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Institutional Hurdles Choking The Growth Of China’s Investment In Pakistan

By Thu Dao More than seven years have passed since the launch of mega China – Pak partnership under the much hyped China Pakistan Economic…

By Thu Dao

More than seven years have passed since the launch of mega China – Pak partnership under the much hyped China Pakistan Economic Corridor (CPEC). However, a reality check on the keenness of Chinese companies on investing in Pakistan paints a grim picture. Most of the early CPEC investments were in power sector which even witnessed timely start of operations by many plants. However, it also created sizeable liabilities on the future cash flows of these projects which were revealed by the financial agreements signed with the Chinese investors. Most of these deals entailed assurance of exorbitant rate of returns to the Chinese companies for their investments. Going through economic crisis for most of the past five years, Pakistan never seemed comfortable in fulfilling these liabilities by making timely payments. This resulted in pilling up of dues of Chinese firms amid ballooning circular debt for the sector. While the so-called start of CPEC phase-II in 2019 signaled readiness for increasing investments, the experiences of Chinese companies working on ground have been far from pleasant.

During a meeting with Pak Minister for Planning and Development Ahsan Iqbal in May 2022, 25 Chinese Independent Power Producers (IPPs) reportedly warned that they would be forced to shut down their operations unless upfront payment of about Rs 300 billion is made to them. Pakistan’s delayed response to the long standing Chinese demand of establishing a revolving account also complicated the matter. The “Pakistan Energy Revolving Account” with Rs 50 billion was finally put in place in December 2022 to confirm with the CPEC agreement. Nevertheless, media reports were floating during the same month about Chinese ambassador to Pakistan, Nong Rong acknowledging reluctance of Chinese companies owing to delayed payments to IPPs, rising exchange rate and “unhelpful behavior” of National Electric Power Regulatory Authority.

The situation is not quite encouraging for Chinese companies engaged in other sectors of Pakistan as well. There is frequent media reporting of Chinese investors not getting required support from Pakistani institutions and officials. These concerns are also being conveyed to Pak government by them through various channels including the Pak Mission in Beijing. Apart from non-clearance of their dues, the Chinese companies operating in Pakistan suffer due to the policies adopted by State Bank of Pakistan and other regulators. One of the main problems faced by these companies is obstacles in profit repatriation. Delays in profit repatriation negatively impact their future investments and industrial procurements. On January 23 2023, Overseas Investors Chamber of Commerce and Industry (OICCI) Secretary General M. Abdul Aleem complained to Pak media that repatriation of profits in the form of dividends to the overseas headquarters of foreign companies has been on hold since the beginning of 2022-23. The official data from State Bank of Pakistan (SBP) confirms this by showing that the repatriation dropped to $182.5 million in July-December of FY 2022-23 from $794 million during same period last year. The policy holding back the proceeds is said to be a result of severe forex shortage in the country with around $1 billion of dividend and profit repatriation reportedly stuck. The decline in repatriation is being witnessed across all sectors including power, telecom, transport, energy, or food and beverages. Pakistan Business Council (PBC) CEO Ehsan Malik recently said some multinational companies had stopped declaring dividends to reduce the pressure on dollar outflows.

Another factor troubling the Chinese investors in Pakistan is the rapid depreciation seen in the value of Pakistani rupee in international market. The decline badly hurts the Chinese companies due to the ‘double conversion’ requirement under which Pakistani rupee needs to be converted to US $ and then from US $ to renminbi (RMB). Apart from it, the Chinese businesses constantly rue the lack of Pakistani banks’ cooperation with Chinese commercial banks for direct settlement of funds. Despite raising of these issues by the Chinese at several bilateral forums, the Pakistani institutions including SBP are found faltering in taking strategic decisions. According to latest SBP data, the total inward FDI in the country shrank by 59% to $461 million in the first six months of the current fiscal year i.e. July-December 2022. In contrast to tall claims made by the political leadership, the problems within are likely to continue plaguing the business environment of the country.

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