growth driver for the economy with various sectors benefiting. Potentially led by the cements segment, one expects to see spillover benefits coming to local allied businesses such as steel and engineering. Some relief to the fiscal balance may also come on the back of concessional loans becoming a direct support to developmental expenditure. However, gauging more concrete implications of the program’s implementation remains contingent on the detailed terms of the major power and infrastructure project deals.


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