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CPEC: Cause or remedy to Pakistan’s debt dilemma?

M Waqas Jan

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New times, Similar woes

Pakistan’s most recent debt and balance of payment crises have come to highlight yet again the continuing fragility of its economic and financial situation. Even despite a considerably improved security situation and a significant rise in its GDP growth rate, Pakistan’s current account deficit over the last fiscal year has neared the $16bn mark reducing its Forex reserves by nearly 40pc. This will likely further exacerbate public debt, which currently stands at a staggering 70% of GDP. Add to that the political upheaval of the current  election season; the past few year’s narrative of Pakistan emerging  as a key developing market stands in all out jeopardy, as investors both at home and abroad watch with increasing trepidation.

This bodes ominously for the widely publicized China Pakistan Economic Corridor (CPEC), which has over the last few years dominated economic discourse within the country. Having become increasingly intertwined within Pakistan’ politico-economic framework, CPEC’s detractors and supporters both at home and abroad have hotly debated whether CPEC itself is the cause, or remedy to much of the country’s economic and financial troubles.

Warnings of an impending Debt trap

For instance, the widening current account deficit over the last few years has been continually attributed to the huge import costs of machinery and related building materials for CPEC projects currently underway. This was highlighted by the government as necessary given their stance that importing such capital goods was essential to the long-term restructuring and development of the country. This was also the reason used to justify the rampant borrowing undertaken by the government. By issuing sovereign bonds and taking on expensive commercial loans, the government in effect borrowed more in its attempt to curtail dwindling Forex reserves; reserves that were, and are still crucially needed to meet the ever widening current account deficit.

In a similar vein, critics both in and outside of Pakistan have pointed out the potential of CPEC turning into a ‘debt trap’ for a structurally and financially weak Pakistan. Parallels are often drawn against the Sri Lankan experience of having China fund and build the Hambantota sea port only to have it included as part of a debt-for-equity swap, when low revenues and high liabilities left it unfeasible for the Sri Lankan government to own and operate it. The massive liabilities being incurred on behalf of CPEC projects are often compared to this example.

This is especially true considering Pakistan’s increasing reliance on both public and private Chinese banks for financing CPEC related projects. This over-reliance on Chinese funding has in fact extended beyond CPEC projects with the Chinese government repeatedly offering small bailouts to the Pakistani government. The most recent one being the $1 billion emergency loan released at the end of June to help cover Pakistan’s unsustainable import bill for the next few months.  Thus as CPEC’s detractors have pointed out, there is certainly a growing dependency on Chinese funds that can in turn be used as leverage against Pakistan on the geo-political front.

Age-old cycles of debt induced poverty

On the other hand, despite criticisms identifying CPEC as a potential threat to Pakistan’s politico-economic autonomy, it is extremely difficult to argue that the Pakistani economy would be any better off without CPEC. Owing to deep seeded politics and decades old economic structural failings, Pakistan has been unable to mount the sort of economic turnaround seen in the other post-colonial yet newly industrialized Nations of Asia.  This is in spite of the comparisons tinged with nostalgic ‘what ifs’, which are often drawn against the economies of the East Asian tigers and even China for that matter.

Yet, there has been little if any effort to emulate the export led growth strategies of the above countries backed by a strong industrial and manufacturing sector. In fact, both exports and manufacturing have instead declined over the last few years, serving as the most glaring examples of the Pakistani economy’s structural failings. Moving beyond short term measures of financing the deficit through loans and bailout programs, expanding the country’s exports is in fact the only viable and sustainable solution to the country’s widening Current Account deficit.

This is in contrast to prevailing policy measures that have continued to relinquish the country’s politico-economic autonomy to its creditors. The only difference being that policy makers, in light of deteriorating relations with the US over the last few years, have preferred to slowly substitute China for the Bretton Woods institutions as its major source of credit. As has been for decades, the economy’s reliance on external funding remains the same even in light of dramatic shifts in the global political economy.

Still, even amidst mounting public debt and new credit lines from Chinese sources, Chinese officials stationed in Islamabad have gone to great lengths to point out that, out of the $19 billion used to finance CPEC projects so far, only 31.6% has comprised of loans to the government in the form of preferential buyer credit. The rest of the financing has been doled out in the form of aid, interest free loans and loans secured by private investors from commercial banks, all of which are mostly outside of Pakistan’s debt servicing obligations. Taking into account both ongoing and completed early harvest projects, the same officials have placed the overall burden of CPEC projects at around 10% of the country’s overall debt servicing obligations. They too point out that the primary factor behind Pakistan’s worsening fiscal and external accounts is more due to its economy’s inherent structural limitations and challenges; the same challenges that have plagued Pakistan and the surrounding region for decades.  They argue that it is overcoming these very limitations and challenges that CPEC as a part of the overall vision of the Belt & Road initiative aims to address over the long run in a holistic, sustainable manner.

Of Grand visions and dreams

Coming back to Pakistan’ gaping debt crisis in relation to CPEC, it is unlikely that debt under CPEC has played a major role in bringing the economy to its present position. Despite being a slave to geo-political tensions, Pakistan’s economy has suffered more from years of mismanagement and structural failings that have moved beyond the security dynamics of the South Asian region.

What CPEC instead does, is offer in concrete terms, a viable chance for the country to prioritize its economy as the basis for its power and influence within the region, in the same way China has done at a global level.  It offers perhaps the only realistic chance for Pakistan to move beyond its Agrarian focus and develop a robust manufacturing sector to help add greater value to its exports. By successfully leveraging the massive investments in energy, transport and communications infrastructure as well as the financial opportunities under corresponding SEZs, Pakistan can use CPEC as an opportunity to break free of its present structural limitations that have so far reinforced the ensuing cycles of debt and poverty.

This however, is only possible if the underlying, decades-old problems of the present debt crisis are correctly identified and remedied in accordance with a sustainable long-term approach. While all of this is unlikely to materialize overnight, policymakers and administrators overseeing CPEC need to re-prioritize the development of long-term sources of revenue, as opposed to the short-term sources of credit that have come to characterize CPEC in day to day politico-economic discourse. If not, then the entire CPEC initiative is reduced to being just another excuse to borrow more funds to keep the economy afloat. This serves neither Pakistani nor Chinese interests in the long run.

Research Associate and Program Coordinator for the China Study & Information Centre (CS & IC) at the Strategic Vision Institute, a non-partisan think tank based out of Islamabad. He can be reached at waqas[at]thesvi.org

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South Asia

Geopolitics, the black swan in Saudi-Indian relations

Dr. James M. Dorsey

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When Saudi Crown Prince Mohammed bin Salman meets Indian Prime Minister Narendra Modi next week, the elephant in the room is likely to be what weighs more: the issues the two men agree on or the ones that divide them.

As a matter of principle, Prince Mohammed and Mr. Modi are likely to take their strategic partnership to a new level as a result of changing energy markets, a decline in American power, the rise of China and the transnational threat of political violence.

Discussions with the crown prince and his delegation of Saudi businessmen on energy and investment will prove to be the easy part. Saudi Arabia is investing US$44 million in a refinery in Maharashtra’s Ratnagiri and supplies 20 percent of India’s crude oil. India, moreover, expects the Saudis to invest in ports and roads while Saudi Arabia is interested in Indian agriculture that would export products to the kingdom.

At first glance, security issues should be a no-brainer. The two countries hold joint military exercises, share intelligence and cooperate on counterterrorism. They are also working to counter money laundering and funding of political violence. Things get complicated, however, when geopolitics kicks in. Prince Mohammed arrives in Delhi on the back of a visit to Pakistan, where he is expected to sign a memorandum of understanding on a framework for $10 billion of investments, primarily in oil refining, petrochemicals, renewable energy and mining.

The memo follows significant Saudi aid to help Pakistan evade a financial crisis that included a $3-billion deposit in Pakistan’s central bank to support the country’s balance of payments and another $3 billion in deferred payments for oil imports.

The tricky part are the investments in the memorandum that include a plan by the Saudi national oil company Aramco to build a refinery at the Chinese-backed port of Gwadar, close to Pakistan’s border with Iran and the Indian-backed Iranian port of Chabahar. Both Pakistan and Saudi Arabia are closely monitoring Chabahar’s progress.

A potential Saudi investment in the troubled Pakistani province of Balochistan’s Reko Diq copper and gold mine would strengthen the kingdom’s hold in the strategic province that both Prince Mohammed and US president Donald J Trump’s hardline national security adviser John Bolton see as a potential launching pad for efforts to destabilise Iran. Taken together, the refinery, an oil reserve in Gwadar and the mine would also help Saudi Arabia in efforts to prevent Chabahar from emerging as a powerful Arabian Sea hub.

Saudi funds are flowing into ultra-conservative anti-Shiite, anti-Iranian Sunni madrassas in Balochistan. It remains unclear whether the money originates with the Saudi government, Saudi nationals of Baloch descent or the two million-strong Pakistani diaspora in the kingdom.

The money helps put in place building blocks for possible covert action should the kingdom or the US — or both — decide to act on proposals to support irredentist action.

Such covert action could jeopardise Indian hopes to use Chabahar to bypass Pakistan, enhance its trade with Afghanistan and Central Asia and create an antidote to Gwadar, a crown jewel in China’s Belt and Road initiative.

Pakistani analysts expect around $5 billion in Afghan trade to flow through Chabahar after India in December started handling the port operations. It could also further strain ties with Pakistan that accuses India of fomenting nationalist unrest in Balochistan.

The funds take on added significance in the face of Saudi concerns about Chabahar and India’s support for the port. The money continues to flow even though the crown prince has significantly cut back on the kingdom’s global funding of ultra-conservative Sunni Muslim groups to bolster his assertion that the kingdom is embracing a more moderate, albeit as yet undefined, form of Islam.
The money started coming in at about the time the Riyadh-based International Institute for Iranian Studies published a study that said Chabahar posed a “direct threat to the Arab Gulf states” that called for “immediate countermeasures”.

Written by Mohammed Hassan Husseinbor, a Washington-based Iranian Baloch lawyer and activist, the study warned that Chabahar would allow Iran to step up oil exports to India at the expense of Saudi Arabia, raise foreign investment in the Islamic Republic, increase government revenues and allow Tehran some muscle-flexing in the Gulf and the Indian Ocean. Noting the expanse of Iran’s Sistan and Balouchestan province, Mr. Husseinbor said “it would be a formidable challenge, if not impossible, for the Iranian government to protect such long distances and secure Chabahar in the face of widespread Baluch opposition, particularly if this opposition is supported by Iran’s regional adversaries and world powers”.

Published in a country that tightly controls the media as well as the output of think tanks, the study stroked with a memorandum drafted a year later by Bolton before he assumed office. The memo envisioned US support “for the democratic Iranian opposition”, including in Balochistan and Iran’s Sistan and Baluchestan province.

Iranian officials believe that Saudi Arabia and the US have a hand in a string of recent attacks by Baloch, Kurdish and Iranian Arab nationalists but have so far refrained from producing anything beyond allegations. Most recently, they point to a rare suicide bombing in Chabahar in December that targeted a Revolutionary Guards headquarters, killing two people and wounding 40.

Writing in the Pakistan Security Report 2018, journalist Muhammad Akbar Notezai said, “to many in Pakistan” concerns about Indian support for the Baloch “were materialized with the arrest of Kulbushan Jadhav, an Indian spy in Balochistan who had come through Iran. Ever since, Pakistani intelligence agencies have been on extra-alert on its border with Iran”.

The journalist warned that “the more Pakistan slips into the Saudi orbit, the more its relations with Iran will worsen… If their borders remain troubled, anyone can fish in the troubled water”.

Mr. Notezai implicitly put his finger on the pitfalls Prince Mohammed and Mr. Modi will have to negotiate to ensure that their ever closer economic, energy and security relations can withstand the challenges posed by the escalating and intertwined rivalries that link West and South Asia.

Author’s note: This article appeared in Firstpost

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Tapping potential of connectivity through BCIM-EC

Sultana Yesmin

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The Bangladesh-China-India-Myanmar economic corridor (BCIM-EC) is a sub-regional initiative, earlier known as “Kunming Initiative”, or BCIM Regional Economic Cooperation, was established in August 1999 in Kunming, capital of China’s south-western Yunnan Province by the scholars from China, India, Bangladesh, and Myanmar.

Chinese Premier Li Keqiang proposed the BCIM-EC initiative during his visit to India in May, 2013. The Joint Statement between China and India officially proposed the establishment of the BCIM-EC, while later Bangladesh and Myanmar offered strong and positive responses towards the development of economic corridor across the sub-region.

The proposed BCIM economic corridor aims to construct a 2,800-km economic corridor connecting 20 major cities and towns of the BCIM countries. Starting from Kolkata, the capital of West Bengal, the corridor is planned to end in Kunming, capital of China’s Yunnan Province via Bangladesh’s Jessore, Dhaka, and Sylhet; Imphal of Manipur and Silchar of Assam in North Eastern part of India, and Myanmar’s Ka Lay, Monywa, Mandalay, Lashio and Muse.

The BCIM Forum was primarily initiated with the aim of building regional cooperation among the four participating countries as well as integrating the BCIM economies through building overland economic corridor along the routes connecting the sub-region of South Asia, Southeast Asia, and East Asia.

The overland connectivity aside, over the years, the objectives of the BCIM-EC expanded in the areas of poverty alleviation, people-to-people connectivity, cross-border energy trade, tourism, human resource development, sustainable development as well as trans-border security.

Significant progresses have already been witnessed towards the achievement of these objectives. As for example, starting from 1999 to 2015, total 12th BCIM Forums have been arranged by the BCIM countries. The idea of the construction of Kunming-Mandalay-Dhaka-Kolkata (K2K) economic corridor was first proposed in the 9th BCIM Forum held in Kunming, China from January 18 to 19, 2011, which marked significant milestone in the development of the economic corridor across the BCIM sub-region.

The 10th BCIM Forum held in Kolkata, India from February 18-19, 2012 was also crucial for taking the decision about the Kolkata to Kunming (K2K) Car Rally along the BCIM routes. As per the consensus, the historical Kolkata to Kunming (K2K) Car Rally in February 2013 was warmly received in four countries that underscored the construction of BCIM economic corridor across the sub-region.

Subsequent to these developments, strengthening the working relationship between Track II and Track I and the initiation of Track I diplomacy through the consensus in 9th Forum and the 11th BCIM Forum respectively injected noteworthy impetus into the development of multimodal connectivity across the BCIM sub-region.

So far, three Joint Study Group (JSG) meetings have been conducted among the representatives of the four countries to foster physical connectivity, facilitate trade in goods, services, and investment; promote economic integration; and also to enhance people-to-people contacts among the BCIM countries.

The 1st JSG was held in Kunming, China from December 18-19, 2013, while the initiative was undertaken for the official launch of intergovernmental process of BCIM-EC. The 2nd JSG held in Bangladesh’s Cox’s Bazar from December 17-18, 2014 gained momentum after the consensus of the four countries to prepare separate country reports on the concept, scope and elements; principles and modalities of cooperation; and framework of cooperation. And, during the 3rd JSG meeting which held on 24- 25 April 2017, in Kolkata, the four countries agreed on upgrading of the talks on BCIM-EC to the intergovernmental level.

The significance of the BCIM-EC is enormous. Geo-strategically, the economic corridor is the gateway to three sub-regions, South Asia, Southeast Asia, and East Asia. It is also the hub of blue economy and international maritime trade with the endowment of the Bay of Bengal and its adjacent areas, Indian Ocean, the Andaman and Nicobar Islands.

The geo-economic significance of the BCIM-EC is also immense. The BCIM sub-region with the enhanced transport connectivity can be a zone for international trade and business. The free flow of goods and services as well as cross-border trade and investment through the seamless connectivity will facilitate equitable sharing of benefits among the BCIM countries.

The proposed BCIM-EC attempts to build multimodal connectivity in order to accelerate all round development across the sub-region, goodwill, peace, and the stability in the sub-region based on the principles of mutual interest, trust and respect, and equitable sharing of benefits.

Though there is a prevalence of some security, economic, and political factors remaining as key challenges, the countries need to come up with concrete measures to fully tap the immense potentials of connectivity through the successful establishment of the BCIM-EC across the sub-region.

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Kashmir: Aftermath of Pulwama attack?

Amjed Jaaved

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India quickly blamed Pakistan for Pulwama attack. .Indian media reports reflect that India’s accusation, if anything, was a knee-jerk reaction to pander to sentiments of fanatic gallery. It would have sounded credible, if the accusation had been corroborated with evidence.

The allegation was made even before forensic-lab and National Investigation Agency teams `visited the site of the attack at Lethpora, some 30 km from Srinagar on the Srinagar-Jammu national highway, took photographs and videos and collected samples from the 15-mile area for forensic examination’. (Indian Express February 16, 2019). Indian Express dated Feb. 15, 2019 speculated `High-grade RDX explosive, weighing about 80 kilogram, was used in the suicide attack’. The Hindu dated February 16, 2019 estimated `100-150 kg of the explosive was used’. Investigating `agencies have also taken tower dumps of the attack area to filter out suspicious calls and those made in around the same time as the attack’ (Hindustan Times dated February 16, 2019). No word yet from the investigators.

The Standing operating procedure required movement of up to 100 persons in a convoy.  But `the CRPF had been moving such convoys, comprising more than 2,500 personnel each, on the Srinagar-Jammu highway. In the past fortnight, two such convoys had moved from Jammu to Srinagar. The latest was on February 4 with a convoy of 91 vehicles and 2,871 personnel’. Why the convoy could not spot the lonely suicide vehicle trailing behind? How the terrorists knew that the convoy movement was delayed by two days? How they remained undetected loading the vehicle with explosives whole day?

Obviously, some demoralized security personnel provided information to `militants’. There are frequent suicides and desertions in forces. A few days back a soldier was abducted and killed by freedom fighters. Later an inquiry blamed some of his companions of collusion with `terrorists’. Critics including Kashmiri leaders have questioned why the CRPF personnel were not air-lifted. They pointed to IAF’s showcased `airlifts of record 463 tonnes to Ladakh from Chandigarh within hours’. `The effort was accomplished with the aid of a fleet of 16 fixed wing transport aircraft comprising of C-17 Globemaster, the Ilyushin-76 Gajraj and the Medium  lift Tactical aircraft, Antonov-32 (Indian Express dated December 19, 2018).

To demonise Valley-based Kashmiris, government encouraged fanatic Hindus to stage violent rallies in Jammu. To forestall plunder of Valley based Kashmiri living in Jammu and save their lives, Centre had to impose curfew. There was a veritable, though alarming possibility, that Valley-based Kashmiri would do tit for tat to Jammu residents living in the Vale. Spectre of a civil war between various regions of Kashmir alarmed the central government. Its dignitaries rushed to Srinagar to hold all-party conference.  The Kashmiri leaders are already rueful at creation of Ladakh as a separate divisional headquarter. Fearing internecine clashes, Kashmiri leaders, including Hurriyat’s Gilani had to appeal to government for security of Kashmiris marooned outside Valley and in Indian states. Kashmiris are furious that the Centre could not airlift even the students `imprisoned’ in Srinagar University because of cut-off of road-rail links.

Kashmiri leaders assail about Pulwama attack. They point out similar attacks took place in Chhattisgarh. But, they received no limelight.  In 2010, Naxals ambushed Indian troops in Dantewada in Chhattisgarh killing 76 personnel. On April 24, 2017, 25 Indian soldiers were killed at  Sukma, Chhattisgarh. India is using the Pulwama attack as an excuse to escalate tensions with Pakistan. It made no bones about using air force in future surgical strikes. It wants to attack Azad Kashmir at 25 points (Happymon, Line on Fire: Ceasefire Violations and India-Pakistan Escalation Dynamics). India wants to revive mukti bahini experience in Balochistan, Sindh and Khybr Pakhtunkhwa. Hindustan Times Feb 16, 2019 recounts `official line’ is that `the 1971 war was started by Pakistan on December 3 by attacking Indian airfields in Punjab. But now there is enough historical evidence to prove that this is not true’

India wants to isolate Pakistan, particularly from the USA. But, days before the attack, the USA in its travel advisory used the word Azad Kashmir for `Pakistan occupied Kashmir’. Pakistan’s leverage in Afghan peace is undeniable. India ratcheted the pressure on Pakistan by withdrawing the Most Favoured Nation (MFN) status, largely symbolic. In fact, it could also lead to increased illegal trade between the two countries.  The gesture is unlikely to affect bilateral trade, which is $2 billion by the usual route and another $6 billion via Dubai and Singapore. Pakistan is yet to give India MFN status and maintains a list of 1,200 items that are banned for import from India. The word `most’ in the term, MFN, is not used as a superlative degree of adjective.  It simply means reciprocal bilateral relationships following both GATT and WTO norms of reciprocity and non-discrimination. In such relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege.  In contradistinction, the non-discriminatory component of the GATT/WTO applies a reciprocally-negotiated privilege to all members of the GATT/WTO without respect to their status in negotiating the privilege. Readers may refer to Dictionary of Economic Terms or other sources. Most Favoured Nation status is given to an international trade partner to ensure non-discriminatory trade between all partner countries of the WTO.

A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements. It is the first clause in the General Agreement on Tariffs and Trade (GATT). Therefore now, India will withdraw all such privileges accorded to Pakistan in the wake of the attack. According to the World Trade Organisation (WTO) guidelines, a member country is not allowed to discriminate between trade partners and if special status is granted to one trade partner, the country is required to extend it to all members of the WTO. It only ensures non-discrimination – which means treating virtually everyone equally.

India’s tough  talk of `surgical attacks’ is hollow as  Pakistan reportedly used US Raytheon TOW 2A anti-armour missiles , TOW-2 anti-tank guided missiles and  120 mm heavy mortars to target Indian army bunkers in the Rajouri and Poonch  sectors. If Indian army advances on international border, it will have to face Pakistan’s Nasr TNW missiles and Chinese Sh-15 Howitzer (TNW) Guns (American equivalent M-777).

The surge in Kashmir violence is due to political vacuum. More and more youth are being attracted to violence. Indian Express dated February 16, 2019 reported `Over the last three years, the total number of freedom fighters  killed, both local and foreign, climbed from 130 in 2016 to 200 in 2017 and 240 in 2018. Most of them were local youth. In the first 46 days of 2019, 31 militants have been killed in the Valley. In 2018, there were 99 operations in the Valley, with 28 civilian casualties. At least 57 of these operations took place in South Kashmir, and civilian deaths were reported in Shopian, Pulwama and Kulgam in South Kashmir, police officers said. They attributed the many operations to a sharp spike in the number of local recruits to militant ranks since mid-2015, after a relative drop in militancy-related incidents between 2008 and 2013’.

Let India stop blaming Pakistan and look to ground reality. Reminisce what historian Pundit Kalhana, in his twelfth century magnum opus Raja Tarangni (River of Kings). Says `Such is Kashmir, the country which may be conquered by the forces of spiritual love but not by armed forces’ (Ganguly Rajat, India Pakistan and the Kashmir Dispute, Asian Studies Institute and Centre for Strategic Studies, Victoria University of Wellington, Australia).

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