Higher than the highest debt, deeper than the deepest trap; yes, this should be the new slogan for the so-called “all-weather friendship” between Pakistan and China now that Beijing’s sinister motives for undertaking the China-Pakistan Economic Corridor (CPEC) have been exposed.

According to a report, Ministry of Planning and Development documents have revealed that Pakistan will pay China $40 billion for $26.5 billion of CPEC investments in 20 years. This figure doesn’t include the $8.2 billion Pakistan Railways Mainline-I, the only project that can materialize in the next few years, according to the news report. The Ministry of Finance showed these documents to the International Monetary Fund (IMF) during bailout negotiations. So they tried their best to hide the total cost of the money-wasting and anti-economy projects.

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Also, do remember, while talking to a media outlet an official from the Planning Ministry exposed Chinese Ambassador to Pakistan Yao Jing, as he falsely stated the total cost of 22 ongoing and completed power projects (under CPEC) in a briefing media in October 2018, as the actual cost was $28.6 billion dollars and Jing stated it was $19 billion. This gave rise to a $9 billion discrepancy between the figures quoted by Pakistan ($28.6 billion) and Beijing ($19 billion), due to the fact that the ambassador was not including the cost of Kohala power project, the 300-megawatt Gwadar Power Plant, and the Oracle power plant among the ongoing schemes.

From $62 billion to $40 billion?

The report by the  Express Tribune has raised many questions concerning the cost of the China-Pakistan Economic Corridor. One of them is why the Ministry of Planning and Development has estimated that $40 billion will be the total cost of the project? In April 2017, Sindh Governor Muhammad Zubair announced – as reported by the Express Tribune – that China has approved additional financing for infrastructure projects in Pakistan under the China-Pakistan Economic Corridor (CPEC), taking the investment volume to $62 billion from $55 billion.

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One reason behind this discrepancy could be the fact that the Planning and Development Ministry had not included the funds which have not actually been deployed by the Chinese authorities, and the two parties have only agreed to extend the multi-billion dollar project in the future and thus the real cost of the entire project will eventually be close to $62 billion; all for the sake of earning the trust of the MF – as it has always raised concerns about China’s CPEC intentions – by showing them the total cost is lower than the one reported frequently by the media.

Precisely $39.83 billion

Out of $39.83 billion, debt repayments of energy and infrastructure projects consist of $28 billion and the remaining $11.3 billion will be paid in the form of dividends to the investors. The project can be divided into two parts; 1) infrastructure schemes and 2) power plant projects. Infrastructure projects are being set up by the government of Pakistan and thus the burden of repaying Chinese loans for them will be on the government’s shoulders. As far as power projects are concerned, these are based on a “new kind of” IPP (independent power producers) mode – a twist – which we will discuss later on in this article.

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The Chinese government has issued loans of $5.9 billion to the government of Pakistan at interest rates ranging from 2% to 5.2%. Three government loans – approx $800 million – have been obtained at 5.2%. There are five infrastructure projects for which Pakistan will return $7.5 billion to the Chinese government.

There are 18 power plant projects. The commercial loans for setting up power plants have been arranged at an interest rate of the London Interbank Offered (Libor) plus 4.5%. However, it is the return on equity, which in some cases is as high as 34.2%, that will cause an outflow of $11.3 billion from Pakistan’s economy to the Chinese economy.

The twist – Chinese debt trap

Equipment, building materials and services/labor for the multi-billion dollar project – CPEC – are all imported from China. Furthermore, the majority (almost all) of the companies that will be investing in Pakistan’s energy sector – under CPEC – are headquartered in China. The banks that will provide these Chinese companies (investors) with billions of dollars to invest in Pakistan’s power sector are also Chinese. And these are not private Chinese banks but state-owned Chinese banks, mainly “Exim Bank Of China” and “China Development Bank.”

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So what is the twist here? There is one, and let us discuss it now. You may ask what IPP (independent power producer) mode is. According to PPIB’s (Private Power and Infrastructure Board) website, due to the intense energy crisis in the country and the fact that the government of Pakistan wasn’t able to afford to spend on electricity projects, and therefore to tackle the situation it created a “One Window Facilitator” – the PPIB – to promote private investment in the power sector on its behalf. And from there the concept of IPP surfaced. So there is nothing wrong in inviting private investment in the country, which on one hand can inject foreign currency (especially dollars/FDI) in the economy and on the other can help the government of Pakistan address the power crisis, which will stabilize the economy by saving industries and increase the living standard of the masses. So a private investor can invest and get a return on their equity – as simple as that! Yeah, but it only works like that in a normal case. The process has been twisted for IPPs working under the China-Pakistan Economic Corridor (CPEC)!

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According to the Agreement on CPEC Energy Projects Cooperation, the government of Pakistan is legally bound to ensure the provision of foreign currency (dollars) for debt repayment to Chinese financial institutions (mainly state-owned Exim Bank of China and China Development Bank) by investors (Chinese companies) of power plants (IPPs) set up under CPEC and for the repatriation of profits (return on equity) by them (Chinese investors). Other then the “dollars” that will leave Pakistan and enter China in the shape of “dividends” to the “Chinese IPPs” in CPEC, more “dollars” will leave the economy of “Pakistan” in the shape of foreign reserves which the government of Pakistan is legally obliged to provide to these Chinese IPPs so that they can pay the loans back to the state-owned banks of China.

Ultimately, the country that is already suffering from a shortage of dollar reserves – Pakistan – will end up pouring a substantial amount into the Chinese economy and will find itself knocking on the doors of the IMF, World Bank, Saudi Arabia, UAE, EU, US, UK and China for a bailout once again! The consequences will be much more severe if the country goes bankrupt in the future. CPEC won’t contribute to the development of Pakistan’s industrial and technological sectors nor it will generate employment opportunities for the people of Pakistan, Chinese hire their own people!

Article 6 of the agreement says, “Pakistani party agrees to provide each year during project’s operation period through the State Bank of Pakistan, for all of the company’s transactions related to the project that require foreign currency, in case such foreign currency is not available through authorized banks in Pakistan. Pakistani party commits initiating a mechanism for expeditious conversion of revenue of power plants.”

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To protect the Chinese investment from the adverse impact of circular debt, the bilateral agreement also includes Article 5, which ensures that a revolving account will be opened within a month of the commencement of commercial operations of a power project, into which the amount will be deposited (by the Pakistani government) no less than 22% of the monthly payments for the respective power projects. The story doesn’t end here; Article 3 of the agreement promises a tax exemption on interest income accruing from the commercial loans by the Chinese commercial banks. This means that Pakistan has foregone tax on $4.42 billion profit that Chinese financial institutions would earn on $15.42 billion in loans for the energy projects.

China’s motives

Pakistan will have to return all of it – $40billion – to China in a period of 20 years. The government of Pakistan has still not made each and every detail of the CPEC agreements public. Right now, all we have is the information which has been reported by some media outlets.

The project will surely be extended and in future, the total cost of it will be close to $62 billion, or even more. What I can say after analyzing the information available is that the China-Pakistan Economic Corridor is a trap, set for Pakistan by its all-weather ally China. Chinese President Xi Jinping is acting like an international economic hitman. He is lending Pakistan billions of dollars for infrastructure – not free of cost – at high interest rates, Pakistan then imports equipment, raw materials and labor from China using the same dollars  China has provided for the infrastructure scheme. So what comes from China goes back to China with huge interest.

Furthermore, as far as power projects are concerned – which make up the largest portion of the entire debt-trap – Chinese state-owned banks are providing billions of dollars in loans to Chinese investors, which then invest these dollars in Pakistan’s energy sector, and in return they get a share of the profits in the form of dollars (dividend). Also, the government of Pakistan is legally obliged to ensure the availability of dollars for these Chinese investors so that they can pay back the loans which they have initially taken from China’s state-owned banks – what comes from China, goes back to China – with everything else. Therefore, Pakistan, by 2037-38 – the deadline to repay the CPEC loans and pay dividends – may find itself short of dollar reserves and will possibly default on repayments and dividend payments.

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No one till today knows the details of collaterals which China will seize if Pakistan defaults on its obligations. But we do know what China has done with other Belt and Road Initiative partners. Sri Lanka was forced to handover Hambantota port to China when it wasn’t able to repay $1 billion, Kenya – according to its Auditor General’s latest report – will soon lose Mombasa port to China if it defaults on Chinese loans, people and politicians in Nepal have raised concerns over hefty Chinese debts for infrastructure projects, Laos debt has reached 68% of its GDP and now economists worry about how the country will repay a Chinese $6 billion loan for a railway project. The list is quite long. Maldives, Djibouti, Kyrgyzstan, Nigeria, Papua New Guinea, Samoa, Montenegro, Fiji, Ethiopia, Thailand … the list goes on and on and on.
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So why is China looting these countries? To seize their key national assets and continue expanding its influence across the world.