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https://www.quora.com/What-is-the-greatest-shock-India-is-giving-to-Pakistan/answer/Nirav-Bhatt-45
Nirav Bhatt's answer to What is the greatest shock India is giving to Pakistan? - Quora
By ignoring CPEC and Let Pakistan go into the debt trap.
With this article we have tried to expose many interesting facts and figures about current Economic Crisis in Pakistan with relevant references. We have collected the information by referring only and only Pakistani News sites.
CPEC Explained Official Way - During the state visit to Pakistan in 2015, Chinese President Xi Jinping and Prime Minister of Pakistan Nawaz Sharif signed an agreement to commence work on the multi billion dollar agreement of CPEC[1], which will be developed as a regional route of China’s One Road One Belt project. The CPEC is based on a $46 Billion (now it is $62 Billion[2]) that China has loaned Pakistan under Sovereign Guarantee. From the original allocation the $11-billion amount is for infrastructure purposes and is a Chinese loan whereas the $35-billion is an investment for the power sector. Infrastructure investments offered by China for CPEC are to be paid back as Return on Equity (ROE) which is guaranteed at either 17% or 20% under Pakistan’s Sovereign Guarantee.[3]
CPEC, the China-Pakistan Economic Corridor, or the road that nobody in Pakistan can seem to stop talking about. The fact is CPEC is not a multi billion gift from Beijing to the Pakistani economy, but rather a complicated set of infrastructure investments that will be paid for mostly by Pakistani investors, consumers, and taxpayers in the form of commercial loans from Chinese banks paid back by Pakistani power generation companies and the government, and electricity tariffs paid by ordinary Pakistani consumers. China is not losing money through CPEC, it is making money at every step of the way.[4]
Convulted Economics - Consider this example which shows hidden devil in CPEC Projects. With a substantial portion of the Chinese investments focused on power projects, the viability of the projects has been closely examined, based on interest rates charged by the China Development Bank and the China EXIM Bank. Official documents have revealed that with an estimated debt-equity ratio of 80%-20%, and these investments guarantee a 17% to 20% rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost).[5] China will recover its investment in less than 26 months and bleed Pakistan for the 25 years of contract period.[6] Not only that, hugely expensive electricity will cripple their economy, making them a basket case.
Sri Lankan Precedent - To put the things in perspective, Sri Lanka is one of the Prime Example of Chinese ruthlessness. Unable to repay its debt to China, Sri Lanka is handing over the power plant, Hambantota port and possibly the airport to Chinese control in a debt/equity swap. China would then achieve a major objective of its ‘One Belt One Road’ project, that of having a strategic presence on Sri Lankan soil by professing to offer ‘economic aid’ with no strings attached. Thanks largely to such Chinese ‘aid’, Sri Lanka now spends 90 per cent of all government revenues to service debts.[7]
Venezuela Disaster - Check one more example of Venezuela, politically and financially high risk country in which China has invested over $55 billion from 2008 and it went to $120 Billion to pay back till 2016, the other biggest Chinese investment in any single country so far--may hold the answers. It created a win-win scenario for the Chinese by marrying off, low-wage Chinese labour, to long-term infrastructure projects, in exchange for secure and continuous supply of oil and commodities. All the Chinese loans to Venezuela were commodities-backed, under which Venezuela was obliged to keep supplying to China millions of barrels of oil to feed the Chinese economic boom.[8] [9]
Chinese gets maximum benefits - Because of contracts for direct investments in CPEC, almost all the bids awarded to Chinese companies and Pakistani subcontractors getting the leftovers that the Chinese would leave in their plates.[10] There are also reports that some of the projects have been awarded to black listed companies in China[11] , and substandard construction of Chinese Companies leaves everybody unsure of the quality. Khanpur and Nandipur hydroelectricity Power Plants are prime examples of this.[12][13]
China is now having huge under-utilised capacity of industrial production and workforce. In CPEC majority of workers, goods & materials are Chinese. China is constructing quarters for their own work forces in Pakistan.[14] No assurances could be given that Pakistani labour would be recruited to work.[15] So the money China is investing comes back to China and with interest. The official documents also revealed that by including the cost of insurance, also paid to a Chinese insurance company, the cost of borrowings would surge to 13%.[16]
Pakistan is providing Tax Exemptions to the Chinese firm managing and developing Projects under CPEC for 23 years.[17][18] The Federal Board of Revenue (FBR) also granted exemption from duty and taxes on import of materials and equipment for construction and operation as well as capital goods to be used in CPEC projects.[19] The Chinese will be granted long-term leases at concessional rates to set up in Special Economic Zones where they will also enjoy 20-year tax holidays, water, power and effluent treatment facilities and where trade union activities will be suspended.[20][21]
Hell for FDI - Pakistan is facing lot of internal security problems because of internal instability and terrorism, that's why Foreign Direct Investment besides China is very low.[22] Transparency International’s Corruption Perceptions Index (CPI) shows how Pakistan is a very corrupt country.[23] Pakistan’s ranking has also fallen in the Doing Business report published by the World Bank, ranking 116th out of the 176 economies surveyed.[24] Reko Diq is the classic example how how Pakistani establishment treats Foreign Direct Investments.[25][26]
High Taxation and Electricity Costs - Already Pakistan has highest electricity rates in South-East Asia. Because of high taxation and high Electricity rates Industries in Pakistan cannot compete with products of other countries. For example Pakistan's struggling textiles sector, which account for 60 percent of the country's exports because they cannot compete with competing industries in China, India and Bangladesh which are providing concessions to decrease their production cost.[27] With adding surcharges, GST and other taxes electricity bills are very heavily charged[28] and the funniest part is whether you have TV or don’t have or don’t watch, Government is additionally charging 35 Rupees as PTV charges.[29] Another big reason is China to whom Pakistan is providing favourable terms like Free Trade and Low Tariff on products imported from China makes them cheaper is the other major reason behind falling Industries in Pakistan.[30] China is offering vast incentives and ploughing billions of dollars into the Western region of Xinjiang to build a textile industry, which will rely on CPEC road and rail links to export goods.[31]
Electricity Problems - There are a lot of Power Shortage, called load-shedding, sometimes last up to 8 to 14 hours a day and hamper economic activity , particularly affecting the country’s textile industry, and leave people across a wide socioeconomic spectrum in sweltering heat.[32] Many factories are not able to manufacture or produce and that means that the owners have to pay workers for doing nothing.[33] This affects the economy badly and has resulted in a severe energy crisis. It has become so bad that textile importers have shifted to Bangladesh and India.[34] Pakistan Govt is praising CPEC with promise of removing shortfall of electricity generation, the fact is Pakistan has surplus Power generation capacity. In April 2017, because of poor transmission infrastructure and non-payments to independent power producers (IPPs) and Power Plants they are not generating sufficient electricity in Pakistan.[35] The country could not pay only $26 Billion to leave their countrymen to suffer heat waves in summer, it shows how financially capable Pakistan is.[36]
Falling Exports - Pakistani goods and services that they can offer to the world are not growing. This is well evident by their trade deficient where exports are much lower compared to their imports. Pakistan’s exports have fallen by 15.4% in the last three years from $24.58 billion in 2012-13 to 20.8 billion in 2015-16 which is compared to $44.8 billion imports causing $24 billion trade deficit which is very huge as 215% more than its exports.[37] Owing to slowdown in exports, Pakistan’s external debt to export ratio has been projected at 441.8% by 2019-20, which is highly unsustainable.[38] By that year, Pakistan will consume 40% of its export earnings to service the external debt in 2019-20.[39]
Falling Foreign Remittances - In recent years Foreign Remittances are fell sharply as decline of manpower because of weakened Oil Economy and ideological tussle with OPEC countries.[40] These incomes are vital for Pakistan Economy but they are now on downside. No only this, massive number of Pakistanis are deported back to Pakistan due to the involvement in terrorism, drug trafficking, thefts, forgery and physical assault.[41] Because of high availably of cash, poor law enforcement and complex tax system, most Pakistan foreign nationals send $10 billion worth of remittences through illegal money laundering ways which cost government lot.[42]
Poor Tax System - In Pakistan only 1% of the population is registered in the Tax System while the burden falls unequally on those at the bottom of the pyramid who pay via indirect taxation. Around 75% of the direct income tax collected is from businesses, and the rest from individuals. Only 21% of the registered companies paid income tax, with the vast majority being tax non-filers. Tax evasion by individuals is on an even larger scale.[43] The Government collects just 9% countries wealth in taxes, which is lowest in the world. This is the major cause why Pakistan Government is highly depended on debt.[44]
Artificial Forex - Finance Minister Ishaq Dar is trying to keep the rupee artificially strong and not allowing the rupee to continue depreciating naturally. In his vain desire to keep the rupee at an artificially high value, Dar has used up more foreign exchange reserves and built up even more through borrowing from loans from foreign commercial banks.[45] Total foreign exchange reserves are $22 billion that include $4.8 billion of the commercial banks as well. And out of these $4.8 billion, the government has borrowed $3.3 billion from the commercial banks, called as “forward buying from the market” to be returned to them.[46] If trade deficit grow continually, these Foreign Exchange Reserves wiped out in very short time. Not only will Pakistan most certainly need an IMF bailout, it will need one bigger than one than Islamabad has ever asked for before.
Lack of Education and Operational Capabilities - Pakistan is spending 2.68% of the GDP on Education[47], an embarrassingly low amount when compared to other countries in the region. The overall literacy rate has gone down to 58% which was estimated at 60% in 2012-13[48], shows falling Social and Living Standards as Pakistan stands at 160th in the world when it comes to literacy. Because of Islamic and Political Radicalisation in education during Zia Ul Haq military rule, the routes of quality education are shattered.[49] The education administration is slack, corrupt and rather helpless against the student community. There are no proper checks on the functioning of the educational institutions and accountability is missing at all levels. [50] The centuries old syllabus and foreign adopted material is another reason for degradation of whole system.[51] Currently in Pakistan there are more than 25 million of children between the ages of 5 to 16 who are not in schools and around 70% of children out-of-school have never been to a school.[52] Pakistan’s 6% graduation rate is very low in comparison with developed countries, which resulted a very limited high-skilled workforce.[53]
Without proper skilled workforce you don’t have the capacity to run and execute similar kind of project. Nandipur Hydro Power Plant is one of the prime example where after lot of operational failures Pakistan handed over the operations to Chinese Company.[54] And here is the height, in Pakistan are tenders are also awarded to foreign companies from Turkey and China to cleaning up their cities and do the garbage and waste management.[55][56][57][58]
Lack of Unity - The dominated nature of Punjab province kept all its provinces its envy and they never actually united as a nation. These states are continuously fighting themselves for getting major share in revenue, infrastructure and political power.[59][60] Failure of Kalabagh Dam which from the last 30 years Pakistani States have failed to reach on consensus is a prime example of lack of unity in Pakistan’s Provinces.[61] The same thing is happening with CPEC, where every state is fighting to get maximum benefit.[62] The lion’s share of Chinese projects currently underway in Pakistan have been assigned to Punjab, in fact some people are calling it as “China-Punjab Economic Corridor”[63][64]
Terrorism - The Islamic and Jihadi organisation which are also becoming major threats for Pakistan itself.[65] Some of these organisations are turned against Pakistan and hitting them with major terrorist attacks which destabilising Pakistan internally and economically.[66] There are estimates which says Pakistan lost over $100 Billion[67] and at least 80,000 Pakistanis have been killed[68] fighting with Terrorist Insurgency.
Immense Defence Budget - As competing for military supremacy with India, Pakistan is spending 7 to 8 billion dollars on its defence budget which also hurts the economy. Due to the constant pressure of Pakistan Military institutions, the elected government are not intervening on this amount. So after paying interests on loans and defence budget, there is very less amount left for development work.[69]
Corruption - This is the number one reason of Pakistan’s Economic Backwardness. From top level ministers to small bodies in Government everywhere corruption is massively involved in every development activities and goes to the root level of every institutions. Members from center of powers are taking away every dollar they could steal and invest it wisely in Dubai, UK, USA and Panama. They should be no surprise if there is a kind of selloff like politicians did in Venezuela and Sri Lanka.[70] Investigation agencies who tackle corruption like National Accountability Bureau (NAB)[71], Anti-Corruption Establishment (ACE) and Federal Investigation Agency (FIA) have miserably failed to check/counter corruption, tax evasion and illegal flight of capital.[72] In many times the members of these investigation agencies are also found involved tangled in corruption charge, became ineffective to implement rule of law and justice.[73][74]
IMF Warning - IMF has already raised cautioned about CPEC, "Pakistan will need to manage increasing outflows and the import requirements of these projects will likely offset a significant share of these inflows. As Chinese IPPs start their operations, profit repatriation by these firms would begin to rise in subsequent years... these outflows could reach about 0.4% of GDP per year over the longer run,".[75]
Hidden Truth and Big Lies - Major details about this deal are hush hush, exemplified by what, as Governor of State Bank of Pakistan, Ashraf Mahmood Wathra, in December 2015, had said “I don’t know out of the $46 billion, how much is debt, how much is equity and how much is in kind”.[76]
Pakistan also has a history of fudging information and false propaganda. Recently, it was announced with much fanfare that the IMF and World bank had declared Mr Ishaq Dar as the best finance minister in the world. That was promptly rubbished by the two institutions. Again, Pakistan had claimed GDP growth of 4.7%, after IMF corrections it was found to be closer to 3.1%.[77]
Current Pakistani Loans - Total public debt of Pakistan is at around $220 billion. Of this, around $73 billion is external debt which is owed in dollar terms to non-Pakistani lenders. Renowned economists have projected that Pakistan’s external debt would swell to $110 billion by 2019-20.[78] The rest (around $145 billion) is owed to Pakistani sources (banks and others). This includes both Government & Private sector debt, but most of it is government debt.
These loans are nearly 68% of their GDP which is a violation of Pakistans own Fiscal Responsibility and Debt Limitation Act 2005, which binds the government to keep the total public debt below 60pc of GDP.[79] Two-thirds of the tax (66%) revenue collected in the first quarter of 2016-17 was used for debt servicing, leaving the government with less than 34 per cent of the total collection to run the country..[80]
In April 2017 International Monetary Fund (IMF) raised concerns over Pakistans widened fiscal deficit outlook by a significant margin (now projected to reach 4.1% of the GDP)[81], which must be financed through borrowings which attract interest. The Current Account Deficit is now at 121%, standing at $5.473 billion compared to $2.482 billion in the same period of previous year, according to data released by the State Bank of Pakistan (SBP) on Monday. The monumental increase in the deficit suggests that the government has been unable to manage the balance of payments position over the medium and long run.[82]
Pakistan’s external debt to export ratio is projected to be at 442% by 2019-20, which obviously will make it unserviceable. The growth continues to remain elusive at under 5% - private analysts say closer to 4% - and by all accounts unless the GDP growth rate shores up to 6.50% or beyond, the present level of debt may already be unsustainable.[83]
So what is for Pakistan - First Gwadar Port is given on a lease to China of 43 years[84], Pakistan has no economic benefits other than collecting toll and road side services. In practical, China’s major manufacturing is located in her east, bordering the South China Sea. It is crazy enough to imagine Chinese would like to ship goods through an at heavy risk CPEC route, when they can ship the same goods by sea for a fraction of the cost, the ports being next door and the sea lanes much better secured.[85] Xinjiang has very less manufacturing industries and are very less goods to ship to anywhere which makes CPEC very under utilized. The route going through Himalayan regions of Gilgit Baltistan is nearly closed for 3 months and have travel risk during Winter season.[86][87] Even in last two years because of harsh weather conditions road was closed for months and vital cargo of the Dasu dam project could not be transported, it was transported by sea through Karachi.[88] Secondly CPEC is regional route[89] and it is highly unlikely that China will allow the main traffic from terrorism affected area of Xinjiang as China is directly connected to Africa, West Asia and Europe through main road of OBOR. So if Pakistan thinks that it will collect lot of income from toll, simply it is not going to happen.[90]
Pakistan plans to train 15,000 security personnel to protect Chinese workers in the corridor. Presently, 8,000 Pakistani security officials are deployed for the protection of over 8,100 Chinese workers in Pakistan.[91] So Govt of Pakistan has to do without a single penny worth benefit getting out of it. The height is these security burden Pakistan now raising from Electricity Bill by imposing surcharge.[92] Under terms of CPEC, Pakistan has to take care of maintenance and security of the road.[93]
China has an established track record of arriving much like a horde of locusts and completely wiping out the local indigenous industry. Pakistan signed a Free Trade Agreement with China in 2007.[94] Result of that is extremely negative on Pakistani industry; as it flooded the country with cheap Chinese imports. The trade deficit with China reached almost $4bn in 2013, and two years later, in 2016 it jumped to $9.1bn.[95] Some economic experts even claim that the 'trade deficit with China will grow rapidly in next few years. China would like to move its surplus equipment in steel, cement and pleat glass to via foreign direct investment like CPEC[96], so that they can build their infrastructure and produce goods locally. China is a huge manufacturing based companies, that barely imports any manufactured goods and has surplus exports, this is the exact reasons why China is stressing on OBOR on fast pace. Cheaper Chinese goods are already did great damage to Pakistan’s Industry, if they don’t care in coming years Industry will be completely wiped out in Pakistan.[97]
If you think Pakistan’s State owned comes to the rescue. Check this, most of the previously Profit making state-owned entities like Pakistan International Airlines (PIA)[98][99], Pakistan Television Corporation (PTV)[100], Pakistan Steel Mills (PSM)[101][102] , the Oil and Gas Development Company Limited (OGDCL)[103] and Pakistan Railways[104] have miserably failed to due to poor governance and mismanagement and nowadays these loss making entities became liabilities to the government to keep them running.
Instead of concentrating on improving export and industrial sector, Pakistan has embarked on a loan procurement spree. It is obtaining loans from a variety of sources, including the multilateral financial institutions, and through the floatation of bonds in the international market as well as from the foreign commercial banks. Pakistan is taking more loans to cover their deficits and interests of maturing debts, which now reached at new alarming levels and may even lead to Bankruptcy.[105][106][107]
Due to already burden of existing loans, Pakistan is finding very hard to lend money from existing sources as Local and International Institutions are not willing to offer more loans. With no choice Pakistani government is now putting few of their national assets as mortgage in trading more loans. By mortgaging Motorways, Airports, and Broadcasting stations, Pakistan is issuing new bonds at high interest rate to acquire additional debt.[108][109]
Every year Pakistan have to pay Trade Deficit (Currently $24 Billion) plus Budget Deficit plus Interest of there current debts (currently $220 Billion) plus CPEC related loans (Originally $11 Billion Loans with 2% interest plus $35 Billion with 17% guaranteed ROE [Official Figures] and by the way loans are now reached around $62 Billion). With the current Pakistani capacities and capabilities, corruption, political turmoil, terrorism and poverty and crippling shortage of energy, I don’t know how Pakistan is going to pay all these stuffs, surely Pakistan is heading towards circular debt trap and will be bankrupt in near future.
So if Pakistani thinks that their all weather friend China comes to rescue, please check that China has huge burden of their own loans which is 250% of their GDP[110]who don’t care to hurt anyone when anything come across to their business. Even in January 2017 Global Times which is a Chinese state-run media talks about Pakistan’s ‘deepening financial crisis’ clearly shown Chinese concerns about Pakistan Economic crises and debt trap.[111]
contd/--
Nirav Bhatt's answer to What is the greatest shock India is giving to Pakistan? - Quora
By ignoring CPEC and Let Pakistan go into the debt trap.
With this article we have tried to expose many interesting facts and figures about current Economic Crisis in Pakistan with relevant references. We have collected the information by referring only and only Pakistani News sites.
CPEC Explained Official Way - During the state visit to Pakistan in 2015, Chinese President Xi Jinping and Prime Minister of Pakistan Nawaz Sharif signed an agreement to commence work on the multi billion dollar agreement of CPEC[1], which will be developed as a regional route of China’s One Road One Belt project. The CPEC is based on a $46 Billion (now it is $62 Billion[2]) that China has loaned Pakistan under Sovereign Guarantee. From the original allocation the $11-billion amount is for infrastructure purposes and is a Chinese loan whereas the $35-billion is an investment for the power sector. Infrastructure investments offered by China for CPEC are to be paid back as Return on Equity (ROE) which is guaranteed at either 17% or 20% under Pakistan’s Sovereign Guarantee.[3]
CPEC, the China-Pakistan Economic Corridor, or the road that nobody in Pakistan can seem to stop talking about. The fact is CPEC is not a multi billion gift from Beijing to the Pakistani economy, but rather a complicated set of infrastructure investments that will be paid for mostly by Pakistani investors, consumers, and taxpayers in the form of commercial loans from Chinese banks paid back by Pakistani power generation companies and the government, and electricity tariffs paid by ordinary Pakistani consumers. China is not losing money through CPEC, it is making money at every step of the way.[4]
Convulted Economics - Consider this example which shows hidden devil in CPEC Projects. With a substantial portion of the Chinese investments focused on power projects, the viability of the projects has been closely examined, based on interest rates charged by the China Development Bank and the China EXIM Bank. Official documents have revealed that with an estimated debt-equity ratio of 80%-20%, and these investments guarantee a 17% to 20% rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost).[5] China will recover its investment in less than 26 months and bleed Pakistan for the 25 years of contract period.[6] Not only that, hugely expensive electricity will cripple their economy, making them a basket case.
Sri Lankan Precedent - To put the things in perspective, Sri Lanka is one of the Prime Example of Chinese ruthlessness. Unable to repay its debt to China, Sri Lanka is handing over the power plant, Hambantota port and possibly the airport to Chinese control in a debt/equity swap. China would then achieve a major objective of its ‘One Belt One Road’ project, that of having a strategic presence on Sri Lankan soil by professing to offer ‘economic aid’ with no strings attached. Thanks largely to such Chinese ‘aid’, Sri Lanka now spends 90 per cent of all government revenues to service debts.[7]
Venezuela Disaster - Check one more example of Venezuela, politically and financially high risk country in which China has invested over $55 billion from 2008 and it went to $120 Billion to pay back till 2016, the other biggest Chinese investment in any single country so far--may hold the answers. It created a win-win scenario for the Chinese by marrying off, low-wage Chinese labour, to long-term infrastructure projects, in exchange for secure and continuous supply of oil and commodities. All the Chinese loans to Venezuela were commodities-backed, under which Venezuela was obliged to keep supplying to China millions of barrels of oil to feed the Chinese economic boom.[8] [9]
Chinese gets maximum benefits - Because of contracts for direct investments in CPEC, almost all the bids awarded to Chinese companies and Pakistani subcontractors getting the leftovers that the Chinese would leave in their plates.[10] There are also reports that some of the projects have been awarded to black listed companies in China[11] , and substandard construction of Chinese Companies leaves everybody unsure of the quality. Khanpur and Nandipur hydroelectricity Power Plants are prime examples of this.[12][13]
China is now having huge under-utilised capacity of industrial production and workforce. In CPEC majority of workers, goods & materials are Chinese. China is constructing quarters for their own work forces in Pakistan.[14] No assurances could be given that Pakistani labour would be recruited to work.[15] So the money China is investing comes back to China and with interest. The official documents also revealed that by including the cost of insurance, also paid to a Chinese insurance company, the cost of borrowings would surge to 13%.[16]
Pakistan is providing Tax Exemptions to the Chinese firm managing and developing Projects under CPEC for 23 years.[17][18] The Federal Board of Revenue (FBR) also granted exemption from duty and taxes on import of materials and equipment for construction and operation as well as capital goods to be used in CPEC projects.[19] The Chinese will be granted long-term leases at concessional rates to set up in Special Economic Zones where they will also enjoy 20-year tax holidays, water, power and effluent treatment facilities and where trade union activities will be suspended.[20][21]
Hell for FDI - Pakistan is facing lot of internal security problems because of internal instability and terrorism, that's why Foreign Direct Investment besides China is very low.[22] Transparency International’s Corruption Perceptions Index (CPI) shows how Pakistan is a very corrupt country.[23] Pakistan’s ranking has also fallen in the Doing Business report published by the World Bank, ranking 116th out of the 176 economies surveyed.[24] Reko Diq is the classic example how how Pakistani establishment treats Foreign Direct Investments.[25][26]
High Taxation and Electricity Costs - Already Pakistan has highest electricity rates in South-East Asia. Because of high taxation and high Electricity rates Industries in Pakistan cannot compete with products of other countries. For example Pakistan's struggling textiles sector, which account for 60 percent of the country's exports because they cannot compete with competing industries in China, India and Bangladesh which are providing concessions to decrease their production cost.[27] With adding surcharges, GST and other taxes electricity bills are very heavily charged[28] and the funniest part is whether you have TV or don’t have or don’t watch, Government is additionally charging 35 Rupees as PTV charges.[29] Another big reason is China to whom Pakistan is providing favourable terms like Free Trade and Low Tariff on products imported from China makes them cheaper is the other major reason behind falling Industries in Pakistan.[30] China is offering vast incentives and ploughing billions of dollars into the Western region of Xinjiang to build a textile industry, which will rely on CPEC road and rail links to export goods.[31]
Electricity Problems - There are a lot of Power Shortage, called load-shedding, sometimes last up to 8 to 14 hours a day and hamper economic activity , particularly affecting the country’s textile industry, and leave people across a wide socioeconomic spectrum in sweltering heat.[32] Many factories are not able to manufacture or produce and that means that the owners have to pay workers for doing nothing.[33] This affects the economy badly and has resulted in a severe energy crisis. It has become so bad that textile importers have shifted to Bangladesh and India.[34] Pakistan Govt is praising CPEC with promise of removing shortfall of electricity generation, the fact is Pakistan has surplus Power generation capacity. In April 2017, because of poor transmission infrastructure and non-payments to independent power producers (IPPs) and Power Plants they are not generating sufficient electricity in Pakistan.[35] The country could not pay only $26 Billion to leave their countrymen to suffer heat waves in summer, it shows how financially capable Pakistan is.[36]
Falling Exports - Pakistani goods and services that they can offer to the world are not growing. This is well evident by their trade deficient where exports are much lower compared to their imports. Pakistan’s exports have fallen by 15.4% in the last three years from $24.58 billion in 2012-13 to 20.8 billion in 2015-16 which is compared to $44.8 billion imports causing $24 billion trade deficit which is very huge as 215% more than its exports.[37] Owing to slowdown in exports, Pakistan’s external debt to export ratio has been projected at 441.8% by 2019-20, which is highly unsustainable.[38] By that year, Pakistan will consume 40% of its export earnings to service the external debt in 2019-20.[39]
Falling Foreign Remittances - In recent years Foreign Remittances are fell sharply as decline of manpower because of weakened Oil Economy and ideological tussle with OPEC countries.[40] These incomes are vital for Pakistan Economy but they are now on downside. No only this, massive number of Pakistanis are deported back to Pakistan due to the involvement in terrorism, drug trafficking, thefts, forgery and physical assault.[41] Because of high availably of cash, poor law enforcement and complex tax system, most Pakistan foreign nationals send $10 billion worth of remittences through illegal money laundering ways which cost government lot.[42]
Poor Tax System - In Pakistan only 1% of the population is registered in the Tax System while the burden falls unequally on those at the bottom of the pyramid who pay via indirect taxation. Around 75% of the direct income tax collected is from businesses, and the rest from individuals. Only 21% of the registered companies paid income tax, with the vast majority being tax non-filers. Tax evasion by individuals is on an even larger scale.[43] The Government collects just 9% countries wealth in taxes, which is lowest in the world. This is the major cause why Pakistan Government is highly depended on debt.[44]
Artificial Forex - Finance Minister Ishaq Dar is trying to keep the rupee artificially strong and not allowing the rupee to continue depreciating naturally. In his vain desire to keep the rupee at an artificially high value, Dar has used up more foreign exchange reserves and built up even more through borrowing from loans from foreign commercial banks.[45] Total foreign exchange reserves are $22 billion that include $4.8 billion of the commercial banks as well. And out of these $4.8 billion, the government has borrowed $3.3 billion from the commercial banks, called as “forward buying from the market” to be returned to them.[46] If trade deficit grow continually, these Foreign Exchange Reserves wiped out in very short time. Not only will Pakistan most certainly need an IMF bailout, it will need one bigger than one than Islamabad has ever asked for before.
Lack of Education and Operational Capabilities - Pakistan is spending 2.68% of the GDP on Education[47], an embarrassingly low amount when compared to other countries in the region. The overall literacy rate has gone down to 58% which was estimated at 60% in 2012-13[48], shows falling Social and Living Standards as Pakistan stands at 160th in the world when it comes to literacy. Because of Islamic and Political Radicalisation in education during Zia Ul Haq military rule, the routes of quality education are shattered.[49] The education administration is slack, corrupt and rather helpless against the student community. There are no proper checks on the functioning of the educational institutions and accountability is missing at all levels. [50] The centuries old syllabus and foreign adopted material is another reason for degradation of whole system.[51] Currently in Pakistan there are more than 25 million of children between the ages of 5 to 16 who are not in schools and around 70% of children out-of-school have never been to a school.[52] Pakistan’s 6% graduation rate is very low in comparison with developed countries, which resulted a very limited high-skilled workforce.[53]
Without proper skilled workforce you don’t have the capacity to run and execute similar kind of project. Nandipur Hydro Power Plant is one of the prime example where after lot of operational failures Pakistan handed over the operations to Chinese Company.[54] And here is the height, in Pakistan are tenders are also awarded to foreign companies from Turkey and China to cleaning up their cities and do the garbage and waste management.[55][56][57][58]
Lack of Unity - The dominated nature of Punjab province kept all its provinces its envy and they never actually united as a nation. These states are continuously fighting themselves for getting major share in revenue, infrastructure and political power.[59][60] Failure of Kalabagh Dam which from the last 30 years Pakistani States have failed to reach on consensus is a prime example of lack of unity in Pakistan’s Provinces.[61] The same thing is happening with CPEC, where every state is fighting to get maximum benefit.[62] The lion’s share of Chinese projects currently underway in Pakistan have been assigned to Punjab, in fact some people are calling it as “China-Punjab Economic Corridor”[63][64]
Terrorism - The Islamic and Jihadi organisation which are also becoming major threats for Pakistan itself.[65] Some of these organisations are turned against Pakistan and hitting them with major terrorist attacks which destabilising Pakistan internally and economically.[66] There are estimates which says Pakistan lost over $100 Billion[67] and at least 80,000 Pakistanis have been killed[68] fighting with Terrorist Insurgency.
Immense Defence Budget - As competing for military supremacy with India, Pakistan is spending 7 to 8 billion dollars on its defence budget which also hurts the economy. Due to the constant pressure of Pakistan Military institutions, the elected government are not intervening on this amount. So after paying interests on loans and defence budget, there is very less amount left for development work.[69]
Corruption - This is the number one reason of Pakistan’s Economic Backwardness. From top level ministers to small bodies in Government everywhere corruption is massively involved in every development activities and goes to the root level of every institutions. Members from center of powers are taking away every dollar they could steal and invest it wisely in Dubai, UK, USA and Panama. They should be no surprise if there is a kind of selloff like politicians did in Venezuela and Sri Lanka.[70] Investigation agencies who tackle corruption like National Accountability Bureau (NAB)[71], Anti-Corruption Establishment (ACE) and Federal Investigation Agency (FIA) have miserably failed to check/counter corruption, tax evasion and illegal flight of capital.[72] In many times the members of these investigation agencies are also found involved tangled in corruption charge, became ineffective to implement rule of law and justice.[73][74]
IMF Warning - IMF has already raised cautioned about CPEC, "Pakistan will need to manage increasing outflows and the import requirements of these projects will likely offset a significant share of these inflows. As Chinese IPPs start their operations, profit repatriation by these firms would begin to rise in subsequent years... these outflows could reach about 0.4% of GDP per year over the longer run,".[75]
Hidden Truth and Big Lies - Major details about this deal are hush hush, exemplified by what, as Governor of State Bank of Pakistan, Ashraf Mahmood Wathra, in December 2015, had said “I don’t know out of the $46 billion, how much is debt, how much is equity and how much is in kind”.[76]
Pakistan also has a history of fudging information and false propaganda. Recently, it was announced with much fanfare that the IMF and World bank had declared Mr Ishaq Dar as the best finance minister in the world. That was promptly rubbished by the two institutions. Again, Pakistan had claimed GDP growth of 4.7%, after IMF corrections it was found to be closer to 3.1%.[77]
Current Pakistani Loans - Total public debt of Pakistan is at around $220 billion. Of this, around $73 billion is external debt which is owed in dollar terms to non-Pakistani lenders. Renowned economists have projected that Pakistan’s external debt would swell to $110 billion by 2019-20.[78] The rest (around $145 billion) is owed to Pakistani sources (banks and others). This includes both Government & Private sector debt, but most of it is government debt.
These loans are nearly 68% of their GDP which is a violation of Pakistans own Fiscal Responsibility and Debt Limitation Act 2005, which binds the government to keep the total public debt below 60pc of GDP.[79] Two-thirds of the tax (66%) revenue collected in the first quarter of 2016-17 was used for debt servicing, leaving the government with less than 34 per cent of the total collection to run the country..[80]
In April 2017 International Monetary Fund (IMF) raised concerns over Pakistans widened fiscal deficit outlook by a significant margin (now projected to reach 4.1% of the GDP)[81], which must be financed through borrowings which attract interest. The Current Account Deficit is now at 121%, standing at $5.473 billion compared to $2.482 billion in the same period of previous year, according to data released by the State Bank of Pakistan (SBP) on Monday. The monumental increase in the deficit suggests that the government has been unable to manage the balance of payments position over the medium and long run.[82]
Pakistan’s external debt to export ratio is projected to be at 442% by 2019-20, which obviously will make it unserviceable. The growth continues to remain elusive at under 5% - private analysts say closer to 4% - and by all accounts unless the GDP growth rate shores up to 6.50% or beyond, the present level of debt may already be unsustainable.[83]
So what is for Pakistan - First Gwadar Port is given on a lease to China of 43 years[84], Pakistan has no economic benefits other than collecting toll and road side services. In practical, China’s major manufacturing is located in her east, bordering the South China Sea. It is crazy enough to imagine Chinese would like to ship goods through an at heavy risk CPEC route, when they can ship the same goods by sea for a fraction of the cost, the ports being next door and the sea lanes much better secured.[85] Xinjiang has very less manufacturing industries and are very less goods to ship to anywhere which makes CPEC very under utilized. The route going through Himalayan regions of Gilgit Baltistan is nearly closed for 3 months and have travel risk during Winter season.[86][87] Even in last two years because of harsh weather conditions road was closed for months and vital cargo of the Dasu dam project could not be transported, it was transported by sea through Karachi.[88] Secondly CPEC is regional route[89] and it is highly unlikely that China will allow the main traffic from terrorism affected area of Xinjiang as China is directly connected to Africa, West Asia and Europe through main road of OBOR. So if Pakistan thinks that it will collect lot of income from toll, simply it is not going to happen.[90]
Pakistan plans to train 15,000 security personnel to protect Chinese workers in the corridor. Presently, 8,000 Pakistani security officials are deployed for the protection of over 8,100 Chinese workers in Pakistan.[91] So Govt of Pakistan has to do without a single penny worth benefit getting out of it. The height is these security burden Pakistan now raising from Electricity Bill by imposing surcharge.[92] Under terms of CPEC, Pakistan has to take care of maintenance and security of the road.[93]
China has an established track record of arriving much like a horde of locusts and completely wiping out the local indigenous industry. Pakistan signed a Free Trade Agreement with China in 2007.[94] Result of that is extremely negative on Pakistani industry; as it flooded the country with cheap Chinese imports. The trade deficit with China reached almost $4bn in 2013, and two years later, in 2016 it jumped to $9.1bn.[95] Some economic experts even claim that the 'trade deficit with China will grow rapidly in next few years. China would like to move its surplus equipment in steel, cement and pleat glass to via foreign direct investment like CPEC[96], so that they can build their infrastructure and produce goods locally. China is a huge manufacturing based companies, that barely imports any manufactured goods and has surplus exports, this is the exact reasons why China is stressing on OBOR on fast pace. Cheaper Chinese goods are already did great damage to Pakistan’s Industry, if they don’t care in coming years Industry will be completely wiped out in Pakistan.[97]
If you think Pakistan’s State owned comes to the rescue. Check this, most of the previously Profit making state-owned entities like Pakistan International Airlines (PIA)[98][99], Pakistan Television Corporation (PTV)[100], Pakistan Steel Mills (PSM)[101][102] , the Oil and Gas Development Company Limited (OGDCL)[103] and Pakistan Railways[104] have miserably failed to due to poor governance and mismanagement and nowadays these loss making entities became liabilities to the government to keep them running.
Instead of concentrating on improving export and industrial sector, Pakistan has embarked on a loan procurement spree. It is obtaining loans from a variety of sources, including the multilateral financial institutions, and through the floatation of bonds in the international market as well as from the foreign commercial banks. Pakistan is taking more loans to cover their deficits and interests of maturing debts, which now reached at new alarming levels and may even lead to Bankruptcy.[105][106][107]
Due to already burden of existing loans, Pakistan is finding very hard to lend money from existing sources as Local and International Institutions are not willing to offer more loans. With no choice Pakistani government is now putting few of their national assets as mortgage in trading more loans. By mortgaging Motorways, Airports, and Broadcasting stations, Pakistan is issuing new bonds at high interest rate to acquire additional debt.[108][109]
Every year Pakistan have to pay Trade Deficit (Currently $24 Billion) plus Budget Deficit plus Interest of there current debts (currently $220 Billion) plus CPEC related loans (Originally $11 Billion Loans with 2% interest plus $35 Billion with 17% guaranteed ROE [Official Figures] and by the way loans are now reached around $62 Billion). With the current Pakistani capacities and capabilities, corruption, political turmoil, terrorism and poverty and crippling shortage of energy, I don’t know how Pakistan is going to pay all these stuffs, surely Pakistan is heading towards circular debt trap and will be bankrupt in near future.
So if Pakistani thinks that their all weather friend China comes to rescue, please check that China has huge burden of their own loans which is 250% of their GDP[110]who don’t care to hurt anyone when anything come across to their business. Even in January 2017 Global Times which is a Chinese state-run media talks about Pakistan’s ‘deepening financial crisis’ clearly shown Chinese concerns about Pakistan Economic crises and debt trap.[111]
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