Politics

The Next Phase Of CPEC [REPORT]

China Pakistan CPEC Close To Entering Next Phase
http://cpecvela.com/cpec-map/ [CC BY-SA 4.0], via Wikimedia Commons
“Since its inception in 2Q15, the China-Pakistan Economic Corridor (CPEC) has been viewed as the silver bullet to address energy deficits and remove infrastructure bottlenecks. We assess that ~60% of the targeted capacity additions of ~12,000 MW will reach completion while 20% are facing long delays. The Thar coal mine (3.8 mn tpa) faster than expected. road networks has been mixed, but upgrades to railways have lagged. China’s assistance for external account has largely explained the ~200% balance of payment (BOP)-specific financing to US$20.6 bn [billion] (7.2% of GDP),” reads the opening to the latest Pakistan Market Strategy report released by Credit Suisse earlier in February.

In December of last year, ValueWalk reported China denied claims made in the New York Times that they were using CPEC to transport military equipment. “According to our information, the relevant report is not true,” Chinese foreign ministry’s spokesperson Hua Chunying said at the time during her regular briefing held at the ministry when commenting on the New York Time’s report by Maria Abi-Habib.

Importance Of CPEC And Difficulties Encountered

“With the first phase of CPEC nearing completion (4Q 2019 as per the Chinese assessment), project delivery has been mixed to positive, in our view, on both the energy and infrastructure fronts. Of the targeted 11,770 MW to be added under the CPEC umbrella, we assess that operations have started for 3,240 MW (28%) while another 3,570 MW (30%) is in the advanced stages of construction, and the remainder has low visibility,” the latest Credit Suisse report stated concerning Phase I operations.  It would continue to detail why the project is important to the economy of Pakistan. “CPEC, one of the fastest growing offshoots of the One Belt, One Road (OBOR) vision of China, has been touted as a game changer for Pakistan’s weak economy. OBOR, floated by President Xi Jinping in 2013, has seen mixed progress over the years in certain economies. However, Pakistan has comparatively stood out, with swifter execution. Several agreements were signed in 2015 for investing ~US$46 bn in a range of energy and infrastructure projects. Alongside, plans were laid out to develop the port city of Gwadar.”

Despite the financial promise of the infrastructure project hurdles continue to remain for Pakistan and partner companies. “past three years, the CPEC been expanded by including additional projects to take the price tag up to ~US$62 bn (or 20% of Pakistan’s GDP). On the flipside, other OBOR countries have been revisiting, and in some cases, shelving projects, due to potential difficulties in repayments.”

While many in Pakistan feel the project is the ‘silver bullet’ to address their economic woes and maintains a positive public perspective mainly due to the “continuing dialogue of the top-tier military leadership of both countries further underscores the depth of this partnership, in our view.” Which provides “regional connectivity” CPEC can also be “seen as a geo-strategic initiative as it broadens China’s influence in South Asia.”

However, domestically there has been “unease in several sectors of the economy wherein rising Chinese competition is perturbing the local manufacturers.” This factor combined with “apprehensions about imported raw material and skilled labour [sic] being used in project sites which has not created business opportunities for domestic companies and set a stage for large-scale human development,” remain long-term obstacles for CPEC.

Pakistan’s New Reliance On China

“The key pushback from investors is that Pakistan is under too much debt and will have a tough time repaying. The US, in particular, has vocal about the Chinese debt being unsustainable it as a factor behind Pakistan’s decision to approach the IMF [International Monetary Fund] for a bailout. We understand that Pakistan has provided full disclosure of the Chinese debt profile in the talks held in November 2018.,” the Credit Suisse report cautions about the rise costs of CPEC. “Based on available details, categories within the external debt pile such as bilateral loans, commercial credits, safe deposits, and swap arrangements have surged in recent years, attributed largely to Chinese assistance for propping up Pakistan’s reserves and providing relief to BOP. We estimate that outstanding stock of from these categories has risen to US$20.6 bn (as of 3Q18), marking a 200% increase in three years.”

However, the reports would add that the worst of the external account stress appears to be behind them.

The Next Phase Of CPEC

The report also delivered hopeful news, “As per the Chinese assessment, Phase I of CPEC will be completed in 4Q19 and the next phase will ensure more social-economic and industrial cooperation. We expect the next phase of CPEC to shift towards transfer of technology, setting up of special economic zones, and focus on poverty alleviation.” Credit Suisse also details the significance of a recent high profile trip to Pakistan in relation to the project, “The Saudi Crown Prince, His Excellency Muhammad Bin Salman, has made a high-profile visit to a Pakistan with a delegation of senior business leaders and ministry officials. The Kingdom has firmed up its intention to invest ~US$20 bn and both sides have signed an MoU for cooperation in the fields of refining petrochemicals, mineral resources, renewable energy, and food processing.”

“Going forward, in CPEC 2.0, we understand that Pakistan is making a case with China for more market access for its products and the response has been positive. While details are still sketchy, the second phase of the Free Trade Agreement is expected to be finalised [sic] in 2Q19 when Prime Minister Imran China again,” the Pakistan Market Strategy commented on how Pakistan plans to resolve their unbalanced trade with China going forward.