PESHAWAR – Pakistan Prime Minister Imran Khan will fly to Beijing today (February 3) to attend the opening ceremony of the Winter Olympics and meet Chinese leaders to assuage Beijing’s security concerns and address differences over billions of dollars worth of Belt and Road Initiative (BRI) projects in his country.
Khan is scheduled to meet Chinese President Xi Jinping and other Chinese dignitaries from February 3-6 where discussions will inevitably turn toward the US$1.5 billion in overdue payments Pakistan owes Chinese energy companies that have built power plants as part of the $60 billion China-Pakistan Economic Corridor (CPEC).
The CPEC Authority has already warned that the Chinese-built power units may go into default if unpaid dues are not cleared soon. During a briefing with Prime Minister Khan last week, the authority cautioned that Chinese Independent Power Producers (IPPs) may soon suspend their operations under Power Purchase Agreements due to the rising prices of coal on international markets.
The CPEC has strategic value for Beijing as a major spoke in its wider BRI ambitions in South Asia, not least as an alternative trade route for goods and energy shipments that currently travel through the congested and strategically vulnerable Malacca Strait. Pakistan has likewise benefitted from much-improved road and port infrastructure.
But the CPEC’s power plant component, which has seen the construction of several new electricity generating facilities in recent years, has bogged down the wider corridor amid perceptions in Pakistan that the financial terms of building and take-or-pay power contracts that require Islamabad to pay for power even if it is not delivered and transmitted are tilted overwhelmingly to China’s advantage.
Qaiser Bengali, a distinguished economist who heads the Social Policy and Development Center (SPDC) and Karachi and Sustainable Development Policy Institute (SDPI), claims that the power purchase agreements are heavily loaded in China’s favor and are imposing unsustainable costs on the national economy and finances.
“The government had allowed a guaranteed 15% clear profit to the Chinese power companies over the cost of their investment. The Chinese investors misused this facility by inflating the investment cost to increase their percentage in profit from 15 to 30%,” Bengali claimed, adding that the China-Pakistan Free Trade Agreement has also been weighted in China’s favor.
“The trade agreement proposed no tax and duties on the items imported from China or exported to China from Pakistan. It is an agreement on an equal basis, but equality only works when we needed items manufactured by China and China needed goods manufactured in Pakistan,” Bengali added.
He notes that Pakistan lacks any high-value products to export to China apart from a few textile items, mostly towels and bedsheets.
“The free trade agreements, instead of increasing exports of the country, end up surging the imports. All the agreements reached with China were in China’s favor and inflicted losses to the economy and local industries,” Bengali claimed.
China has expressed its own displeasure with the CPEC. Beijing recently stopped financing major CPEC projects while seeking new security guarantees from Islamabad amid a rash of militant attacks on its interests. In particular, Beijing has put the $6.8 billion Main Line-1 (ML-1) railway project, the CPEC’s largest, on the back burner.
The ML-1 proposes to upgrade existing railway tracks linking Karachi to Peshawar and Taxila to Havelian (1,733 kilometers), rehabilitate and build major bridges, install modern signaling and telecom systems and convert level crossings into underpasses and flyovers.
Analysts say that China does not consider the prevailing security, financial and political situation amenable for further investment, particularly when Islamabad seeks additional borrowing at exceptionally low-interest rates while nearing default on existing financial agreements.
Local media reports indicate that Pakistan Finance Ministry has finalized a draft agreement for a $3 billion loan to shore up depleting foreign exchange reserves to be discussed with Chinese leaders during Khan’s visit to Beijing. Underscoring the desperation, Pakistan is also reportedly approaching Russia and Kazakhstan for credit lines of $1 billion each.
The report says that Islamabad would use the $2 billion on the ML-1 railway project while the $3 billion from China will be used to build up the national coffers.
Pakistan has already borrowed $15 billion from China in commercial loans and to support foreign reserves, which plummeted to $16.1 billion this month despite a $7 billion infusion of Saudi and Chinese deposits. Pakistan paid $148 million in interest to China for a $4.5 billion trade finance facility to repay maturing debt during the fiscal year ending in June 2022.
Pakistan’s gross financing requirements are estimated to rise to $30 billion in the next 2022-23 budget, leaving the government with no other option but to seek a fresh loan from the International Monetary Fund (IMF) after the expiry of its existing program in September 2022.
Islamabad has already met the conditions set by the IMF for the revival of a stalled $6 billion loan program. The IMF executive board is expected to decide on the release of the third tranche of $1 billion early this month.
However, a National Security Policy recently approved by the federal cabinet restricts the government from receiving loans from the IMF and other multilateral creditors. But fast-falling reserves and growing financing requirements have left Khan’s government with little choice but to approach the IMF and World Bank for assistance.
Khan’s visit to Beijing coincides with growing security concerns from militants who are openly targeting the CPEC and China’s commercial interests. Last week, ethnic Baloch separatists launched deadly attacks in restive Balochistan province, the CPEC’s epicenter, in which 14 Pakistani soldiers were killed and an army check post destroyed in two separate incidents.
On January 31, as many as five attacks targeting military personnel were reported by the banned Tehreek-e-Taliban Pakistan (TTP) militant group in North Waziristan, Chitral, Rawalpindi, Dera Ismail Khan and Mohmand agencies, killing and wounding over 10 law enforcement agency personnel. The government has not yet confirmed the reports, perhaps to avoid worrying China ahead of Khan’s visit.
Economist Bengali says that rising security costs, where Pakistan troops are increasingly deployed to protect the China-funded projects, are starting to outweigh expected revenues from the Gwadar seaport, of which China holds a majority share. The Gwadar port revenue-sharing agreement, he said, gives 91% of all port revenues to the Chinese Port Holding Company and only 9% to Pakistan.
“Pakistan government is expending huge sums on the provision of security for the CPEC,” said Bengali, noting that the Pakistan army is now providing “round-the-clock” protection to Chinese nationals. “The CPEC is a loss-making project for the country as far as its huge security expenses and rate of returns on the projects are concerned. Pakistan must revisit the agreements with the Chinese companies,” he said.
Follow FM Shakil on Twitter at @faq1955