Pakistan’s external debt likely to swell to $110b in four years

[Nilgiri]

India is a 1.2? Billion person market. If I was a corporation I would bend over backwards just to get entry. As do many corporations since the 1990's liberalization.

Thing is 200 million population is no small number either. Definitely does not merit going after just one country's loans and investment (and China isn't even really committing FDI either, it seems they are adopting the wait and see approach before they shoulder actual risk).

Pakistan can do a lot better here.

 

[Bilal Khan (Quwa)]

The problem is when $22 Billion, of government collections, is used to just service the existing debt.

I can't recall if Pakistan spent 20% of it's 2014 budget for debt.

As for the 2016 Budget is 32% deficit from collection on the $42Billion. (Don't give me the Japan's 31.5% decifit bs).



India is a 1.2? Billion person market. If I was a corporation I would bend over backwards just to get entry. As do many corporations since the 1990's liberalization.



Government + No Corruption?

It's not really a thing to tie the ability to receive electricity with paying your taxes. At least not in the US/Canada/Netherlands/Turkey. Most countries haven't tied a National ID number with anything other than Passport, Bank Account, or Credit History.

The problem Pakistan faces is lack of efficient electricity production, transmission line loss, and collection loss. So even if the new CPEC power plants can produce X units of electricity it will only translate to X(price/unit)-Y(Transmission)-Z(Nonpayment)=Revenue. Since it's a national utility company everything is averaged.

What would it take to consolidate our debt with the Chinese and get them to agree to a fixed payment schedule? In effect, our issue here is the fact that a substantial portion of the fiscal budget is going into servicing debt.

 

[GreenFalcon]

If Pakistan has a patriotic government, then this debt can easily be tackled. But if the parties like PPP and PML-N keep leading Pakistan, then we are doomed

 

[randomradio]

Sir, there was a time when the US was under serious debt too, in fact, we borrowed a trillion from China to get out of our situation just a few years ago. India is still under heavy debt, about 5-7 years ago, it was probably worst. When any nation tries to grow, unless they have magic, they have to get resources, and today, that kind of resources come as loans.

With the GDP forecasts going up and billions getting ready to go to Pakistan (i have read many of those articles and assessments on here and otherwise), the debt is a temporary thing. Within a couple of years, Pakistani economy will be running full speed and she can start to pay back the loans. Pakistan's GDP (real one after reforms and end of real estate black market) should be around 500-600 billion. So based on that, adding growth, you can easily make the payments and more. I read somewhere that Pakistan's Forex reserves will hit $ 50 billion by the end of 2018. So it doesn't look like such a scary pictures compared to what you are showing us?

The thing is this debt is not expected to balloon by a whopping 50% in just 4 years time by even the worst of our domestic naysayers.

Its the rate of debt accumulation in relative terms that these Pakistani economists have every right to bring into light.

 

[Nilgiri]

Thats total gross debt (public and private) I imagine?

 

[randomradio]

Thats total gross debt (public and private) I imagine?

Yeah, total debt.

 

[LA se Karachi]

@farhan_9909 @LA se Karachi @Khan_21 @Areesh @WAJsal @Devil Soul @madokafc @Bilal9 et al.

Two renowned economists, former finance minister Dr Hafiz Pasha and former director general debt Dr Ashfaque Hasan Khan, have made the external debt projections. The $110-billion external debt level by 2019-20 will be $24 billion higher than projections made by the IMF in its latest report on Pakistan.

So the IMF made projections, but we should trust these two economists instead? Well, if they say so, I guess.

“Pakistan can keep its debt at sustainable levels by achieving about 6% annual economic growth,” said Dr Ali Kemal, research economist at the Pakistan Institute of Development Economics (PIDE). He, however, said despite the increase in debt levels, Pakistan was still not Greece.

6% annual growth isn't far away. Pakistan is already almost at 5%. CPEC is projected to add about 2.5% to Pakistan's annual economic growth rate. Even if it falls short of that projection, crossing the 6% mark won't be a problem.

It's also estimated that Pakistan's energy woes alone are costing it up to 2-2.5% growth each year. CPEC energy projects making a large dent in that alone will speed up Pakistan's economic growth.

“We are at a comfortable stage and there is no need to worry about anything,” said Zafar Masud, Director General of the Central Directorate of National Savings, while speaking at the conference.

Even this article ends by saying that there is no immediate cause for concern. Obviously, CPEC was going to add a significant amount of debt to the book. We already knew this. Nothing ever comes for free.

if China wants to go down the path of pouring money in a sinkhole it is their business

Yes, clearly you know more about development than the Chinese government.

The good news is that China has put lower than market rates for these, but the problem with that is it does not hold Pakistan's feet to the fire (and thus prompt good quality GCF through natural selection etc).

I agree with you on this. However, I suspect that China will indeed start to "hold Pakistan's feet to the fire", as you put it, once CPEC gets off the ground. Dangling more money can go a long way.

I for one do not see much overall value addition of the CPEC route compared to just massive container shipping with the regular routes flowing out of Shanghai and HK through the malacca straits. It hedges during wartime somewhat, but the massive financial cost dividends are just not there for land based commerce of most goods.

Not all of China borders the Pacific Ocean. Its western parts are closer to Pakistan than its east. And as economic growth shifts west, CPEC will become increasingly useful. No one is suggesting that Gwadar is the next Shanghai or Shenzen. It doesn't have to be.

Just as importantly, CPEC is not just a route to transport goods (though that is a large part of it). It's much more than that:

And, the vast majority of the money is going to fund energy projects:

Now, why would CPEC be so disproportionately weighted (over 70%) towards energy projects? If the Chinese simply wanted a port and a route to the sea, they wouldn't bother tying up $34 billion for energy projects in Pakistan. They could invest it in their own country instead (or other countries).

The answer is that there is likely much more to come. The Chinese aren't just bankers for Pakistan, they are business partners too. The truth is that the incredibly high growth rates that China experienced in the past probably aren't coming back. Its economy has been steadily slowing for the past few years, and seems to be stabilizing at 6-7% annual growth now. It's going to experience a population decline not too long from now. The cost of labor has been rising steadily, and Chinese investors are increasingly taking their capital overseas to other countries like Vietnam.

China seems to have decided that if capital is going overseas because investments are becoming less profitable in their own country, they might as well go to a friendly country with a lot of economic potential like Pakistan. Pakistan is an ally that has mostly stuck with it through thick and thin. And China has largely done the same for Pakistan. Pakistan is a fast-growing country of nearly 200 million. It's both a large market and a huge source of labor. While it is growing moderately, it could be growing significantly faster. However, it's endless energy crisis, underdeveloped/insufficient infrastructure, and poor leadership in regards to the economy have always gotten in the way.

CPEC aims to change that. Once this is remedied to a sufficient extent, factories and business investment will follow. You don't want to set up a factory where there are lengthy power outages each day. Why invest in any factory that will be under-utilized? Why not take your money somewhere else, where this isn't a problem? It's also difficult to transport goods when there are insufficient roads, railways, and ports to transport them. Infrastructure matters.

Having China as Pakistan's main creditor is not a burden at all; on the contrary: it is a very big advantage in this case, which India simply hasn't. Traditional investors only see the financial aspects and profits, China also considers geopolitical implications, which means Pakistan is more important than financial benefits in case of doubt. I hope you understand my point.

I would give this post a positive rating, if I could. Your point is forgotten by so many. China investing in Pakistan has a large geo-politcal component to it as well. They want to see Pakistan grow for their own reasons too. They're not going to simply abandon one of their closest allies over $40-50 billion. They will take it slow with Pakistan. Even before CPEC was announced, the Chinese were investing a lot in Pakistan:

http://www.unescap.org/sites/default/files/Chapter 3 - FDI.pdf


And even in the unlikely event that there is no investment coming from China after this, CPEC will still have been completed. The roads will still be there. The railways will still be there. Gwadar will still be there. And most importantly, the power plants will still be there. Other important countries have already expressed much interest in investing in Pakistan after the CPEC projects are completed. We're not putting all of our eggs in one basket forever, as some incorrectly claim. Build it, and they will come.

 

[Jacob Martin]

Yep a lot remains in the "let's see" column compared to "sure win" column.

The "factories" will come later apparently.

As far as transit goes, I'm pretty sure its cheaper for made in China goods to get shipped out of their ports as quickly as possible onto ships (cheapest mode of transport worldwide by far) even with cheap transit land fees (which I am not sure what they will be/are)....rather than going overland just to use another country's port. This applies for natural resources and energy China wants to import too. Is there something I am missing here? I can see that in times of conflict its useful to have alternate routes available especially if there is a major chokepoint in your current cheap route (malacca straits)....but the world is generally not at world war conflict time, and probably wont be for a very long time to come if ever.

Thus the Chinese surplus liquidity does strike some parallels with Latin America. In that instance it arose out of the energy crisis (and the surplus liquidity that was created in the Middle East that western banks then circumvented to Latin America). In this case its the overcapacity China finds itself in and plenty of liquidity to recycle outside its borders and create revenue streams for the future. Whether thats a a win-win econmically for China does not win, all that matters is they win....and its definitely a better option to go for such things rather than letting the liquidity sit around domestically or worse spend to create even more overcapacity and bubbles at home (esp when you are trying to coax domestic consumption).

As for Chinese strategy with this model w.r.t Pakistan, again we will have to wait and see how they deal with any potential defaulting or insolvency. A lot depends on the geopolitical situation and the situation back home in China at that point too and where and what exactly causes the issue within CPEC.

Apologize for the tardy replies. Short of time.

You are right as far as cost of shipment is concerned. All reports say that the current routes are cheaper. The initial plan was to have a sea/land route to Xinjiang etc. Because it is felt that China's far West is better off connected to the Arabian Sea. Then there are the strategic considerations. But, as you mentioned, strategic considerations in case of eventualities like hostility in South China Sea, naval blockade of the Straits are really far-fetched unless China itself is planning something. No prospect of anything like that in the medium term.

Actually, Singapore is a good case study for how developing a transit network can work for the overall economy. Many people don't know that tiny Singapore is not just a trans-shipment point, and has a thriving manufacturing sector - based on its port which makes import and export easy. Gwadar does not have the size limitations of Singapore, but has other limitations like freshwater supply. However, as I keep repeating, it won't happen unless people can work safe in the knowledge that they will not be blown up by a bomb.

Surplus liquidity - very good point. And in China's case, not just money. All the steel, cement, construction equipment, power generation and transmission equipment - which are all in surplus. India could have struck some wonderful deals with the Chinese at present. For example, L&T is building a steel flyover in Bangalore which, IMO, they are massively stiffing the government. The Chinese would surely have offered a better deal. Maybe we also have our own set of "strategic considerations" (apart from graft and kickbacks)?!

So the IMF made projections, but we should trust these two economists instead? Well, if they say so, I guess.




6% annual growth isn't far away. Pakistan is already almost at 5%. CPEC is projected to add about 2.5% to Pakistan's annual economic growth rate. Even if it falls short of that projection, crossing the 6% mark won't be a problem.

It's also estimated that Pakistan's energy woes alone are costing it up to 2-2.5% growth each year. CPEC energy projects making a large dent in that alone will speed up Pakistan's economic growth.




Even this article ends by saying that there is no immediate cause for concern. Obviously, CPEC was going to add a significant amount of debt to the book. We already knew this. Nothing ever comes for free.




Yes, clearly you know more about development than the Chinese government.




I agree with you on this. However, I suspect that China will indeed start to "hold Pakistan's feet to the fire", as you put it, once CPEC gets off the ground. Dangling more money can go a long way.




Not all of China borders the Pacific Ocean. Its western parts are closer to Pakistan than its east. And as economic growth shifts west, CPEC will become increasingly useful. No one is suggesting that Gwadar is the next Shanghai or Shenzen. It doesn't have to be.

Just as importantly, CPEC is not just a route to transport goods (though that is a large part of it). It's much more than that:

And, the vast majority of the money is going to fund energy projects:

Now, why would CPEC be so disproportionately weighted (over 70%) towards energy projects? If the Chinese simply wanted a port and a route to the sea, they wouldn't bother tying up $34 billion for energy projects in Pakistan. They could invest it in their own country instead (or other countries).

The answer is that there is likely much more to come. The Chinese aren't just bankers for Pakistan, they are business partners too. The truth is that the incredibly high growth rates that China experienced in the past probably aren't coming back. Its economy has been steadily slowing for the past few years, and seems to be stabilizing at 6-7% annual growth now. It's going to experience a population decline not too long from now. The cost of labor has been rising steadily, and Chinese investors are increasingly taking their capital overseas to other countries like Vietnam.

China seems to have decided that if capital is going overseas because investments are becoming less profitable in their own country, they might as well go to a friendly country with a lot of economic potential like Pakistan. Pakistan is an ally that has mostly stuck with it through thick and thin. And China has largely done the same for Pakistan. Pakistan is a fast-growing country of nearly 200 million. It's both a large market and a huge source of labor. While it is growing moderately, it could be growing significantly faster. However, it's endless energy crisis, underdeveloped/insufficient infrastructure, and poor leadership in regards to the economy have always gotten in the way.

CPEC aims to change that. Once this is remedied to a sufficient extent, factories and business investment will follow. You don't want to set up a factory where there are lengthy power outages each day. Why invest in any factory that will be under-utilized? Why not take your money somewhere else, where this isn't a problem? It's also difficult to transport goods when there are insufficient roads, railways, and ports to transport them. Infrastructure matters.




I would give this post a positive rating, if I could. Your point is forgotten by so many. China investing in Pakistan has a large geo-politcal component to it as well. They want to see Pakistan grow for their own reasons too. They're not going to simply abandon one of their closest allies over $40-50 billion. They will take it slow with Pakistan. Even before CPEC was announced, the Chinese were investing a lot in Pakistan:

http://www.unescap.org/sites/default/files/Chapter 3 - FDI.pdf


And even in the unlikely event that there is no investment coming from China after this, CPEC will still have been completed. The roads will still be there. The railways will still be there. Gwadar will still be there. And most importantly, the power plants will still be there. Other important countries have already expressed much interest in investing in Pakistan after the CPEC projects are completed. We're not putting all of our eggs in one basket forever, as some incorrectly claim. Build it, and they will come.

Theoretically speaking, all that you said about the multiplier effect of CPEC are correct. The infrastructure porjects will create jobs and boost consumption. Better road/railway/port connectivity coupled with regular energy supply can simultaneously result in manufacturing/service industries to take advantage. Very plausible.

What about freshwater availability in Gwadar area? Last I knew there were major shortages. A. What are the immediate measures? Are these measures scalable?

And a final point - I am not trolling you. But the fact is, if India had an equivalent of CPEC, and it was based mostly in Kashmir, I would not be hopeful about it due to security issues. That will ultimately determine everything. What is the honest assessment of where Balochistan is headed security-wise?

 

[Thəorətic Muslim]

What would it take to consolidate our debt with the Chinese and get them to agree to a fixed payment schedule? In effect, our issue here is the fact that a substantial portion of the fiscal budget is going into servicing debt.

The problem with consolidations is Pakistan will be turned into a Banana Republic.

The World Bank charges 0.5% on top of the international market it borrows from. Unlike a specific country the WB/IMF are used to leverage influence upon countries on the international stage. UN Security Members are statistically proven to receive more aid & loans from the WB/IMF. But were as there are many actors specific states usually have sole national interests.

The issue isn't the substantial debt servicing, the US spent 5.87% of it's budget on interest payments, but the lack of taxation reform. There has yet to be agricultural or land reforms which are necessary to break up the hold of 23 families. Reforms which were on Pakistan's 2nd 5 Year Plan but never enacted on, unlike S. Korea which did enact in carrying out the plan it copied from Pakistan.

Thing is 200 million population is no small number either. Definitely does not merit going after just one country's loans and investment (and China isn't even really committing FDI either, it seems they are adopting the wait and see approach before they shoulder actual risk).
Pakistan can do a lot better here.

Your Chaiwala never set foot into London or Dubai. Pakistan's leaders have and they like those places better.

 

[LA se Karachi]

Theoretically speaking, all that you said about the multiplier effect of CPEC are correct. The infrastructure porjects will create jobs and boost consumption. Better road/railway/port connectivity coupled with regular energy supply can simultaneously result in manufacturing/service industries to take advantage. Very plausible.

That's certainly the idea, yes. But it's particularly true in a country grappling with a seemingly endless energy crisis that is estimated to be costing it 2-2.5% growth a year.

What about freshwater availability in Gwadar area? Last I knew there were major shortages. A. What are the immediate measures? Are these measures scalable?

Balochistan is currently going through a drought. It does every few years. Rainfall returning to normal levels will greatly improve the situation.

Long-term, however, a few different things are being done:

1. Construction of pipelines to existing dams (such as the Mirani Dam)

2. Construction of new dams:

"The construction of two other dams — the Sawwar dam undertaken by the provincial government and Shaadi Kaur by the federal government in 2012, both located in and around Pasni, Gwadar district — is yet to be completed, which authorities say is at the root of the problem."

"SDO Shaban says: “If these dams had been completed in time, we wouldn’t have had to to rely on other sources of acquiring water. Embezzlement and a lack of funds is another issue which needs to be sorted before the water shortage snowballs into a bigger conflict between the towns.”"

3. A desalination plant has been "made functional". However, pipelines to the core of the city are lacking (they're going to add them). And it sounds like there are some other issues with it that still need to be sorted out. A desalination plant right now is a bit expensive. However, as Gwadar gets off the ground, it will become more affordable and can shoulder quite a bit of the burden when it needs too.

http://www.dawn.com/news/1243899

And a final point - I am not trolling you. But the fact is, if India had an equivalent of CPEC, and it was based mostly in Kashmir, I would not be hopeful about it due to security issues. That will ultimately determine everything. What is the honest assessment of where Balochistan is headed security-wise?

Well thankfully, Balochistan is not Kashmir. With all due respect, you cannot compare the two. You will never see the whole province being shut down after protests. You never see the kinds of protests that you do in Kashmir. And there's a reason for that: a majority of its people do not want independence. I know people that have worked in the province, and they tell me that it is mostly safe and that few people support the separatists. It's why you see so many of their leaders go abroad: they have little support in the province.

What I have heard from people who've been there, is that many of the people are unhappy with the lack of development in Balochistan and want a larger share of revenues. Hundreds of civilians have died in the province since the insurgency flared up after 2004. While I don't mean to down-play the loss of life, it's a relatively small amount.

But the fact is, if India had an equivalent of CPEC, and it was based mostly in Kashmir

More importantly, this statement is incorrect. CPEC is not mostly based in Balochistan:

Only about a third of the CPEC projects are in Balochistan:

https://defence.pk/threads/for-those-who-are-confused-about-cpec.457168/