DURING the recent visit of a high-level Pakistani delegation to Beijing, China apparently did not commit to Pakistani proposals aimed at easing the immediate economic pressure, but it finally sealed the agreement on industrial cooperation which is considered vital to operationalize the second phase of the China-Pakistan Economic Corridor (CPEC).
Pakistan had signed a memorandum of understanding on industrial cooperation with China in 2018, as the first phase of CPEC was advancing and many mega-infrastructure and energy projects were nearing completion. The political change in Pakistan and the pandemic disrupted the process, which negatively impacted the pace of CPEC.
Besides the framework agreement on industrial cooperation among CPEC partners, Pakistan wanted to engage the mighty power to get support to ease the growing pressure on the country’s external accounts, some flexibility to expand space for new loans and support to solve the persistent problem of bank credit. challenges for private projects induced by the CPEC.
To this end, Pakistan has offered China to expand the limit of the currency swap facility from the current $4.5 billion to $10 billion, contribute to the establishment of the China-China Industrial Cooperation Fund Pakistani and to postpone repayment of the $4 billion Chinese loan due this year.
The expanded currency swap facility will allow the government to creatively manage the country’s debt profile by shifting responsibility for Chinese lending from the books of the Federal Government to those of the State Bank, thereby opening much-needed space for new loans.
To meet the financing needs of private projects under the aegis of the CPEC, the Industrial Cooperation Fund can serve well, not least because local commercial banks, citing higher risks, are reluctant to lend. Finally, the renewal of repayments can contain the haemorrhage in terms of foreign exchange reserves which threatens monetary stability.
The recent trip to China may not have created immediate financial space, but the industrial cooperation framework agreement is indeed crucial
To make China more responsive to Pakistan’s request, the government, ahead of the trip, approved compensation worth $11.6 million for Chinese people affected by the Dasu Dam terrorist attack. The cabinet signed a payment of 100 billion rupees against 230 billion rupees pending dues to Chinese power plants and ordered the immediate release of 50 billion rupees. The government also ordered the creation of a revolving bank account with a minimum balance equal to 22% of the power purchase agreement with Chinese companies. In addition, Pakistan has decided to include the 300 MW Gwadar power station in its high priority program in terms of prompt payment of bills.
The government expected the four-day visit to be a big success, with the hierarchy playing out engagements with leaders and potential private investors. Responding to DawnIn his request for comment on the trip, Finance Minister Shaukat Tareen was clear and specific. “Of course the visit was very productive,” he said in a text message.
Khalid Mansoor, special assistant to the Prime Minister on CPEC, seemed excited. “Absolutely exceptional trip, Alhamdulillah. Couldn’t have been better,” he wrote. On the phone he said Dawn that the historic framework agreement has set in motion a journey that can change the fortunes of the country. “We prepared well and reaped the rewards of hard work. The interactions with the relevant interfaces have been enriching. They took note of all our proposals. The atmosphere of the meetings was very positive.
He called the delay in signing the framework after about years of a memorandum of understanding on industrial cooperation a “force majeure”, blaming the delay on the global health crisis. Clarifying reports on the exemption granted to Chinese investors from 37 approvals for investment projects announced after China’s return, he said the facility would be available to all local and foreign investors in special economic zones across the country.
For their part, business leaders have expressed some nervousness over what they perceive as the country’s gradual shift towards the emerging anti-US/West camp. Exporters oriented to western markets argued for a balance in diplomatic relations. Most of the top business leaders approached probably didn’t want to be seen on the wrong side of the government or their foreign partners and avoided discussing the subject altogether.
Musadaq Zulqarnain, Chairman and CEO of Interloop Ltd. and its associated companies, advised to wait and watch before taking a stand on the government’s desperation to woo China. Commenting on China’s stance on Pakistan’s high expectations, he said, “It is difficult to assess the outcome of the trip to China at this stage. The Chinese are notorious for taking time to make up their minds. The current talks took place on the sidelines of the Winter Olympics, a global sporting event staged in difficult times during the pandemic.”
“Pakistan is in a difficult situation. The government must balance diplomatic relations with China, Russia, the United States and Europe. Our economic interests are also closely linked to those of the West.
“The focus should be on investment from Chinese companies. Pakistan should become the natural choice for Chinese investors over Bangladesh, Vietnam, Cambodia and African destinations,” he said. He expressed concern about the wave of terrorism in Pakistan in this context.
Messages were dropped for Board of Investment (BOI) Chairman Mr. Azfar Ahsan and Secretary Fareena Mazhar for their input on the subject, but their response did not reach Dawn until the tabling of this report.
“Bending over backwards will not be enough to encourage the Chinese private sector to relocate its factories to Pakistan. I don’t know of a country that has become the destination of choice for foreign investors where the locals are reluctant. The government needs to mobilize local investment if it wants global investors to be interested,” said a Karachi businessman, apparently upset by the unstable gas supply to his plant.
Posted in Dawn, The Business and Finance Weekly, January 14, 2022