CPEC is Game-Changer or Debt Trap

China is investing $62 billion in Pakistan through the China-Pakistan Economic Corridor as part

of its Belt and Road initiative, which the government and public believe as a game-changer for
the country’s destiny. During the last six years since its advent in Pakistan, CPEC has
enabled the country to avert its energy crisis, besides building an elaborate network of roads and
other infrastructure in its various parts. With increasing energy and diminishing distances, not
only the lifestyle of people has changed, but economic activity also got a remarkable boost.

Critics’ views
With rapid progress being made in Pakistan through CPEC, several contrary voices started
terming the multibillion dollar project a “debt-trap” for Pakistan, which will prove a back-
breaking burden on the country’s economy. The critics have three main concerns.
First, they mistakenly blame the current financial crisis on the loans acquired for the CPEC
projects and the subsequent payments of these loans.
Second, they say that government did not negotiate CPEC terms properly and gave Chinese
companies tax breaks, which have disadvantage to local companies.
Third, some also feel the roads and other communication networks will only benefit Chinese
traders who will be able to move their goods cheaply with Pakistan deriving only meagre
benefits.

Let us analyse each of these points. Is there a link between the current balance of payments
(BOP) crisis and the Chinese loans for CPEC projects? According to the State Bank of Pakistan,
in 2017 Pakistan’s debt servicing amounted to $5 billion, of which only $500 million or about
10% went to China.

The second point is about the terms of negotiating CPEC projects and the inability of Pakistani
companies to compete with the Chinese ones. This could be partially attributed to the special tax
concessions allowed to the Chinese companies. However, these preferential tax conditions did
not arise because of any negotiations with the Chinese companies but because of our policy to
boost economic growth and investment.
There is no reason why the same treatment cannot be extended to local companies. If and when
Saudi Arabia becomes a partner in CPEC, as it is being speculated, it is very likely that its
companies will also be given the same concessions as the Chinese get.

Finally, the concern that the roads and other infrastructure would primarily benefit China and not
Pakistan can be addressed by making proper policies concerning the use of these facilities.
Pakistan can gain immensely by becoming a transit hub because of this infrastructure if we can
get over our fear regarding security. On the other hand, if we deny transit rights to other
countries and keep the trade facilitation regime as it is, there is no doubt that Pakistan’s gains
will be very limited. We can learn from the examples of Singapore, Hong Kong and Dubai,
which became high-income countries by becoming transit hubs.

Negating the misleading comments, secretary of the Economic Affairs Division of Pakistan, told
that the country‘s total foreign debt is about $106 billion and Chinese loan accounts only 10 to
11 percent of the total foreign debt, whereas the remaining 89-90 per cent is from other sources
IMF, Paris Club, World Bank or other western organisations.

Win-win situation.
China has remained great support for Pakistan and always came to its rescue during the tough
economic crisis. Through CPEC, China is building infrastructure in Pakistan to save its economy
and to build its infrastructure with the $62 billion amount. Some of the money coming in the
country is purely an investment, some are an interest-free loan, and other is on very easy and
simple terms. China has provided loans to Pakistan, and at the same time invested in Pakistan,
and has planned to invest more in the next phase of CPEC, a win-win situation for both as with
peace and economic stability in Pakistan, China will also get benefit.

Concessional Loans
CPEC-related government loans have an interest rate of only 2 per cent and a repayment period
of 20-25 years, and repayment of debt will begin in 2021. CPEC is not imposing any immediate
burden with respect to loans repayment. Referring to China’s developmental projects, some
infrastructure sector is being developed through interest-free or government concessional loans.
Gwadar Port is a grant-based investment, which means the Government of Pakistan does not
have to pay back the investment amount for the development of the port.

International views
Not only local, but foreign rating and economic organizations also see CPEC is a great benefit
for Pakistan, rather than a debt trap. World’s leading rating agency Moody’s said that ongoing
implementation of CPEC projects is likely to contribute 9 to 10 percent of Pakistan‘s GDP in
the coming fiscal years.
Another international audit and tax services agency Deloitte said that CPEC would add up to 2.5
percentage points to the country’s growth rate.

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