THE China-Pakistan Economic Corridor (CPEC) is apparently
entering a new phase, touching more critical and sensitive areas of
trade, industrialisation and financial settlement systems than did the
first phase, which focused on developing power projects and road
infrastructure.
The broad power policy was already in
place when the two countries agreed to expand around 10,000 megawatts of
generation capacity to remove energy bottlenecks.
The
Chinese made abundant funds available for investments and Pakistan
offered generous tax concessions and exemptions along with guaranteed
revenue stream for repayments.
The private sector would be playing a greater role, hence the need for financial mechanisms including the yuan as an alternative to the dollar
While the quantum of investments in the power sector and
loans for road projects currently under implementation is put at $27
billion by the Planning Commission and $23bn by the Ministry of Finance
for varying reasons, rough estimates suggest that these would add to
foreign repayment obligations by $3bn to 3.5bn per annum over the next
few years.
Going forward, the two governments have now
formally shaped up the Long Term Plan (LTP) 2017-30, which sets the
general direction for the next 13 years of engagement.
The
private sector would be playing a greater role in bilateral trade and
industrialisation, hence the need for financial mechanisms and
arrangements including the treatment of the yuan — or renminbi (RMB) —
as an alternative to the US dollar.
This could be the
most important phase of the CPEC that would determine its sustainability
and depend on the actual planning, clarity and transparency of the
arrangements to avoid mid-course challenges.
Pakistan has
to draw wisdom from the experience of its free trade agreement with
China, and preparedness of the private sector and the human resources to
benefit from the special economic zones (SEZs).
That is
where the two governments have set up the joint expert group, in
addition to existing sectoral joint working groups, to meet on a monthly
basis and process feasibility studies and address issues that may crop
up.
The main task for the expert group is to complete the
planning phase of these SEZs and make sure it enters the implementation
phase during 2018 that would, in the meanwhile, expected to complete
the political transition in Pakistan. Therefore, the upcoming year would
generally be a dull year for actual progress on ground.
The
Board of Investment and the Planning Commission are engaging with
prominent chambers of commerce and industry in Khyber Pakhtunkhwa,
Punjab, Islamabad, Sindh, Gilgit-Baltistan (GB), Azad Jammu and Kashmir
(AJK), and the Federation of Pakistan Chambers of Commerce and Industry,
among others, for briefings about upcoming SEZs.
The
repeated questions coming from the business community in these sessions
pertained to concerns that the incentive package would be restricted to
Chinese investors.
The government has tried to dispel
such impressions. Local businessmen have also been told that all the
nine SEZs — identified so far in all the four provinces and special
areas including AJK, GB and Federally Administered Tribal Areas — would
be initially developed by provincial governments for building
infrastructure in various forms of public-private partnerships.
This
would be followed by setting up industrial units for which the federal
government would offer equal incentives to all. Provincial governments
would also be free to give additional tax incentives to attract local
and foreign investors.
The LTP generally covers seven
broad areas of cooperation in three phases, first ending by 2020, second
by 2025 and third in 2030.
The areas of cooperation
include energy and connectivity (already in the completion phase except
for railway lines), trade and industrial parks, financial cooperation
(the next stage), agricultural development and poverty alleviation,
tourism, peoples livelihood and exchange programmes.
The
long-term plan would remain a moving document providing macroeconomic
guidance for implementing the CPEC in the next phase. “The plan would be
adjusted based on real situation as well as the consensus between the
parties during the course of implementation… New routes, nodes and
aspects may be considered for inclusion in future by mutual agreement,”
reads the document.
The plan promises to explore the
establishment of multi-level cooperation mechanisms and strengthen
policy coordination, including their own financial reform and opening up
besides innovating financial products and financial services to control
financial risks.
This also includes the understanding to
establish and improve a cross-border credit system and financial
services, strengthen currency-swap arrangements and establish a
bilateral payment and settlement system.
Pakistan and
China have also agreed to set up a bilateral foreign exchange reserve
pool, increase cooperation between central banks and financial
regulatory agencies, and establish a settlement platform for yuan-based
cross-border trade.
The countries would also consider
expanding the amount of currency swap and assign the foreign currency to
domestic banks through credit-based bids to support the financing for
projects along the CPEC and promote the settlement in domestic
currencies (yuan and rupees) to reduce the demand for a third-party
currency.
The two countries would also promote the free
flow of capital in an orderly manner, and enhance the facilitation in
cross-border transfer of legitimate funds and open up their financial
sector to each other.
They agreed to encourage financial
institutions of the two countries to support the financing, including
the loans from international consortium of banks, for the projects along
the CPEC and establish and improve a cross-border credit system.