Chinese help for Pakistan comes at a high price
There has been a structural shift of trading partners in Pakistan — from traditional western countries to those geographically closer and culturally similar.
Over the past decade the combined share of the United States and the United Kingdom of trade into Pakistan has declined by 15 percentage points to 26%. The Middle East also has a sweet slice of the pie from oil imports, while Pakistan is receiving dollars in the form of remittances sent by its millions of overseas citizens working there.
While the potential for trade with India is high, it accounts for just 5% of total volume due to longstanding military tension between the wary neighbours, while Pakistan’s exports to Afghanistan are on the rise.
One country that is taking a bigger slice of the pie is China, which is on pace to become Pakistan’s biggest trading partner. Its share of official trade has doubled in the last decade and in absolute terms it increased by 5.5 times to $7.7 billion.
These numbers don’t include the huge amount of goods smuggled from China. Interestingly, there is a difference of $3.4 billion in the value of goods reportedly exported by China to Pakistan versus the amount recorded at Pakistan customs of imports from China.
Incorporating these numbers, China’s share of Pakistan’s trade is 17% and soon it will surpass that of the United States, as the latter’s proportion has fallen by a third in the last decade to 20%.
Sino-Pakistan flows are not limited to trade, as both countries are advancing on the investment front as well. China is also expected to be the biggest foreign direct investor in Pakistan in the coming decade. The signs are already visible, as China Mobile, the world biggest mobile network by subscribers, is undertaking its first international venture is in Pakistan. In the recent 3G/4G auction in the country, China Mobile was the only player out of the four competing companies to obtain both 3G and 4G licences.
The Chinese are also relatively resilient to terrorist activities in Pakistan, despite occasional incidents involving abductions of Chinese engineers. One reason that economic relations remain close is that the two countries share a strong anti-India political ideology; the adage “the enemy of my enemy is my friend” comes to mind.
China has pledged to invest $32 billion in energy, transport and infrastructure projects in Pakistan in the next five to seven years. The Exim Bank of China has agreed to fund these projects in both the public and private sectors. These are big numbers, as over the last 15 years Chinese cumulative FDI in Pakistan was less than $1 billion – a mere 3% of total foreign investment of $30 billion in the same period.
A new commitment of $32 billion is gigantic in Pakistan’s context, but it is not much considering China’s share of global FDI last year alone was 5% or $81 billion spread over 156 countries.
Almost 14% of Chinese FDI is in mining and petroleum while only one percent is in electricity. Transport construction ventures are also favoured by Beijing. In recent times, China has also been targeting sophisticated technology and customers in more advanced markets.
Some of the important potential projects are the construction of an economic corridor, which provides trade avenues to several countries, energy projects in solar power and coal, motorways and improvements to Pakistan’s railway system. There is a proposed investment of $20 billion in the energy sector. Examples of similar past cooperation with the Chinese are in the Heavy Mechanical Complex, Chashma nuclear plant and the Karakoram Highway.
For large investments that involve preferential, medium-term soft loans, China is expecting that all power projects including the Bhasha Dam, Gaddani and Lakhra coal ventures, the Tarbela Extension and transmission lines be handed over to its investors, under the law, without an international bidding process.
China’s assistance to Pakistan to acquire cheap energy, in particular, indicates that it is perhaps teaching Pakistan the secret of its extraordinary economic success in recent history. The move from predominantly thermal to cheaper coal, nuclear and renewable energy along with cheap and abundant labour will definitely improve the competiveness of Pakistani exports. Currently, nuclear and coal-based power have a combined share of only 3% in Pakistan.
As they say, there is no such thing as a free lunch – Pakistan has to be cautious in selecting these projects and should not fall into a state of complacency. These investments will be in the form of loans and they have to be repaid. Out of $32 billion, $20 billion would be deployed in power projects whereas the rest would be used in building roads, bridges and similar infrastructure.
As for the economic impact of the Chinese-backed investments on imports and exports in the next 20 years, 70% of the $20-billion investment in power plants will go abroad (most probably to China) for machinery imports and their installation. As for the infrastructure projects, there will probably not be any immediate economic return; instead future generations of Pakistanis will end up servicing the debt.
Pakistan has to deal with this problem by increasing export diversity and enhancing domestic industrial capacity to absorb the strains on its balance of payments as it piles up debt. One should not keep all its eggs in the same basket; hence, the country should rely on other foreign partners apart from China.
To give one example, Singapore, Malaysia and Thailand account for 14% of Pakistan’s imports but not much investment has been forthcoming from these countries.
Additionally, Pakistan needs to further strengthen its economic relations with the Middle East to encompass direct investment apart from being limited to remittances and oil imports.
Most importantly, improving ties with India is imperative for unlocking regional potential. There are lessons to be learned from China-Japan or China-India affiliations that countries can be political rivals yet still expand their economic and trade ties.