China has Pakistan over a barrel on ‘One Belt, One Road’
Tax concessions for Chinese firms, mounting security costs, crippling debt ... the China-Pakistan Economic Corridor is beginning to look like a disaster for its host nation
The US$56 billion China-Pakistan Economic Corridor (CPEC) – a part of China’s “One Belt, One Road” vision – has yet to translate into the game-changer envisioned by its sponsors. Worse than that, the unparalleled tax breaks and mounting security costs involved have already saddled Islamabad’s exchequer with a hole in its finances of more than US$2.5 billion.
Pakistan’s lower house was informed last month that the government had issued a statutory regulatory order (SRO) giving a series of tax exemptions to Chinese firms as an incentive for working in what is considered a highly dangerous zone. These concessions – extensive tax breaks from customs duty, income tax, sales tax, federal excise duty and withholding taxes – have been granted to Chinese companies for the whole of the CPEC operation, including road, mass transit, and Gwadar port projects.
“There is absolutely nothing in the CPEC for the local trade and industry; even the labor is coming from China, which will cause a steep escalation in the operational cost of the project,” said Muhammad Ishaq, a leading industrialist and a director of Khyber Pakhtunkhwa Board of Investment and Trade in conversation with Asia Times. He cautioned CPEC will be a big disaster for Pakistan in the long run.
Interestingly, while affording concessions to the Chinese companies, Islamabad went back on its oft-repeated position policy on tax immunity. Only this month, it withdrew tax exemptions worth Rs100 billion (US$945 million) with the aim of bringing its budget deficit down. Since 2014, it has withdrawn around US$3.25 billion in exemptions.
The generous tax holiday to Chinese contractors and companies is in addition to the US$1 billion sum Islamabad has so far pledged to put in place a failsafe security to protect the CPEC-related projects and the Chinese personnel working on them. The overall project cost is expected to jack up thanks to the induction of a 15,000-strong force to provide round-the-clock surveillance.
In August last year, Pakistan’s military establishment set up two Special Security Divisions (SSDs) to provide security cover for Chinese personnel and CPEC installations from Gwadar in the South to Rawalpindi and Khunjrab in the North. It is believed that initially the Pakistani side pushed Chinese officials for the reimbursement of security-related costs; the latter would not yield, however, stating that security for the project was none of their business.
“There is absolutely nothing in the CPEC for the local trade and industry; even the labor is coming from China”
Sadly, Islamabad decided to bill domestic electricity consumers for the astronomical CPEC security outlay. Consumers are having to pay a surcharge in their utility bills to allow for a security spend of 1% of the capital cost of CPEC projects.
Pakistan will have little or no foreign exchange inflow back into the country while it will pays US$90 billion back to China over 30 years against loans and investments worth US$56 billion under CPEC. “The average annual repayment of CPEC will be US$3.7 billion,” Saad Hashemy, an analyst at the brokerage house Topline Securities, said in a report titled Pakistan’s External Account Concerns and CPEC Repayment.
The Central Bank of Pakistan highlighted in its quarterly economic review heavy borrowings from Chinese commercial banks at “questionable rates” to pay for the import of Chinese machinery. During the first quarter of the fiscal year 2016-17 Chinese loans surged to US US$979 million, compared to US $138 million during the comparable period the previous year. The terms of these loans seem dubious at best. Independent economists warn Pakistan seriously risks another International Monetary Fund bailout once the outflows on loans and profits to China begin.