Did you know that as a nation we have apparently cultivated an unseemly taste for alien cheeses, and that we should curb such gastronomic impulses in order to correct the imbalance in our current accounts? Apparently this was an assertion by a senior member of the new, but now much diminished, Economic Advisory Council (EAC). The comment and its serious intent provided some comic relief after the recent embarrassing u-turns of our new government. It is a bit of mystery that the Pakistan Tehreek-i-Insaf (PTI) government, whose ascent to power appears was so well scripted, was not better prepared to get the ground running. Am I unfairly judging a government barely 25 days old? Maybe, but this new government has not been able to shrug off this impression of unpreparedness since it was voted in to power on July 25.
Despite the party’s braggadocio of ruling through its ‘moral authority,’ the PTI has so far failed to back many of its principles. Though the controversy on Atif Mian and the EAC may feel like stale news, its implications are much wider as it characterises the PTI’s loss of innocence in today’s big, bad world. Governing, it transpires, is a different kettle of fish than merely talking about it. Hopefully we will get there soon enough as the learning picks up. The new budget, which is about to be announced as I write, represents the first discernably practical action to come to grips with the affairs of the country.
A controversy over the China Pakistan Economic Corridor (CPEC) that erupted out of Mr Razzak Dawood’s comments was another example of how the new government snagged a tripwire in another embarrassing minefield. In my opinion, he was reflecting a widely held view in business circles (as well as the PTI manifesto) that in pursuing the ‘game-changing’ dimensions of the CPEC, Chinese companies have been accorded preferential incentives by over-enthusiastic Pakistani planners dealing with canny Chinese negotiators. As voices rose in a crescendo to dispel, retract and reiterate, it yet again underlined that transparency has its limits and that all governments must operate within established lines. It also called into question whether institutional bodies like the EAC can contribute to a real debate on such important national issues, and whether the die has already been cast on account of a mutuality of geopolitical interests. Any further discussion of costs and benefits, is, shall we say truly academic!
First let us briefly discuss the CPEC commitments in the context of there being two sides to an argument as indeed there are to an agreement. One must contend with the other party’s leverage and one’s BATNA (best alternative to a negotiated agreement). People who find fault with the CPEC’s terms forget that the Chinese stepped in at a point when no one else was willing to make investments in Pakistan due to our extremely fraught macro-economic and security situation and a burgeoning power crisis compounded by circular debt. Negotiations with the Chinese can be difficult at the best of times due to cultural and language barriers but the country’s sovereign choices have always been pretty limited due to our perpetually impecunious state. So, we take what we can get. Despite that, power sector investments constituting the major chunk of about $36 billion were offered on much the same terms as were being availed by local investors and in fact spawned a number of equity partnerships with private entities on the existing IPP model. So, doubters can be fairly accused of looking a gift horse in the mouth.
On the other hand, the sovereign debt risk is carried on the nation’s balance sheet. Sustainability of this debt depends on the size and liquidity of the balance sheet and whether productivity gains emanating from all the projects add up to an ability to repay, or, as the economy grows, to at least refinance the debt easily. So, as a further illustrative example, while CPEC power projects have enabled more electricity to be produced, we have done next to nothing to address the dysfunction in our transmission and distribution companies, thereby increasing the overall wastage and compounding losses and capacity charges. If left unchecked, this will lead to a bigger circular debt problem and even more expensive electricity, making us even less competitive than before. This can has been kicked down the road long enough by successive governments and being a public-sector structure and governance issue needs to be addressed urgently by the government.
Other elements of the CPEC have to do with trade and connectivity and are much more strategic in nature. A start has been made on the Gwadar port and parts of the western route and the ML-1 project is said to be a high priority. Collectively, the connectivity bridge is only half-way built and the trade related risk and returns are even less certain and granular. Whilst the conceptualisation is truly magnificent, any attempt at a nuts and bolts analysis gets murkier, pushing commentators such as myself to the realm of geo-politics!
On paper, the logic for CPEC is unassailable. Right through history, nations have grown wealthy and powerful through trade. The sea-faring nations which were the first to colonise, exploit and plunder the far reaches of Asia, Africa and the Americas later became the great trading nations of the world, accumulating ever greater wealth that ultimately helped propel them into the modern era.
The very distinct economic disparity between the fortunes of coastal countries versus those which are landlocked proves this beyond doubt (in our region, think of Nepal and Afghanistan). This even applies to China where the vast majority of its population lives in the eastern one third of its territory, within 1,000 miles of the coast and which is far more prosperous in contrast to its interior. And it is only when China learnt to trade in the era of globalisation that it has transformed its economy within a generation to the second largest in the world. The CPEC will potentially provide an opening to its restive and under-developed eastern Xinchiang province, while helping Pakistan (and the region) to industrialise and trade.
Driven by the globalisation mantra, most countries, while competing for trade, have collaborated to integrate their economies through information, commercial, legal and physical infrastructure on the basis that everyone gains. However, Pakistan, saddled with a weak competitive base while being embroiled in regional security issues, has largely missed out on the benefits of trade and globalisation.
Now it is becoming clearer that we are at the front and centre of an impending crisis of the Trumpian era: globalisation is being upended and the United States and China are at loggerheads virtually anywhere their interests intersect.
As observed by Zamir Akram in his piece Assault on CPEC in The Express Tribune, the hostility of the United States is open, and its opposition coordinated through our old nemeses: India and Afghanistan. While we may find this unfair, I will argue that realistically speaking, it will be next to impossible to walk a fine line between competing geopolitical interests. Since we were discussing money, further investments in pursuit of the CPEC vision will require us to resolve the political overhang and proceed with a regionally inclusive and transparent strategy, including bringing both India and Afghanistan on board the regional trade and connectivity initiative. The antipathy of the United States can be tamped down through absolute transparency on the CPEC agenda, and by inviting participation of European countries in CPEC related projects.
Hence, a course correction at this stage is not such an outlandish idea after all. On the other hand, the rhetoric on debt and irresponsible accusations of graft must end and be replaced by open, rational and transparent debate on how we go on from here since the second phase after the ‘early harvest’ projects is due to be launched. So, let us all be clear: we are in a hole not because of CPEC debt but because CPEC is being built on a weak foundation of a struggling economy, poor governance structures and an uncertain geopolitical situation. The government’s challenge is to fix all of the above or we may end up building a road to nowhere.
The author is a former CEO of Dawood Hercules Corporation Ltd and can be reached at shahid@prachas.net
Despite the party’s braggadocio of ruling through its ‘moral authority,’ the PTI has so far failed to back many of its principles. Though the controversy on Atif Mian and the EAC may feel like stale news, its implications are much wider as it characterises the PTI’s loss of innocence in today’s big, bad world. Governing, it transpires, is a different kettle of fish than merely talking about it. Hopefully we will get there soon enough as the learning picks up. The new budget, which is about to be announced as I write, represents the first discernably practical action to come to grips with the affairs of the country.
While CPEC power projects have enabled more electricity to be produced, we have done next to nothing to address the dysfunction in our transmission lines and distribution companies
A controversy over the China Pakistan Economic Corridor (CPEC) that erupted out of Mr Razzak Dawood’s comments was another example of how the new government snagged a tripwire in another embarrassing minefield. In my opinion, he was reflecting a widely held view in business circles (as well as the PTI manifesto) that in pursuing the ‘game-changing’ dimensions of the CPEC, Chinese companies have been accorded preferential incentives by over-enthusiastic Pakistani planners dealing with canny Chinese negotiators. As voices rose in a crescendo to dispel, retract and reiterate, it yet again underlined that transparency has its limits and that all governments must operate within established lines. It also called into question whether institutional bodies like the EAC can contribute to a real debate on such important national issues, and whether the die has already been cast on account of a mutuality of geopolitical interests. Any further discussion of costs and benefits, is, shall we say truly academic!
First let us briefly discuss the CPEC commitments in the context of there being two sides to an argument as indeed there are to an agreement. One must contend with the other party’s leverage and one’s BATNA (best alternative to a negotiated agreement). People who find fault with the CPEC’s terms forget that the Chinese stepped in at a point when no one else was willing to make investments in Pakistan due to our extremely fraught macro-economic and security situation and a burgeoning power crisis compounded by circular debt. Negotiations with the Chinese can be difficult at the best of times due to cultural and language barriers but the country’s sovereign choices have always been pretty limited due to our perpetually impecunious state. So, we take what we can get. Despite that, power sector investments constituting the major chunk of about $36 billion were offered on much the same terms as were being availed by local investors and in fact spawned a number of equity partnerships with private entities on the existing IPP model. So, doubters can be fairly accused of looking a gift horse in the mouth.
On the other hand, the sovereign debt risk is carried on the nation’s balance sheet. Sustainability of this debt depends on the size and liquidity of the balance sheet and whether productivity gains emanating from all the projects add up to an ability to repay, or, as the economy grows, to at least refinance the debt easily. So, as a further illustrative example, while CPEC power projects have enabled more electricity to be produced, we have done next to nothing to address the dysfunction in our transmission and distribution companies, thereby increasing the overall wastage and compounding losses and capacity charges. If left unchecked, this will lead to a bigger circular debt problem and even more expensive electricity, making us even less competitive than before. This can has been kicked down the road long enough by successive governments and being a public-sector structure and governance issue needs to be addressed urgently by the government.
Other elements of the CPEC have to do with trade and connectivity and are much more strategic in nature. A start has been made on the Gwadar port and parts of the western route and the ML-1 project is said to be a high priority. Collectively, the connectivity bridge is only half-way built and the trade related risk and returns are even less certain and granular. Whilst the conceptualisation is truly magnificent, any attempt at a nuts and bolts analysis gets murkier, pushing commentators such as myself to the realm of geo-politics!
On paper, the logic for CPEC is unassailable. Right through history, nations have grown wealthy and powerful through trade. The sea-faring nations which were the first to colonise, exploit and plunder the far reaches of Asia, Africa and the Americas later became the great trading nations of the world, accumulating ever greater wealth that ultimately helped propel them into the modern era.
The very distinct economic disparity between the fortunes of coastal countries versus those which are landlocked proves this beyond doubt (in our region, think of Nepal and Afghanistan). This even applies to China where the vast majority of its population lives in the eastern one third of its territory, within 1,000 miles of the coast and which is far more prosperous in contrast to its interior. And it is only when China learnt to trade in the era of globalisation that it has transformed its economy within a generation to the second largest in the world. The CPEC will potentially provide an opening to its restive and under-developed eastern Xinchiang province, while helping Pakistan (and the region) to industrialise and trade.
Driven by the globalisation mantra, most countries, while competing for trade, have collaborated to integrate their economies through information, commercial, legal and physical infrastructure on the basis that everyone gains. However, Pakistan, saddled with a weak competitive base while being embroiled in regional security issues, has largely missed out on the benefits of trade and globalisation.
Now it is becoming clearer that we are at the front and centre of an impending crisis of the Trumpian era: globalisation is being upended and the United States and China are at loggerheads virtually anywhere their interests intersect.
As observed by Zamir Akram in his piece Assault on CPEC in The Express Tribune, the hostility of the United States is open, and its opposition coordinated through our old nemeses: India and Afghanistan. While we may find this unfair, I will argue that realistically speaking, it will be next to impossible to walk a fine line between competing geopolitical interests. Since we were discussing money, further investments in pursuit of the CPEC vision will require us to resolve the political overhang and proceed with a regionally inclusive and transparent strategy, including bringing both India and Afghanistan on board the regional trade and connectivity initiative. The antipathy of the United States can be tamped down through absolute transparency on the CPEC agenda, and by inviting participation of European countries in CPEC related projects.
Hence, a course correction at this stage is not such an outlandish idea after all. On the other hand, the rhetoric on debt and irresponsible accusations of graft must end and be replaced by open, rational and transparent debate on how we go on from here since the second phase after the ‘early harvest’ projects is due to be launched. So, let us all be clear: we are in a hole not because of CPEC debt but because CPEC is being built on a weak foundation of a struggling economy, poor governance structures and an uncertain geopolitical situation. The government’s challenge is to fix all of the above or we may end up building a road to nowhere.
The author is a former CEO of Dawood Hercules Corporation Ltd and can be reached at shahid@prachas.net