I will be least surprised if the ticket was given for free or was given as Udhaari.PM Imran departs for 3-day US trip on commercial Qatar Airways flight
pakistanis don't even have their own aircraft for state visit and they want Kashmir
Pakistan Economy : Updates and Discussions
- Thread starter randomradio
- Start date
Almost 50% in interest, another 3 years.. Pak will be paying close to 8 billion $..
That's a gift for the next term, whoever gets selected..
Was it fair for the World Bank to order Pakistan to pay $5.8 billion to a mining company?
By Kyla Tienhaara, The Conversation
The tribunal’s calculation of possible ‘lost future profits’ exposes the unfairness of global economic governance.
Pakistan's Prime Minister Imran Khan | Arif Ali/AFP
It’s been a rough month for Pakistan’s Prime Minister Imran Khan.
It started off with the International Monetary Fund approving a $6 billion dollar loan to the country. The strict conditions on the loan meant that instead of expanding the welfare state, Khan’s government had to impose “shock therapy” austerity measures.
Unsurprisingly, this resulted in nationwide strikes.
Then, less than two weeks later, a secretive World Bank tribunal ordered Pakistan to pay a mining company $5.8 billion dollars – nearly as much as the IMF loan – to resolve an eight-year-long dispute.
Why would an arm of the development pillar of the Bretton Woods system require a country in crisis to do something that would completely undermine the actions of the financial stability tenets of that same system?
What does it say about the state of global economic governance? Is it broken?
Protecting corporate profits
The International Centre for the Settlement of Investment Disputes was established in 1966 as part of the World Bank Group. The centre oversees arbitrations between foreign companies and states in a process known as the investor-state dispute settlement.
Investor-state dispute settlement is hugely controversial for a variety of reasons ranging from the secrecy of the hearings to the substantial costs associated with defending a claim and the ability of corporations to challenge health and environmental measures.
The case that cost Pakistan $5.8 billion did not revolve around such measures but rather the decision of a provincial government to backtrack on a sweetheart deal that had been offered to a mining firm, allegedly the result of corruption. Leaving the merits of the case to one side – it is difficult to assess the tribunal’s reasoning when the award isn’t public, after all – let’s take a closer look at the payout.
According to the mining company – Tethyan Copper, partially owned by Canada’s Barrick Gold – it spent $220 million on exploration activities before things went South. One might argue that a fair outcome, if the government was solely to blame, would be for the award to cover these sunk costs. Instead, it was more than 25 times that amount. That is because the tribunal chose to award the company “lost future profits” from the project.
No crystal balls
Arbitrators don’t have crystal balls. They don’t know what the value of a mineral will be in a year, let alone 30 years. And they are lawyers, not market analysts. So how do they decide how much profit a firm would have made in a hypothetical alternative future?
The answer is, partially, that they rely on so-called experts brought in by each of the parties to the dispute. These experts provide the best guess for what they think a project is worth. International law scholar Robert Howse calls this “junk science”.
Unsurprisingly, the state’s expert often provides a low-ball estimate for the value of a project and the investor’s expert gives an inflated value. Faced with this discrepancy, arbitrators will often choose to go down the middle path and pick an arbitrary value. Tethyan Copper had originally sought more than $11 billion in damages, suggesting that the tribunal, in this case, may have taken this approach.
When it comes to the calculation of damages, there are very few constraints on arbitrators. As noted in one award, a tribunal generally has the freedom to “arrive at a figure with which it is comfortable in all the circumstances of the case”.
Did the arbitrators, in this case, consider that the owners of Tethyan Copper – Antofogasta of Chile and Barrick Gold – had long ago written off the project and continued to be very profitable firms? Did they consider the records of these companies in terms of alleged corruption and human rights abuses in other countries?
Did they consider that $5.8 billion is one-eighth of Pakistan’s total government budget for 2019-’20? Did they consider that the country is facing an economic crisis? It seems the answer may have been no on all counts though, again, we are left guessing about the tribunal’s justifications for its award.
A way out
An international process is currently underway to come up with reforms to the investor-state dispute settlement and excessive damages awards have been identified as an area of concern for states. A number of countries, most recently South Korea, have come to the wise decision that the best way forward is to opt-out of investor-state dispute settlement altogether.
In practice, this means individual states terminating the thousands of investment treaties that provide access to arbitration, which can be a difficult and time-consuming process. A preferable approach would be for states to coordinate their efforts, for example through a multilateral exit agreement.
Abolishing investor-state dispute settlement won’t solve all of the problems of global economic governance. But it seems a very good place to start.
Kyla Tienhaara is the Canada Research Chair in Economy and Environment at Queen’s University, Ontario.
Was it fair for the World Bank to order Pakistan to pay $5.8 billion to a mining company?
By Kyla Tienhaara, The Conversation
The tribunal’s calculation of possible ‘lost future profits’ exposes the unfairness of global economic governance.
It’s been a rough month for Pakistan’s Prime Minister Imran Khan.
It started off with the International Monetary Fund approving a $6 billion dollar loan to the country. The strict conditions on the loan meant that instead of expanding the welfare state, Khan’s government had to impose “shock therapy” austerity measures.
Unsurprisingly, this resulted in nationwide strikes.
Then, less than two weeks later, a secretive World Bank tribunal ordered Pakistan to pay a mining company $5.8 billion dollars – nearly as much as the IMF loan – to resolve an eight-year-long dispute.
Why would an arm of the development pillar of the Bretton Woods system require a country in crisis to do something that would completely undermine the actions of the financial stability tenets of that same system?
What does it say about the state of global economic governance? Is it broken?
Protecting corporate profits
The International Centre for the Settlement of Investment Disputes was established in 1966 as part of the World Bank Group. The centre oversees arbitrations between foreign companies and states in a process known as the investor-state dispute settlement.
Investor-state dispute settlement is hugely controversial for a variety of reasons ranging from the secrecy of the hearings to the substantial costs associated with defending a claim and the ability of corporations to challenge health and environmental measures.
The case that cost Pakistan $5.8 billion did not revolve around such measures but rather the decision of a provincial government to backtrack on a sweetheart deal that had been offered to a mining firm, allegedly the result of corruption. Leaving the merits of the case to one side – it is difficult to assess the tribunal’s reasoning when the award isn’t public, after all – let’s take a closer look at the payout.
According to the mining company – Tethyan Copper, partially owned by Canada’s Barrick Gold – it spent $220 million on exploration activities before things went South. One might argue that a fair outcome, if the government was solely to blame, would be for the award to cover these sunk costs. Instead, it was more than 25 times that amount. That is because the tribunal chose to award the company “lost future profits” from the project.
No crystal balls
Arbitrators don’t have crystal balls. They don’t know what the value of a mineral will be in a year, let alone 30 years. And they are lawyers, not market analysts. So how do they decide how much profit a firm would have made in a hypothetical alternative future?
The answer is, partially, that they rely on so-called experts brought in by each of the parties to the dispute. These experts provide the best guess for what they think a project is worth. International law scholar Robert Howse calls this “junk science”.
Unsurprisingly, the state’s expert often provides a low-ball estimate for the value of a project and the investor’s expert gives an inflated value. Faced with this discrepancy, arbitrators will often choose to go down the middle path and pick an arbitrary value. Tethyan Copper had originally sought more than $11 billion in damages, suggesting that the tribunal, in this case, may have taken this approach.
When it comes to the calculation of damages, there are very few constraints on arbitrators. As noted in one award, a tribunal generally has the freedom to “arrive at a figure with which it is comfortable in all the circumstances of the case”.
Did the arbitrators, in this case, consider that the owners of Tethyan Copper – Antofogasta of Chile and Barrick Gold – had long ago written off the project and continued to be very profitable firms? Did they consider the records of these companies in terms of alleged corruption and human rights abuses in other countries?
Did they consider that $5.8 billion is one-eighth of Pakistan’s total government budget for 2019-’20? Did they consider that the country is facing an economic crisis? It seems the answer may have been no on all counts though, again, we are left guessing about the tribunal’s justifications for its award.
A way out
An international process is currently underway to come up with reforms to the investor-state dispute settlement and excessive damages awards have been identified as an area of concern for states. A number of countries, most recently South Korea, have come to the wise decision that the best way forward is to opt-out of investor-state dispute settlement altogether.
In practice, this means individual states terminating the thousands of investment treaties that provide access to arbitration, which can be a difficult and time-consuming process. A preferable approach would be for states to coordinate their efforts, for example through a multilateral exit agreement.
Abolishing investor-state dispute settlement won’t solve all of the problems of global economic governance. But it seems a very good place to start.
Kyla Tienhaara is the Canada Research Chair in Economy and Environment at Queen’s University, Ontario.
Was it fair for the World Bank to order Pakistan to pay $5.8 billion to a mining company?
FDI in Pakistan.
Fugitive underworld don Dawood Ibrahim investing drug money in Pakistan stock exchange after oversees assets freeze
Zee Media Bureau Jul 28, 2019, 10:24 AM IST,
These investments are being made through various capital securities firms in all the three stock exchange under in the PSX.
New Delhi: Even as India's most wanted fugitive underworld don Dawood Ibrahim's assets are frozen across the world, the notorious gangster continues to invest money, earned through his organised crime syndicate, in the Pakistan Stock Exchange (PSX).
These investments are being made through various capital securities firms in all the three stock exchange under in the PSX.
The Indian agencies are gathering clinching evidence against Dawood Ibrahim`s investment of illegal money into the PSX, earned through his crime syndicate, which primarily flourishes on drug smuggling, gun-running, Fake Indian Currency Notes (FICN) racket and extortion.
The D-company point man Jabir Moti, currently detained in a London jail, runs more than five front capital securities companies, all operating from the Karachi Stock Exchange, merged with the PSX in 2016.
Besides companies linked with Jabir Moti, D-company has also invested heavily, through various shell companies in Habib Bank`s subsidiary, Habib Metropolitan Financial Services (HMFS), a top equity brokerage firm in Pakistan.
Intelligence reports say Dawood Ibrahim was introduced to the senior management of Habib Bank by cricketer Javed Miandad, a former Senior Vice President of Habib Bank and father-in-law of Dawood's daughter Mehreen Ibrahim.
Habib Bank was charged by the US Department of Financial Services with money laundering and terror links in 2017. Habib Bank`s role is also under suspicion for backing D-company`s operations in Nepal as it runs the Nepalese Himalayan Bank in a joint venture project.
Reports say that around 2012, Dawood Ibrahim came in contact with the then Director of Karachi Stock Exchange Zafar Moti, through his family member Jabir Moti, a listed gang member of the D-company, arrested by the Scotland Yard in a London hotel, on a tip-off from the FBI in August 2018.
Jabir Moti has been charged by the FBI with collecting illegal money earned from D-Company`s narcotics smuggling and has been facing an extradition trial in a London court. Reports suggest that Jabir Moti is the Director of Zafar Moti Capital Securities Pvt Ltd, located at Room 54-55, Ist Floor, Pakistan Stock Exchange Building, Stock Exchange Road, Karachi.
The CEO of this firm is Zafar Moti, who also runs a few other firms. Another company, BRP-MAC Securities Pvt Ltd, allegedly owned by Jabir Moti has Zafar`s wife Afshan Moti on its board. This company is located at 54, Pakistan Stock exchange Building, Karachi. Afshan resides at bunglow 31/1, Ist Girzi Street, Phase IV, Pakistan Defence Housing, Karachi, situated near Dawood`s one of hideouts in the port city of Pakistan.
Highly placed sources in the government said that once the entire trail of Dawood Ibrahim`s illegal money invested in the Pakistan Stock Exchange through his aide Jabir Moti is gathered, substantial records would be brought to the notice of the world to expose Pakistan`s dual policy on terrorism and its intelligence agency ISI`s nexus with the international crime syndicates.
The Indian agencies are also monitoring the extradition trial of Jabir Moti in London`s Westminster`s Magistrate court.
Jabir Moti is also accused of supplying drugs to overseas narcotics gangs. In the London Court, the FBI revealed, "Pakistani national Jabir Moti is a top lieutenant in D-company and reports directly to Dawood Ibrahim. Accused of drug smuggling, he is involved in laundering US$1.4 million on behalf of the D-company."
While FBI is hotly pursuing Jabir Moti`s extradition trial, the Pakistan High Commission in London is making all-out efforts to thwart the process as his subsequent criminal trial in the US can expose the nexus between Pakistan`s establishment with D-company`s organised crime and terror operations.
Fugitive underworld don Dawood Ibrahim investing drug money in Pakistan stock exchange after oversees assets freeze | India News
Fugitive underworld don Dawood Ibrahim investing drug money in Pakistan stock exchange after oversees assets freeze
Zee Media Bureau Jul 28, 2019, 10:24 AM IST,
These investments are being made through various capital securities firms in all the three stock exchange under in the PSX.
New Delhi: Even as India's most wanted fugitive underworld don Dawood Ibrahim's assets are frozen across the world, the notorious gangster continues to invest money, earned through his organised crime syndicate, in the Pakistan Stock Exchange (PSX).
These investments are being made through various capital securities firms in all the three stock exchange under in the PSX.
The Indian agencies are gathering clinching evidence against Dawood Ibrahim`s investment of illegal money into the PSX, earned through his crime syndicate, which primarily flourishes on drug smuggling, gun-running, Fake Indian Currency Notes (FICN) racket and extortion.
The D-company point man Jabir Moti, currently detained in a London jail, runs more than five front capital securities companies, all operating from the Karachi Stock Exchange, merged with the PSX in 2016.
Besides companies linked with Jabir Moti, D-company has also invested heavily, through various shell companies in Habib Bank`s subsidiary, Habib Metropolitan Financial Services (HMFS), a top equity brokerage firm in Pakistan.
Intelligence reports say Dawood Ibrahim was introduced to the senior management of Habib Bank by cricketer Javed Miandad, a former Senior Vice President of Habib Bank and father-in-law of Dawood's daughter Mehreen Ibrahim.
Habib Bank was charged by the US Department of Financial Services with money laundering and terror links in 2017. Habib Bank`s role is also under suspicion for backing D-company`s operations in Nepal as it runs the Nepalese Himalayan Bank in a joint venture project.
Reports say that around 2012, Dawood Ibrahim came in contact with the then Director of Karachi Stock Exchange Zafar Moti, through his family member Jabir Moti, a listed gang member of the D-company, arrested by the Scotland Yard in a London hotel, on a tip-off from the FBI in August 2018.
Jabir Moti has been charged by the FBI with collecting illegal money earned from D-Company`s narcotics smuggling and has been facing an extradition trial in a London court. Reports suggest that Jabir Moti is the Director of Zafar Moti Capital Securities Pvt Ltd, located at Room 54-55, Ist Floor, Pakistan Stock Exchange Building, Stock Exchange Road, Karachi.
The CEO of this firm is Zafar Moti, who also runs a few other firms. Another company, BRP-MAC Securities Pvt Ltd, allegedly owned by Jabir Moti has Zafar`s wife Afshan Moti on its board. This company is located at 54, Pakistan Stock exchange Building, Karachi. Afshan resides at bunglow 31/1, Ist Girzi Street, Phase IV, Pakistan Defence Housing, Karachi, situated near Dawood`s one of hideouts in the port city of Pakistan.
Highly placed sources in the government said that once the entire trail of Dawood Ibrahim`s illegal money invested in the Pakistan Stock Exchange through his aide Jabir Moti is gathered, substantial records would be brought to the notice of the world to expose Pakistan`s dual policy on terrorism and its intelligence agency ISI`s nexus with the international crime syndicates.
The Indian agencies are also monitoring the extradition trial of Jabir Moti in London`s Westminster`s Magistrate court.
Jabir Moti is also accused of supplying drugs to overseas narcotics gangs. In the London Court, the FBI revealed, "Pakistani national Jabir Moti is a top lieutenant in D-company and reports directly to Dawood Ibrahim. Accused of drug smuggling, he is involved in laundering US$1.4 million on behalf of the D-company."
While FBI is hotly pursuing Jabir Moti`s extradition trial, the Pakistan High Commission in London is making all-out efforts to thwart the process as his subsequent criminal trial in the US can expose the nexus between Pakistan`s establishment with D-company`s organised crime and terror operations.
Fugitive underworld don Dawood Ibrahim investing drug money in Pakistan stock exchange after oversees assets freeze | India News
Stocks lose 369 points to hit 41-month low
Our Equities Correspondent, Updated July 30, 2019
KARACHI: The stock market continued to drift lower on the first trading day of the week with KSE-100 index down 369.04 points (1.15 per cent) and close at 41-month low at 31,734.23.
While the foreign investors’ buying came to a halt, local institutions and individuals stood on the side-lines.
The index started off on a positive note as value hunters mustered courage to buy shares, now trading at dirt cheap valuations of 5.8 times the forward earnings.
However, the index could not maintain the upward momentum and succumbed to selling pressure, mainly on the political conditions that seemed to be heating up with the opposition’s demonstrations and the threat to move a no-confidence motion against the Senate chairman.
Finally, the increased participation in Pakistan Investment Bonds auction (accepted amount three years: Rs124.3 billion against Rs8.6bn in the previous auction with the cut-off yield at 14.25pc vs. 13.70pc in the last auction), reduced attractiveness of the equities in comparison to parking funds in government securities.
Meanwhile, the investors were further discouraged by some big ticket companies coming up with dismal results which sent the shares reeling down to intra-day low by 386 points.
Volumes declined again from 86.5 million shares to 45.5m shares (down 47pc day-on-day). Average traded value also receded by 22pc to reach $9.4m as against $12.1m on Friday.
Stocks that contributed significantly to the volumes included K-Electric, Maple Leaf Cement Factory (MLCF), TRG Pakistan, Pakistan Int. Bulk Terminal Ltd and Bank of Punjab, which formed 40pc of the total turnover.
Sector-wise selling pressure was witnessed in banks which fell 80 points and fertiliser 49 points. In the cements, MLCF was down 5.3pc, Pioneer Cement 5.2pc, Kohat Cement 3.8pc and D. G. Khan Cement 4.8pc were the major losers. Cement sector contributed 42 points to the day’s losses.
Among scrips, the top laggards in the index were Hub Power Company receding 40 points, United Bank Ltd 27 points Engro Corporation 27 points and Bank AlFalah Ltd 19 points. Most analysts call was sell on strength.
Published in Dawn, July 30th, 2019
Stocks lose 369 points to hit 41-month low - Newspaper - DAWN.COM
Our Equities Correspondent, Updated July 30, 2019
KARACHI: The stock market continued to drift lower on the first trading day of the week with KSE-100 index down 369.04 points (1.15 per cent) and close at 41-month low at 31,734.23.
While the foreign investors’ buying came to a halt, local institutions and individuals stood on the side-lines.
The index started off on a positive note as value hunters mustered courage to buy shares, now trading at dirt cheap valuations of 5.8 times the forward earnings.
However, the index could not maintain the upward momentum and succumbed to selling pressure, mainly on the political conditions that seemed to be heating up with the opposition’s demonstrations and the threat to move a no-confidence motion against the Senate chairman.
Finally, the increased participation in Pakistan Investment Bonds auction (accepted amount three years: Rs124.3 billion against Rs8.6bn in the previous auction with the cut-off yield at 14.25pc vs. 13.70pc in the last auction), reduced attractiveness of the equities in comparison to parking funds in government securities.
Meanwhile, the investors were further discouraged by some big ticket companies coming up with dismal results which sent the shares reeling down to intra-day low by 386 points.
Volumes declined again from 86.5 million shares to 45.5m shares (down 47pc day-on-day). Average traded value also receded by 22pc to reach $9.4m as against $12.1m on Friday.
Stocks that contributed significantly to the volumes included K-Electric, Maple Leaf Cement Factory (MLCF), TRG Pakistan, Pakistan Int. Bulk Terminal Ltd and Bank of Punjab, which formed 40pc of the total turnover.
Sector-wise selling pressure was witnessed in banks which fell 80 points and fertiliser 49 points. In the cements, MLCF was down 5.3pc, Pioneer Cement 5.2pc, Kohat Cement 3.8pc and D. G. Khan Cement 4.8pc were the major losers. Cement sector contributed 42 points to the day’s losses.
Among scrips, the top laggards in the index were Hub Power Company receding 40 points, United Bank Ltd 27 points Engro Corporation 27 points and Bank AlFalah Ltd 19 points. Most analysts call was sell on strength.
Published in Dawn, July 30th, 2019
Stocks lose 369 points to hit 41-month low - Newspaper - DAWN.COM
Inflation hits double digits after nearly six years
By Mubarak Zeb Khan
Updated August 02, 2019
ISLAMABAD: Inflation has entered double digits in the first month of the new fiscal year, the biggest increase in five years and nine months.
Inflation, measured by the Consumer Price Index (CPI), rose to 10.34 per cent in July this year from 8.9pc the preceding month, the Pakistan Bureau of Statistics said on Thursday. During the same month last year, inflation stood at 5.84pc.
The last time inflation entered the double digits was in November 2013 and recorded at 10.9pc.
The upward adjustments in prices of petroleum products over the past few months, followed by an increase in electricity and gas tariffs fuelled the total inflation. The government also introduced certain tax measures, the cumulative impact of which dragged the overall inflation to double digits. The rupee depreciation also led to an increase in prices of imported consumer and non-consumer items, especially raw material used in manufacturing of industrial products, over the past few months.
The government has projected an inflation target of 11pc to 13pc for the fiscal year 2019-20, compared to 7.3pc recorded in 2018-19. Price levels, perked up in the first month of the current fiscal year, appear to have been driven by a spike in non-food inflation in July.
The CPI tracks the prices of around 480 commodities every month in urban centres across the country.
Food inflation was up 9.2pc on an annual basis, but surged 1.5pc on a monthly basis. Prices of non-perishable food items rose by 7.85pc and those of perishable products by 8.06pc in July.
Food items whose prices increased the most in July were: potatoes 16.84pc, pulse moong 5.41pc, eggs 5.06pc, gur 4.80pc, pulse mash 4.50pc, wheat flour 3.58pc, fresh vegetables 3.56pc, pulse masoor 2.83pc, vegetable ghee 2.49pc, bakery and confectionary 2.45pc, rice 1.77pc, milk fresh 1.41pc, pulse gram 1.31pc, tomatoes 1.17pc, sugar 1.09pc and meat 0.93pc. In the same category, however, prices of chicken declined by 8.26pc, fresh fruit 7.95pc, onions 1.73pc and betel leaves & nuts 0.65pc.
On the other hand, non-food inflation increased 11.1pc on a yearly basis and 2.8pc on a monthly basis. The increase is mainly driven by higher oil prices over the past few months and the combined impact of the depreciation of the exchange rate. The government passed on this increase to domestic consumers.
Non-food prices also remained under pressure on account of education index, which increased to 6.9pc. Clothing and footwear went up by 7.4pc, housing, water, electricity, gas and other fuels by 12.74pc, furnishing and household equipment by 10.17pc, health by 8.97pc, transport by 14.67 pc and recreation and culture by 7.67pc.
Core inflation, measured by excluding volatile food and energy prices, was recorded at 7.8pc on a yearly basis and 1.7pc on a monthly basis.
On July 16, the State Bank of Pakistan has raised its main policy rate by 100 basis points to 13.25 per cent, citing increased inflationary pressures and a likely near-term rise in prices from higher utility costs.
The gradual build-up of domestic demand is evident in the rising core inflation. Of the 89 commodity groups of CPI, it covers the price movement of 43 items. Due to a continuous increase in education and healthcare costs, core inflation remained higher on average, compared to the same period last year.
Average inflation measured by the Sensitive Price Index crawled up 12.16pc in July as against 3.58pc the previous year, while the Wholesale Price Index was up 13.46pc, compared to 10.50pc in 2018-19.
Published in Dawn, August 2nd, 2019
Inflation hits double digits after nearly six years - Newspaper - DAWN.COM
By Mubarak Zeb Khan
Updated August 02, 2019
ISLAMABAD: Inflation has entered double digits in the first month of the new fiscal year, the biggest increase in five years and nine months.
Inflation, measured by the Consumer Price Index (CPI), rose to 10.34 per cent in July this year from 8.9pc the preceding month, the Pakistan Bureau of Statistics said on Thursday. During the same month last year, inflation stood at 5.84pc.
The last time inflation entered the double digits was in November 2013 and recorded at 10.9pc.
The upward adjustments in prices of petroleum products over the past few months, followed by an increase in electricity and gas tariffs fuelled the total inflation. The government also introduced certain tax measures, the cumulative impact of which dragged the overall inflation to double digits. The rupee depreciation also led to an increase in prices of imported consumer and non-consumer items, especially raw material used in manufacturing of industrial products, over the past few months.
The government has projected an inflation target of 11pc to 13pc for the fiscal year 2019-20, compared to 7.3pc recorded in 2018-19. Price levels, perked up in the first month of the current fiscal year, appear to have been driven by a spike in non-food inflation in July.
Upward adjustments in prices of petroleum products, electricity and gas fuel total inflation
The CPI tracks the prices of around 480 commodities every month in urban centres across the country.
Food inflation was up 9.2pc on an annual basis, but surged 1.5pc on a monthly basis. Prices of non-perishable food items rose by 7.85pc and those of perishable products by 8.06pc in July.
Food items whose prices increased the most in July were: potatoes 16.84pc, pulse moong 5.41pc, eggs 5.06pc, gur 4.80pc, pulse mash 4.50pc, wheat flour 3.58pc, fresh vegetables 3.56pc, pulse masoor 2.83pc, vegetable ghee 2.49pc, bakery and confectionary 2.45pc, rice 1.77pc, milk fresh 1.41pc, pulse gram 1.31pc, tomatoes 1.17pc, sugar 1.09pc and meat 0.93pc. In the same category, however, prices of chicken declined by 8.26pc, fresh fruit 7.95pc, onions 1.73pc and betel leaves & nuts 0.65pc.
On the other hand, non-food inflation increased 11.1pc on a yearly basis and 2.8pc on a monthly basis. The increase is mainly driven by higher oil prices over the past few months and the combined impact of the depreciation of the exchange rate. The government passed on this increase to domestic consumers.
Non-food prices also remained under pressure on account of education index, which increased to 6.9pc. Clothing and footwear went up by 7.4pc, housing, water, electricity, gas and other fuels by 12.74pc, furnishing and household equipment by 10.17pc, health by 8.97pc, transport by 14.67 pc and recreation and culture by 7.67pc.
Core inflation, measured by excluding volatile food and energy prices, was recorded at 7.8pc on a yearly basis and 1.7pc on a monthly basis.
On July 16, the State Bank of Pakistan has raised its main policy rate by 100 basis points to 13.25 per cent, citing increased inflationary pressures and a likely near-term rise in prices from higher utility costs.
The gradual build-up of domestic demand is evident in the rising core inflation. Of the 89 commodity groups of CPI, it covers the price movement of 43 items. Due to a continuous increase in education and healthcare costs, core inflation remained higher on average, compared to the same period last year.
Average inflation measured by the Sensitive Price Index crawled up 12.16pc in July as against 3.58pc the previous year, while the Wholesale Price Index was up 13.46pc, compared to 10.50pc in 2018-19.
Published in Dawn, August 2nd, 2019
Inflation hits double digits after nearly six years - Newspaper - DAWN.COM
CPEC is dead. Somebody tell Beijing.
Farooq Tirmizi, May 30 · 11 min read
Pakistan’s political and military leadership, and business elite, have stopped investing their capital in CPEC. Now how do we get out of it?
It’s over. If ever there was a thought within Pakistan’s leadership — political, military, and business — that Beijing could replace Washington as the foreign capital with the most influence in Islamabad, that idea is now firmly dead. We just have not gotten around to telling China yet.
Over the past few weeks, Profit has spoken to several sources in both Pakistan’s business elite circles as well as people who are familiar with the thought process of the military leadership and the picture emerging is not a favourable one of the relationship with China: the more Pakistanis learn about the true costs of the China Pakistan Economic Corridor (CPEC), the less inclined they are to want to participate any further than we already have.
If anything, the signal coming from the country’s establishment appears to be that, far from pivoting Pakistan’s economic and political orientation towards China, Pakistan should retain its historical role as the country that is able to balance its relationship with both China and the United States.
This emerging consensus — particularly within the military leadership — represents a subtle but important shift in the relationship with Beijing. Pakistan stared long and hard at the costs and benefits of becoming an integral part of what Beijing hopes will become the new Pax Sinica world order, and found it wanting. For all its flaws, Pax Americana still offers Pakistan a good deal. Nobody in Pakistan’s leadership wants to offend China, but nobody wants to bend over backwards to become a Chinese satellite state either.
Why CPEC is a raw deal
The biggest difference between the Pax Sinica and Pax Americana is one of how each superpower defines its own self-interest. The United States, though far from perfect, has a somewhat more enlightened view of the world order and America’s place in it: at least until the advent of President Donald Trump, the United States wanted to create a world order which is designed to benefit both the United States and its allies. China it seems, by contrast, wants to build a world order where China’s needs are met first and foremost, and the rest of the world’s needs — including those of its allies — are at best secondary considerations, and at worst, not even considerations at all.
We will explain why we think this difference exists, and how it impacts Pakistan, but first, it is important to recognise why it may have developed in the first place.
The United States started becoming a powerful country in the 1890s as its wealth grew, but in the early years, the US did not make the effort to translate that wealth into significant military power, though it developed increasingly sophisticated military capabilities over the next 50 years.
By the end of World War II, however, the United States was not just the richest country in the world, it was richer than the rest of the world combined. (Seriously, for over 10 years following the war, the United States accounted for over half of global GDP.) It was also, despite some threats from the Soviet Union, more powerful militarily than the rest of the world.
It was in that heady moment of near absolute power that the United States stumbled into having to create Pax Americana, never having fully wanted a globally dominant role, and never having historically seen itself as the arbiter and guarantor of global peace and stability. That absolute power gave America a confidence that is unrivaled in history, and the accidental nature of its arrival in power allowed it to be generous with those who were losing it.
As a result, the system that the United States designed — the Bretton Woods institutional order, the Marshall Plan, etc. — were all designed to enable mutually beneficial relationships between Washington and its allies. America was unquestionably the leader, but it was a confident leader that did not feel the need to thump its chest and point out that it was the leader.
China, by contrast, is arriving at its Great Power status in a very different set of circumstances. We tend to speak of the ‘rise’ of China, but the truth is that for most of human history, China has been the richest and most powerful country on earth. The past three hundred years where this has not been the case are actually a historical anomaly, and, from the Chinese perspective, an embarrassing interregnum from which they must recover.
In other words, China is not merely stumbling into Great Power status: it wants it, it believes it deserves it, and it will brook no opposition to getting what it wants.
The system that China has designed, therefore, is geared towards a completely different goal: unlike the United States, which was comfortable sharing its wealth and power as a means of growing wealth for both itself and its allies, China wants to create a global system where wealth and power flow in the direction of China as a means of strengthening it relative to its main rival (the United States), even if that means weakening its allies in the process.
This latter system has obvious flaws from the perspective of Pakistan, which has seen itself as one of modern China’s oldest and staunchest allies. The deal that Islamabad is getting from Beijing in the form of CPEC looks impressive from a distance, but is in fact far from a mutually beneficial relationship. CPEC makes British colonialism in South Asia look generous by comparison.
The flaws in CPEC
The biggest so-called mystery about CPEC is as follows: if CPEC was supposed to be such a huge bonanza for Pakistan in terms of investment, which is it not showing up in the foreign direct investment (FDI) numbers? Why is Pakistan’s current account balance still negative? In fact, why is Pakistan’s current account balance actually getting worse?
The answer is relatively straightforward: because CPEC is not an investment into Pakistan, it is structured as a resource extraction exercise. Here is how it works: China announces that it has invested in a project in Pakistan worth, let’s say $1 billion. That $1 billion, however, is required to mostly be spent on Chinese equipment, and labour, a significant portion of which is to be imported from China as well, with very little by way of supplies coming from the local economy.
That $1 billion, therefore, never hits Pakistan’s economy as an investment. It is $1 billion that goes from the Chinese government or state-owned company to a state-owned company within China to pay for equipment. Even the Chinese labour gets its salaries deposited into bank accounts within China. The money, in other words, stays completely within China and so never shows up as foreign investment into Pakistan.
Where it does show up is in the trade statistics: that $1 billion of equipment will show up as an import, against which Pakistan will have to arrange foreign currency from somewhere. And it will show up as a liability on the balance sheets of whichever company or government entity is contracting with the Chinese government or state-owned company.
Let us recap what we get and what China gets out of this so-called $1 billion investment.
China gets:
· $1 billion in sales for a Chinese state-owned company
· $1 billion in new loans for a Chinese state-owned bank at very high interest rates
Pakistan gets:
· $0 in investment
· $1 billion in imports and increase in net trade deficit
· $1 billion in liabilities for a Pakistani company or government entity
As is evident from the above, this is an arrangement designed purely to benefit one party and that party is not Pakistan. It could still work out in Pakistan’s favour if the economic value of the asset being built was greater than the $1 billion in liabilities taken on to build it. Unfortunately, more often than not, it is far from clear as to whether that is the case.
This example cited above, by the way, is not hypothetical. It is actually showing up in Pakistan’s macroeconomic numbers.
Pakistan’s imports from China have dramatically increased since 2013, when CPEC was first announced. Prior to 2013, Pakistan’s imports from China had been rising because of the 2007 China-Pakistan Free Trade Agreement, but had stabilized to around $6.6 billion a year. After 2013, the rise has been very steep.
We estimated how much of that is CPEC-related by assuming that the pre-2013 levels of imports from China can be categorized as the “normal” level and the amounts above that are broadly CPEC-related. By our calculations, using data from the Pakistan Bureau of Statistics, we estimate that Pakistan’s CPEC-related imports have come to $31 billion over the past six years.
Does that number sound familiar? It is very close to the number that was originally touted as the total economic value of CPEC’s “fast-track” projects. The government of China was not lying when they said CPEC would be worth that much. They just left out to whom.
The actual investment flows from China during that time have been higher than in the past, it is true, but still relatively smaller compared to this other method. Since 2013, China’s net investment into Pakistan has been $2.5 billion, much higher than the $813 million China invested in Pakistan in the 10 years prior to 2013, but still a relatively small sum compared to the wild projections and promises that the Pakistani press and government wanted to believe when it was first announced.
The shift in Pakistani thinking
While Pakistan’s civilian and military leadership is prone to making bad decisions, they are not completely stupid. They can see these numbers, and they are privy to far more details than have been told to the public about the specific terms of the agreements with China for CPEC projects. And it is becoming increasingly clear that they are becoming deeply uncomfortable with the direction this has taken Pakistan.
Neither the civilian politicians nor the military leadership want to accept the blame for what is clearly a massive blunder on the part of the government of Pakistan in negotiating the CPEC contracts. If any lawyers reviewed them, it is unclear if they understood them, or if their views were taken into consideration at all by the decision-makers. (Hint: there is a reason why good lawyers in the United States are rich: American businesses are willing to pay big money to them to help avoid precisely this kind of massive blunder. It is an investment well worth it.)
The deed is done now, however, and Pakistan cannot easily extricate itself from these arrangements. But, sources familiar with the military leadership’s thinking tell Profit, the leadership in the military has decided to start following the first rule of being in a hole: stop digging. A public renunciation of CPEC would be too embarrassing for the government — both the politicians and the Army — but they are certainly not willing to undertake any further agreements with the government of China.
According to one source, one factor that helped influence the military leadership came when even the military-owned FWO was subjected to exploitative lending contracts by Chinese state-owned companies for construction of CPEC infrastructure projects. It may not be worth risking the relationship with China to try to wriggle out of those contracts, but it was enough to disabuse the top brass of the notion that CPEC would be part of a mutually beneficial relationship with China.
That reluctance to dive into further CPEC-related projects is on display in Pakistan’s business leadership’s decision as well. Take Engro, for instance. In 2016, it appeared that the company was going to jump in head on into the CPEC-related energy projects and direct significant investment towards them. However, in the ensuing three years, Engro appears to have changed course: while it is continuing its investment in Thar Coal energy projects, those are in partnership with the Sindh government. And it is not considering any additional investments in CPEC-linked areas.
CPEC is dead. What comes next?
Slowly but surely, CPEC will die off as a talking point in the government of Pakistan and as a topic of conversation in the media. But the government of Pakistan is still stuck with the agreements they have already signed, and with the expectations they have raised in Beijing that CPEC will be a showcase for the broader Belt and Road Initiative (BRI) for China.
Those expectations will now need to be tempered. Sources familiar with the military leadership’s thought process on the matter say that the military — which sets the foreign policy agenda in Pakistan — is now contemplating a return to the pre-CPEC Pakistani foreign policy of serving as one of the few countries that was able to balance an alliance with both the United States and China.
That is likely easier said than done, however. Firstly, China is not in the mood to play second-fiddle to the United States anymore, in Islamabad or anywhere else in the world. This current Chinese government — under President Xi Jinping — is considerably more assertive than it has ever been in the past. They are unlikely to take kindly to Pakistan scaling back its share of the commitment to CPEC.
And secondly, Pakistan had made a very overt turn towards Beijing and away from Washington. The United States is not exactly in the mood to have Pakistan back as an ally either, at least not without significant concessions on Pakistan’s part. It is unclear whether Pakistan will be willing to make all of those concessions, but it is at least a conversation they will have to consider if the pivot back towards Pakistan’s historic foreign policy arrangements are to be successful.
Sources familiar with the matter say that the government of Pakistan has already made initial overtures to the United States and made it clear that Islamabad’s pivot towards Beijing has effectively been cancelled. Those overtures certainly did not hurt as Pakistan negotiated with the International Monetary Fund (IMF) for its 12th bailout in three decades.
What does this mean for the Pakistani economy?
Pakistan’s business leadership — accustomed as it is to the ways of Britain and the United States — has always been significantly more comfortable staying in the Pax Americana orbit than it ever was going to be in Pax Sinica. Think about it: would the typical Pakistani business executive send their child to Harvard or to Tsinghua University? Are Pakistani executives likely to be comfortable negotiating with their American or European counterparts or would they be comfortable seeking approval for everything they do from Zhongnanhai? Is a Pakistani general more comfortable in Sandhurst and West Point or whatever the Chinese equivalent is?
In material terms, the direction of the Pakistani economy is unlikely to be too dissimilar from what it has been in our history. Pakistan’s single largest export market is the United States and the largest geography to which it exports is the European Union. Investment flows from the US and Europe dwarf — even in the CPEC era — anything that China ever invested in Pakistan.
But in terms of what the future direction of the country could have been, this will be very different. It will mean all of those people learning Mandarin can either stop or continue knowing that it will likely just be a curiosity rather than an economic need. It will mean that Pakistani businesses can stop pretending to have a CPEC strategy. And it will mean that the supposed disentanglement from the US-dominated global financial system need not happen.
The more things change, the more they stay the same.
CPEC is dead. Somebody tell Beijing.
Farooq Tirmizi, May 30 · 11 min read
Pakistan’s political and military leadership, and business elite, have stopped investing their capital in CPEC. Now how do we get out of it?
It’s over. If ever there was a thought within Pakistan’s leadership — political, military, and business — that Beijing could replace Washington as the foreign capital with the most influence in Islamabad, that idea is now firmly dead. We just have not gotten around to telling China yet.
Over the past few weeks, Profit has spoken to several sources in both Pakistan’s business elite circles as well as people who are familiar with the thought process of the military leadership and the picture emerging is not a favourable one of the relationship with China: the more Pakistanis learn about the true costs of the China Pakistan Economic Corridor (CPEC), the less inclined they are to want to participate any further than we already have.
If anything, the signal coming from the country’s establishment appears to be that, far from pivoting Pakistan’s economic and political orientation towards China, Pakistan should retain its historical role as the country that is able to balance its relationship with both China and the United States.
This emerging consensus — particularly within the military leadership — represents a subtle but important shift in the relationship with Beijing. Pakistan stared long and hard at the costs and benefits of becoming an integral part of what Beijing hopes will become the new Pax Sinica world order, and found it wanting. For all its flaws, Pax Americana still offers Pakistan a good deal. Nobody in Pakistan’s leadership wants to offend China, but nobody wants to bend over backwards to become a Chinese satellite state either.
Why CPEC is a raw deal
The biggest difference between the Pax Sinica and Pax Americana is one of how each superpower defines its own self-interest. The United States, though far from perfect, has a somewhat more enlightened view of the world order and America’s place in it: at least until the advent of President Donald Trump, the United States wanted to create a world order which is designed to benefit both the United States and its allies. China it seems, by contrast, wants to build a world order where China’s needs are met first and foremost, and the rest of the world’s needs — including those of its allies — are at best secondary considerations, and at worst, not even considerations at all.
We will explain why we think this difference exists, and how it impacts Pakistan, but first, it is important to recognise why it may have developed in the first place.
The United States started becoming a powerful country in the 1890s as its wealth grew, but in the early years, the US did not make the effort to translate that wealth into significant military power, though it developed increasingly sophisticated military capabilities over the next 50 years.
By the end of World War II, however, the United States was not just the richest country in the world, it was richer than the rest of the world combined. (Seriously, for over 10 years following the war, the United States accounted for over half of global GDP.) It was also, despite some threats from the Soviet Union, more powerful militarily than the rest of the world.
It was in that heady moment of near absolute power that the United States stumbled into having to create Pax Americana, never having fully wanted a globally dominant role, and never having historically seen itself as the arbiter and guarantor of global peace and stability. That absolute power gave America a confidence that is unrivaled in history, and the accidental nature of its arrival in power allowed it to be generous with those who were losing it.
As a result, the system that the United States designed — the Bretton Woods institutional order, the Marshall Plan, etc. — were all designed to enable mutually beneficial relationships between Washington and its allies. America was unquestionably the leader, but it was a confident leader that did not feel the need to thump its chest and point out that it was the leader.
China, by contrast, is arriving at its Great Power status in a very different set of circumstances. We tend to speak of the ‘rise’ of China, but the truth is that for most of human history, China has been the richest and most powerful country on earth. The past three hundred years where this has not been the case are actually a historical anomaly, and, from the Chinese perspective, an embarrassing interregnum from which they must recover.
In other words, China is not merely stumbling into Great Power status: it wants it, it believes it deserves it, and it will brook no opposition to getting what it wants.
The system that China has designed, therefore, is geared towards a completely different goal: unlike the United States, which was comfortable sharing its wealth and power as a means of growing wealth for both itself and its allies, China wants to create a global system where wealth and power flow in the direction of China as a means of strengthening it relative to its main rival (the United States), even if that means weakening its allies in the process.
This latter system has obvious flaws from the perspective of Pakistan, which has seen itself as one of modern China’s oldest and staunchest allies. The deal that Islamabad is getting from Beijing in the form of CPEC looks impressive from a distance, but is in fact far from a mutually beneficial relationship. CPEC makes British colonialism in South Asia look generous by comparison.
The flaws in CPEC
The biggest so-called mystery about CPEC is as follows: if CPEC was supposed to be such a huge bonanza for Pakistan in terms of investment, which is it not showing up in the foreign direct investment (FDI) numbers? Why is Pakistan’s current account balance still negative? In fact, why is Pakistan’s current account balance actually getting worse?
The answer is relatively straightforward: because CPEC is not an investment into Pakistan, it is structured as a resource extraction exercise. Here is how it works: China announces that it has invested in a project in Pakistan worth, let’s say $1 billion. That $1 billion, however, is required to mostly be spent on Chinese equipment, and labour, a significant portion of which is to be imported from China as well, with very little by way of supplies coming from the local economy.
That $1 billion, therefore, never hits Pakistan’s economy as an investment. It is $1 billion that goes from the Chinese government or state-owned company to a state-owned company within China to pay for equipment. Even the Chinese labour gets its salaries deposited into bank accounts within China. The money, in other words, stays completely within China and so never shows up as foreign investment into Pakistan.
Where it does show up is in the trade statistics: that $1 billion of equipment will show up as an import, against which Pakistan will have to arrange foreign currency from somewhere. And it will show up as a liability on the balance sheets of whichever company or government entity is contracting with the Chinese government or state-owned company.
Let us recap what we get and what China gets out of this so-called $1 billion investment.
China gets:
· $1 billion in sales for a Chinese state-owned company
· $1 billion in new loans for a Chinese state-owned bank at very high interest rates
Pakistan gets:
· $0 in investment
· $1 billion in imports and increase in net trade deficit
· $1 billion in liabilities for a Pakistani company or government entity
As is evident from the above, this is an arrangement designed purely to benefit one party and that party is not Pakistan. It could still work out in Pakistan’s favour if the economic value of the asset being built was greater than the $1 billion in liabilities taken on to build it. Unfortunately, more often than not, it is far from clear as to whether that is the case.
This example cited above, by the way, is not hypothetical. It is actually showing up in Pakistan’s macroeconomic numbers.
Pakistan’s imports from China have dramatically increased since 2013, when CPEC was first announced. Prior to 2013, Pakistan’s imports from China had been rising because of the 2007 China-Pakistan Free Trade Agreement, but had stabilized to around $6.6 billion a year. After 2013, the rise has been very steep.
We estimated how much of that is CPEC-related by assuming that the pre-2013 levels of imports from China can be categorized as the “normal” level and the amounts above that are broadly CPEC-related. By our calculations, using data from the Pakistan Bureau of Statistics, we estimate that Pakistan’s CPEC-related imports have come to $31 billion over the past six years.
Does that number sound familiar? It is very close to the number that was originally touted as the total economic value of CPEC’s “fast-track” projects. The government of China was not lying when they said CPEC would be worth that much. They just left out to whom.
The actual investment flows from China during that time have been higher than in the past, it is true, but still relatively smaller compared to this other method. Since 2013, China’s net investment into Pakistan has been $2.5 billion, much higher than the $813 million China invested in Pakistan in the 10 years prior to 2013, but still a relatively small sum compared to the wild projections and promises that the Pakistani press and government wanted to believe when it was first announced.
The shift in Pakistani thinking
While Pakistan’s civilian and military leadership is prone to making bad decisions, they are not completely stupid. They can see these numbers, and they are privy to far more details than have been told to the public about the specific terms of the agreements with China for CPEC projects. And it is becoming increasingly clear that they are becoming deeply uncomfortable with the direction this has taken Pakistan.
Neither the civilian politicians nor the military leadership want to accept the blame for what is clearly a massive blunder on the part of the government of Pakistan in negotiating the CPEC contracts. If any lawyers reviewed them, it is unclear if they understood them, or if their views were taken into consideration at all by the decision-makers. (Hint: there is a reason why good lawyers in the United States are rich: American businesses are willing to pay big money to them to help avoid precisely this kind of massive blunder. It is an investment well worth it.)
The deed is done now, however, and Pakistan cannot easily extricate itself from these arrangements. But, sources familiar with the military leadership’s thinking tell Profit, the leadership in the military has decided to start following the first rule of being in a hole: stop digging. A public renunciation of CPEC would be too embarrassing for the government — both the politicians and the Army — but they are certainly not willing to undertake any further agreements with the government of China.
According to one source, one factor that helped influence the military leadership came when even the military-owned FWO was subjected to exploitative lending contracts by Chinese state-owned companies for construction of CPEC infrastructure projects. It may not be worth risking the relationship with China to try to wriggle out of those contracts, but it was enough to disabuse the top brass of the notion that CPEC would be part of a mutually beneficial relationship with China.
That reluctance to dive into further CPEC-related projects is on display in Pakistan’s business leadership’s decision as well. Take Engro, for instance. In 2016, it appeared that the company was going to jump in head on into the CPEC-related energy projects and direct significant investment towards them. However, in the ensuing three years, Engro appears to have changed course: while it is continuing its investment in Thar Coal energy projects, those are in partnership with the Sindh government. And it is not considering any additional investments in CPEC-linked areas.
CPEC is dead. What comes next?
Slowly but surely, CPEC will die off as a talking point in the government of Pakistan and as a topic of conversation in the media. But the government of Pakistan is still stuck with the agreements they have already signed, and with the expectations they have raised in Beijing that CPEC will be a showcase for the broader Belt and Road Initiative (BRI) for China.
Those expectations will now need to be tempered. Sources familiar with the military leadership’s thought process on the matter say that the military — which sets the foreign policy agenda in Pakistan — is now contemplating a return to the pre-CPEC Pakistani foreign policy of serving as one of the few countries that was able to balance an alliance with both the United States and China.
That is likely easier said than done, however. Firstly, China is not in the mood to play second-fiddle to the United States anymore, in Islamabad or anywhere else in the world. This current Chinese government — under President Xi Jinping — is considerably more assertive than it has ever been in the past. They are unlikely to take kindly to Pakistan scaling back its share of the commitment to CPEC.
And secondly, Pakistan had made a very overt turn towards Beijing and away from Washington. The United States is not exactly in the mood to have Pakistan back as an ally either, at least not without significant concessions on Pakistan’s part. It is unclear whether Pakistan will be willing to make all of those concessions, but it is at least a conversation they will have to consider if the pivot back towards Pakistan’s historic foreign policy arrangements are to be successful.
Sources familiar with the matter say that the government of Pakistan has already made initial overtures to the United States and made it clear that Islamabad’s pivot towards Beijing has effectively been cancelled. Those overtures certainly did not hurt as Pakistan negotiated with the International Monetary Fund (IMF) for its 12th bailout in three decades.
What does this mean for the Pakistani economy?
Pakistan’s business leadership — accustomed as it is to the ways of Britain and the United States — has always been significantly more comfortable staying in the Pax Americana orbit than it ever was going to be in Pax Sinica. Think about it: would the typical Pakistani business executive send their child to Harvard or to Tsinghua University? Are Pakistani executives likely to be comfortable negotiating with their American or European counterparts or would they be comfortable seeking approval for everything they do from Zhongnanhai? Is a Pakistani general more comfortable in Sandhurst and West Point or whatever the Chinese equivalent is?
In material terms, the direction of the Pakistani economy is unlikely to be too dissimilar from what it has been in our history. Pakistan’s single largest export market is the United States and the largest geography to which it exports is the European Union. Investment flows from the US and Europe dwarf — even in the CPEC era — anything that China ever invested in Pakistan.
But in terms of what the future direction of the country could have been, this will be very different. It will mean all of those people learning Mandarin can either stop or continue knowing that it will likely just be a curiosity rather than an economic need. It will mean that Pakistani businesses can stop pretending to have a CPEC strategy. And it will mean that the supposed disentanglement from the US-dominated global financial system need not happen.
The more things change, the more they stay the same.
CPEC is dead. Somebody tell Beijing.
Reaction :CPEC is dead. Somebody tell Beijing.
Farooq Tirmizi, May 30 · 11 min read
Pakistan’s political and military leadership, and business elite, have stopped investing their capital in CPEC. Now how do we get out of it?
View attachment 8759
It’s over. If ever there was a thought within Pakistan’s leadership — political, military, and business — that Beijing could replace Washington as the foreign capital with the most influence in Islamabad, that idea is now firmly dead. We just have not gotten around to telling China yet.
Over the past few weeks, Profit has spoken to several sources in both Pakistan’s business elite circles as well as people who are familiar with the thought process of the military leadership and the picture emerging is not a favourable one of the relationship with China: the more Pakistanis learn about the true costs of the China Pakistan Economic Corridor (CPEC), the less inclined they are to want to participate any further than we already have.
If anything, the signal coming from the country’s establishment appears to be that, far from pivoting Pakistan’s economic and political orientation towards China, Pakistan should retain its historical role as the country that is able to balance its relationship with both China and the United States.
This emerging consensus — particularly within the military leadership — represents a subtle but important shift in the relationship with Beijing. Pakistan stared long and hard at the costs and benefits of becoming an integral part of what Beijing hopes will become the new Pax Sinica world order, and found it wanting. For all its flaws, Pax Americana still offers Pakistan a good deal. Nobody in Pakistan’s leadership wants to offend China, but nobody wants to bend over backwards to become a Chinese satellite state either.
Why CPEC is a raw deal
The biggest difference between the Pax Sinica and Pax Americana is one of how each superpower defines its own self-interest. The United States, though far from perfect, has a somewhat more enlightened view of the world order and America’s place in it: at least until the advent of President Donald Trump, the United States wanted to create a world order which is designed to benefit both the United States and its allies. China it seems, by contrast, wants to build a world order where China’s needs are met first and foremost, and the rest of the world’s needs — including those of its allies — are at best secondary considerations, and at worst, not even considerations at all.
We will explain why we think this difference exists, and how it impacts Pakistan, but first, it is important to recognise why it may have developed in the first place.
The United States started becoming a powerful country in the 1890s as its wealth grew, but in the early years, the US did not make the effort to translate that wealth into significant military power, though it developed increasingly sophisticated military capabilities over the next 50 years.
By the end of World War II, however, the United States was not just the richest country in the world, it was richer than the rest of the world combined. (Seriously, for over 10 years following the war, the United States accounted for over half of global GDP.) It was also, despite some threats from the Soviet Union, more powerful militarily than the rest of the world.
It was in that heady moment of near absolute power that the United States stumbled into having to create Pax Americana, never having fully wanted a globally dominant role, and never having historically seen itself as the arbiter and guarantor of global peace and stability. That absolute power gave America a confidence that is unrivaled in history, and the accidental nature of its arrival in power allowed it to be generous with those who were losing it.
As a result, the system that the United States designed — the Bretton Woods institutional order, the Marshall Plan, etc. — were all designed to enable mutually beneficial relationships between Washington and its allies. America was unquestionably the leader, but it was a confident leader that did not feel the need to thump its chest and point out that it was the leader.
China, by contrast, is arriving at its Great Power status in a very different set of circumstances. We tend to speak of the ‘rise’ of China, but the truth is that for most of human history, China has been the richest and most powerful country on earth. The past three hundred years where this has not been the case are actually a historical anomaly, and, from the Chinese perspective, an embarrassing interregnum from which they must recover.
In other words, China is not merely stumbling into Great Power status: it wants it, it believes it deserves it, and it will brook no opposition to getting what it wants.
The system that China has designed, therefore, is geared towards a completely different goal: unlike the United States, which was comfortable sharing its wealth and power as a means of growing wealth for both itself and its allies, China wants to create a global system where wealth and power flow in the direction of China as a means of strengthening it relative to its main rival (the United States), even if that means weakening its allies in the process.
This latter system has obvious flaws from the perspective of Pakistan, which has seen itself as one of modern China’s oldest and staunchest allies. The deal that Islamabad is getting from Beijing in the form of CPEC looks impressive from a distance, but is in fact far from a mutually beneficial relationship. CPEC makes British colonialism in South Asia look generous by comparison.
The flaws in CPEC
The biggest so-called mystery about CPEC is as follows: if CPEC was supposed to be such a huge bonanza for Pakistan in terms of investment, which is it not showing up in the foreign direct investment (FDI) numbers? Why is Pakistan’s current account balance still negative? In fact, why is Pakistan’s current account balance actually getting worse?
The answer is relatively straightforward: because CPEC is not an investment into Pakistan, it is structured as a resource extraction exercise. Here is how it works: China announces that it has invested in a project in Pakistan worth, let’s say $1 billion. That $1 billion, however, is required to mostly be spent on Chinese equipment, and labour, a significant portion of which is to be imported from China as well, with very little by way of supplies coming from the local economy.
That $1 billion, therefore, never hits Pakistan’s economy as an investment. It is $1 billion that goes from the Chinese government or state-owned company to a state-owned company within China to pay for equipment. Even the Chinese labour gets its salaries deposited into bank accounts within China. The money, in other words, stays completely within China and so never shows up as foreign investment into Pakistan.
Where it does show up is in the trade statistics: that $1 billion of equipment will show up as an import, against which Pakistan will have to arrange foreign currency from somewhere. And it will show up as a liability on the balance sheets of whichever company or government entity is contracting with the Chinese government or state-owned company.
Let us recap what we get and what China gets out of this so-called $1 billion investment.
China gets:
· $1 billion in sales for a Chinese state-owned company
· $1 billion in new loans for a Chinese state-owned bank at very high interest rates
Pakistan gets:
· $0 in investment
· $1 billion in imports and increase in net trade deficit
· $1 billion in liabilities for a Pakistani company or government entity
As is evident from the above, this is an arrangement designed purely to benefit one party and that party is not Pakistan. It could still work out in Pakistan’s favour if the economic value of the asset being built was greater than the $1 billion in liabilities taken on to build it. Unfortunately, more often than not, it is far from clear as to whether that is the case.
This example cited above, by the way, is not hypothetical. It is actually showing up in Pakistan’s macroeconomic numbers.
Pakistan’s imports from China have dramatically increased since 2013, when CPEC was first announced. Prior to 2013, Pakistan’s imports from China had been rising because of the 2007 China-Pakistan Free Trade Agreement, but had stabilized to around $6.6 billion a year. After 2013, the rise has been very steep.
We estimated how much of that is CPEC-related by assuming that the pre-2013 levels of imports from China can be categorized as the “normal” level and the amounts above that are broadly CPEC-related. By our calculations, using data from the Pakistan Bureau of Statistics, we estimate that Pakistan’s CPEC-related imports have come to $31 billion over the past six years.
Does that number sound familiar? It is very close to the number that was originally touted as the total economic value of CPEC’s “fast-track” projects. The government of China was not lying when they said CPEC would be worth that much. They just left out to whom.
The actual investment flows from China during that time have been higher than in the past, it is true, but still relatively smaller compared to this other method. Since 2013, China’s net investment into Pakistan has been $2.5 billion, much higher than the $813 million China invested in Pakistan in the 10 years prior to 2013, but still a relatively small sum compared to the wild projections and promises that the Pakistani press and government wanted to believe when it was first announced.
The shift in Pakistani thinking
While Pakistan’s civilian and military leadership is prone to making bad decisions, they are not completely stupid. They can see these numbers, and they are privy to far more details than have been told to the public about the specific terms of the agreements with China for CPEC projects. And it is becoming increasingly clear that they are becoming deeply uncomfortable with the direction this has taken Pakistan.
Neither the civilian politicians nor the military leadership want to accept the blame for what is clearly a massive blunder on the part of the government of Pakistan in negotiating the CPEC contracts. If any lawyers reviewed them, it is unclear if they understood them, or if their views were taken into consideration at all by the decision-makers. (Hint: there is a reason why good lawyers in the United States are rich: American businesses are willing to pay big money to them to help avoid precisely this kind of massive blunder. It is an investment well worth it.)
The deed is done now, however, and Pakistan cannot easily extricate itself from these arrangements. But, sources familiar with the military leadership’s thinking tell Profit, the leadership in the military has decided to start following the first rule of being in a hole: stop digging. A public renunciation of CPEC would be too embarrassing for the government — both the politicians and the Army — but they are certainly not willing to undertake any further agreements with the government of China.
According to one source, one factor that helped influence the military leadership came when even the military-owned FWO was subjected to exploitative lending contracts by Chinese state-owned companies for construction of CPEC infrastructure projects. It may not be worth risking the relationship with China to try to wriggle out of those contracts, but it was enough to disabuse the top brass of the notion that CPEC would be part of a mutually beneficial relationship with China.
That reluctance to dive into further CPEC-related projects is on display in Pakistan’s business leadership’s decision as well. Take Engro, for instance. In 2016, it appeared that the company was going to jump in head on into the CPEC-related energy projects and direct significant investment towards them. However, in the ensuing three years, Engro appears to have changed course: while it is continuing its investment in Thar Coal energy projects, those are in partnership with the Sindh government. And it is not considering any additional investments in CPEC-linked areas.
CPEC is dead. What comes next?
Slowly but surely, CPEC will die off as a talking point in the government of Pakistan and as a topic of conversation in the media. But the government of Pakistan is still stuck with the agreements they have already signed, and with the expectations they have raised in Beijing that CPEC will be a showcase for the broader Belt and Road Initiative (BRI) for China.
Those expectations will now need to be tempered. Sources familiar with the military leadership’s thought process on the matter say that the military — which sets the foreign policy agenda in Pakistan — is now contemplating a return to the pre-CPEC Pakistani foreign policy of serving as one of the few countries that was able to balance an alliance with both the United States and China.
That is likely easier said than done, however. Firstly, China is not in the mood to play second-fiddle to the United States anymore, in Islamabad or anywhere else in the world. This current Chinese government — under President Xi Jinping — is considerably more assertive than it has ever been in the past. They are unlikely to take kindly to Pakistan scaling back its share of the commitment to CPEC.
And secondly, Pakistan had made a very overt turn towards Beijing and away from Washington. The United States is not exactly in the mood to have Pakistan back as an ally either, at least not without significant concessions on Pakistan’s part. It is unclear whether Pakistan will be willing to make all of those concessions, but it is at least a conversation they will have to consider if the pivot back towards Pakistan’s historic foreign policy arrangements are to be successful.
Sources familiar with the matter say that the government of Pakistan has already made initial overtures to the United States and made it clear that Islamabad’s pivot towards Beijing has effectively been cancelled. Those overtures certainly did not hurt as Pakistan negotiated with the International Monetary Fund (IMF) for its 12th bailout in three decades.
What does this mean for the Pakistani economy?
Pakistan’s business leadership — accustomed as it is to the ways of Britain and the United States — has always been significantly more comfortable staying in the Pax Americana orbit than it ever was going to be in Pax Sinica. Think about it: would the typical Pakistani business executive send their child to Harvard or to Tsinghua University? Are Pakistani executives likely to be comfortable negotiating with their American or European counterparts or would they be comfortable seeking approval for everything they do from Zhongnanhai? Is a Pakistani general more comfortable in Sandhurst and West Point or whatever the Chinese equivalent is?
In material terms, the direction of the Pakistani economy is unlikely to be too dissimilar from what it has been in our history. Pakistan’s single largest export market is the United States and the largest geography to which it exports is the European Union. Investment flows from the US and Europe dwarf — even in the CPEC era — anything that China ever invested in Pakistan.
But in terms of what the future direction of the country could have been, this will be very different. It will mean all of those people learning Mandarin can either stop or continue knowing that it will likely just be a curiosity rather than an economic need. It will mean that Pakistani businesses can stop pretending to have a CPEC strategy. And it will mean that the supposed disentanglement from the US-dominated global financial system need not happen.
The more things change, the more they stay the same.
CPEC is dead. Somebody tell Beijing.
The article uses numbers on FDI from China and exports to China to base its argument. How is that “fake news “ ? Counter with an argument , if you have one.
There must be some truth to this article because for the first time the army is allowing criticism of China. There are articles appearing in newspapers, military fora even zaid hamid Twitter all criticizing China ...for Muslim crack down .. but still...this would never have been allowed if Pak army did not want it.
The Chinese hit the generals where it hurts most - in their wallets - now they are looking for a face saving way to get out of this. Xianjing might give them the escuse they need.
All this could have been avoided if there had been less secrecy around CPEC from the start. The public would have come to the same conclusion 6 years ago. But then greed to cash in got in the way of disclosure.
Pakistani Awam wanted change and they wanted somebody like Modi. They got the change but they got Imran khan, the puppet of Bajwa. Today, inflation is very high and PKR has depreciated 60 pc. They wanted someone like Modi but got worst .
Remaining on FATF grey list to impact capital inflows: IMF
By Mehtab Haider
August 6, 2019
ISLAMABAD: Highlighting five major risks to $6 billion Fund programme, the IMF’s Resident Chief, Teresa Daban Sanchez, has said that Pakistan’s failure to get out of FATF grey list could have implications on capital inflows jeopardizing foreign financing assurances.
She pointed out five major risks to the ongoing IMF programme including fiscal slippages such as resistance to fiscal measures and debt sustainability, secondly opposition to governance and institutional building by vested interests, thirdly absence of majority by ruling party in Upper House of Parliament and provinces may undeliverable on their surplus commitment, fourthly large amount of rollover needs for short term debt and fifthly Pakistan’s failure to get out of grey list by the Financial Action Task Force (FATF).
“The IMF could continue dealing with countries into grey or blacklist but it will have impact on capital inflows. The IMF Board of Directors wants Fund to look into matters of money-laundering and terror-financing because it hampered taxation system. The IMF is mainly responsible for ensuring macroeconomic and financial stability, so looking into FATF issues becomes important for us,” the IMF’s Resident Representative in Pakistan, Teresa Daban Sanchez, said while talking to Senior Journalists Forum organised here at the National Press Club (NPC) on Monday.
To a query about CPEC loan repayments in the context of debt sustainability, she said that Pakistan shared all details of CPEC loans as it was largely meant for private sector. The debt sustainability analysis shows that CPEC loans were manageable but overall the country’s debt situation was not sustainable. She emphasised on the need for moving ahead with debt management. She said that Pakistan and the IMF had entered into 18 arrangements since 1958 and only one programme from 2013 to 2016 fully disbursed and was completed successfully.
When asked that the basis of IMF programme was already shattered in the context of escalating budget deficit exceeding eight percent of GDP than envisaged 7.2 percent for last fiscal and inability of the provinces to throw surplus after presenting the current fiscal year’s budget, the IMF chief replied that there were certain challenges that would have to be resolved to make this programme successful. “If there will be no implementation on reform agenda, there will be no programme,” she added.
She said that the inflation might further go up and growth remained slow over the short term but the IMF programme aimed at stabilising the economy after which inflation would start receding and growth would pick up for achieving long and sustainable levels over the medium term.
She said that the IMF did not place any condition to bring changes into resource distribution formula of NFC, however, the Fund programme got commitment of fiscal federalism as the Centre and provinces signed memorandum of understanding (MoU) to throw revenue surplus and harmonisation of taxes to improve revenue collection. She said that there were different ideas discussed in the IMF report for achieving fiscal sustainability.
To another question about curtailment of defence spending, she said that the IMF did not get involved in micro-management but it got commitment from authorities to ensure social spending on vulnerable segments of the society.
The IMF chief said that Pakistan pursued growth based on consumption and without required level of investment to GDP ratio. With this growth model, the growth was unsustainable. She said that the country achieved ballooning fiscal and current account deficit and kept discount rate on lower side while exchange rate remained overvalued. It all resulted in rising budget deficit and current account deficit. The State Bank of Pakistan (SBP) had to inject heavily in the past that resulted in depletion of foreign currency reserves to keep exchange rate at certain levels, she added.
She said that there were three pillars of the ongoing IMF programme for Pakistan including revenue based fiscal consolidation focused on removing exemptions and privileges, greater coordination with provinces and elimination of quasi fiscal circular debt, second a market determined and flexible exchange rate and a strengthened central bank focused on achieving price stability and thirdly strengthening of social safety programmes.
She also identified 10 goals envisaged to be achieved under the IMF programme including achieving debt sustainability, stronger tax collection and a better FBR, independent central bank, market determined exchange rate regime, moderate inflation, sustainable and inclusive growth, power sector efficiency, a new public finance management regime, better management of SOEs and getting out of FATF grey list.
Remaining on FATF grey list to impact capital inflows: IMF
By Mehtab Haider
August 6, 2019
ISLAMABAD: Highlighting five major risks to $6 billion Fund programme, the IMF’s Resident Chief, Teresa Daban Sanchez, has said that Pakistan’s failure to get out of FATF grey list could have implications on capital inflows jeopardizing foreign financing assurances.
She pointed out five major risks to the ongoing IMF programme including fiscal slippages such as resistance to fiscal measures and debt sustainability, secondly opposition to governance and institutional building by vested interests, thirdly absence of majority by ruling party in Upper House of Parliament and provinces may undeliverable on their surplus commitment, fourthly large amount of rollover needs for short term debt and fifthly Pakistan’s failure to get out of grey list by the Financial Action Task Force (FATF).
“The IMF could continue dealing with countries into grey or blacklist but it will have impact on capital inflows. The IMF Board of Directors wants Fund to look into matters of money-laundering and terror-financing because it hampered taxation system. The IMF is mainly responsible for ensuring macroeconomic and financial stability, so looking into FATF issues becomes important for us,” the IMF’s Resident Representative in Pakistan, Teresa Daban Sanchez, said while talking to Senior Journalists Forum organised here at the National Press Club (NPC) on Monday.
To a query about CPEC loan repayments in the context of debt sustainability, she said that Pakistan shared all details of CPEC loans as it was largely meant for private sector. The debt sustainability analysis shows that CPEC loans were manageable but overall the country’s debt situation was not sustainable. She emphasised on the need for moving ahead with debt management. She said that Pakistan and the IMF had entered into 18 arrangements since 1958 and only one programme from 2013 to 2016 fully disbursed and was completed successfully.
When asked that the basis of IMF programme was already shattered in the context of escalating budget deficit exceeding eight percent of GDP than envisaged 7.2 percent for last fiscal and inability of the provinces to throw surplus after presenting the current fiscal year’s budget, the IMF chief replied that there were certain challenges that would have to be resolved to make this programme successful. “If there will be no implementation on reform agenda, there will be no programme,” she added.
She said that the inflation might further go up and growth remained slow over the short term but the IMF programme aimed at stabilising the economy after which inflation would start receding and growth would pick up for achieving long and sustainable levels over the medium term.
She said that the IMF did not place any condition to bring changes into resource distribution formula of NFC, however, the Fund programme got commitment of fiscal federalism as the Centre and provinces signed memorandum of understanding (MoU) to throw revenue surplus and harmonisation of taxes to improve revenue collection. She said that there were different ideas discussed in the IMF report for achieving fiscal sustainability.
To another question about curtailment of defence spending, she said that the IMF did not get involved in micro-management but it got commitment from authorities to ensure social spending on vulnerable segments of the society.
The IMF chief said that Pakistan pursued growth based on consumption and without required level of investment to GDP ratio. With this growth model, the growth was unsustainable. She said that the country achieved ballooning fiscal and current account deficit and kept discount rate on lower side while exchange rate remained overvalued. It all resulted in rising budget deficit and current account deficit. The State Bank of Pakistan (SBP) had to inject heavily in the past that resulted in depletion of foreign currency reserves to keep exchange rate at certain levels, she added.
She said that there were three pillars of the ongoing IMF programme for Pakistan including revenue based fiscal consolidation focused on removing exemptions and privileges, greater coordination with provinces and elimination of quasi fiscal circular debt, second a market determined and flexible exchange rate and a strengthened central bank focused on achieving price stability and thirdly strengthening of social safety programmes.
She also identified 10 goals envisaged to be achieved under the IMF programme including achieving debt sustainability, stronger tax collection and a better FBR, independent central bank, market determined exchange rate regime, moderate inflation, sustainable and inclusive growth, power sector efficiency, a new public finance management regime, better management of SOEs and getting out of FATF grey list.
Remaining on FATF grey list to impact capital inflows: IMF
FATF scrutiny
August 11, 2019
It is clear that the IMF deal inked this summer does not mean that Pakistan is out of troubled waters. This is what the IMF itself says. Speaking at the University of Peshawar recently, IMF Resident Chief Teresa Daban Sanchez said that Pakistan’s failure to get off the FATF grey list could create massive shortfalls in foreign inflows, which could put the economy in greater trouble. The FATF listing as well as government non-compliance would appear to constitute the two biggest risks to the IMF programme as per the bank itself. These two issues are in addition to opposition by vested interests, resistance to fiscal measures, the absence of a government majority in the Senate, the possible failure of provinces to deliver a surplus, and the large amount of rollover needed for short-term debt. While the IMF says that the FATF listing does not matter to it, it will lead to greater scrutiny from private and sovereign financiers. With Pakistan needing over $22 billion in new debts next year, the country’s financial rating should be crucial moving forward. The problem is that Pakistan is not out of trouble with the FATF yet.
One fear that the IMF resident chief has seemed to allay is about CPEC-related loans. The IMF says that it was showed the CPEC loan details and considers the loans manageable, but it sees a problem with the overall debt situation in the country. What one must wonder, however, is how the IMF sees Pakistan achieving proper debt management when it is itself encouraging Pakistan to seek billions of dollars in new debt. Despite financial stringency under the current government, Pakistan has continued to fail to meet the banks targets.
The IMF is confident that if its measures are followed, Pakistan will achieve the requisite targets soon. However, that trust does not seem to have a strong basis in the actual performance. Inflation and the budget deficit are both getting worse, instead of better. The promise of stable inflation and growth in the medium-term seems too far away for most observers. It is true that consumption-based growth in Pakistan was never sustainable. But the IMF deal is not creating an environment for investment-based growth yet. While the IMF says that strengthening social safety programmes is crucial to its package, this commitment is inconsistent with an increase in inflation amidst an economic slowdown. The importance of getting off the FATF list is clear for the IMF programme to work, but beyond that, there will be need for the government to creatively chart out its own path to economic development.
FATF scrutiny
August 11, 2019
It is clear that the IMF deal inked this summer does not mean that Pakistan is out of troubled waters. This is what the IMF itself says. Speaking at the University of Peshawar recently, IMF Resident Chief Teresa Daban Sanchez said that Pakistan’s failure to get off the FATF grey list could create massive shortfalls in foreign inflows, which could put the economy in greater trouble. The FATF listing as well as government non-compliance would appear to constitute the two biggest risks to the IMF programme as per the bank itself. These two issues are in addition to opposition by vested interests, resistance to fiscal measures, the absence of a government majority in the Senate, the possible failure of provinces to deliver a surplus, and the large amount of rollover needed for short-term debt. While the IMF says that the FATF listing does not matter to it, it will lead to greater scrutiny from private and sovereign financiers. With Pakistan needing over $22 billion in new debts next year, the country’s financial rating should be crucial moving forward. The problem is that Pakistan is not out of trouble with the FATF yet.
One fear that the IMF resident chief has seemed to allay is about CPEC-related loans. The IMF says that it was showed the CPEC loan details and considers the loans manageable, but it sees a problem with the overall debt situation in the country. What one must wonder, however, is how the IMF sees Pakistan achieving proper debt management when it is itself encouraging Pakistan to seek billions of dollars in new debt. Despite financial stringency under the current government, Pakistan has continued to fail to meet the banks targets.
The IMF is confident that if its measures are followed, Pakistan will achieve the requisite targets soon. However, that trust does not seem to have a strong basis in the actual performance. Inflation and the budget deficit are both getting worse, instead of better. The promise of stable inflation and growth in the medium-term seems too far away for most observers. It is true that consumption-based growth in Pakistan was never sustainable. But the IMF deal is not creating an environment for investment-based growth yet. While the IMF says that strengthening social safety programmes is crucial to its package, this commitment is inconsistent with an increase in inflation amidst an economic slowdown. The importance of getting off the FATF list is clear for the IMF programme to work, but beyond that, there will be need for the government to creatively chart out its own path to economic development.
FATF scrutiny
IMF deal overshadows CPEC’s ML-I railway project
By Shahbaz Rana
Published: August 6, 2019
ML-I is the only project of CPEC that has been declared “strategically important” by both China and Pakistan but it has faced delay of at least four years. PHOTO: FILE
ISLAMABAD: The financing issue of the multibillion-dollar Mainline-I (ML-I) project of the China Pakistan Economic Corridor (CPEC) remained unresolved due to ambiguity over taking new loans under the International Monetary Fund (IMF) programme, said a top official on Monday.
The Ministry of Planning and Development did not have clarity about whether the country could sign a new loan deal with China for the construction of $8.5-billion ML-I project of the Ministry of Railways, said Planning Secretary Zafar Hasan in a parliamentary committee meeting.
There were also “flaws” in the ML-I framework agreement signed between China and Pakistan in May 2017, said Hasan while speaking during a meeting of the National Assembly Standing Committee on Planning and Development. The secretary’s statement would pour cold water on the ambitions of Railways Minister Sheikh Rashid Ahmad, who has lately involved Prime Minister Imran Khan to get the ML-I project cleared from the planning ministry.
“PC-I of package-I for the upgrade of Pakistan Railways’ existing ML-I and establishment of a dry port near Havelian, submitted by the Ministry of Railways to the Planning Commission, shall be processed for consideration of the CDWP and Ecnec in two weeks,” read an order of the PM Office. The order was issued on July 29.
The PM issued the directive after the planning ministry’s bureaucracy showed reluctance to process the ML-I project due to increasing probe by the National Accountability Bureau (NAB) into CPEC affairs. “There is no clarity on whether we can take more loans or not under the IMF programme and only after getting this clarity we can start negotiations with China,” said Hasan.
The IMF has not directly stopped Pakistan from entering into any new CPEC deal but it has brought CPEC under the overall debt sustainability matrix of Pakistan.
“Our goal is to help countries to keep debt at sustainable levels and we do not advise any country from whom to borrow,” said Teresa Daban, Resident Representative of the IMF, on Monday while interacting with media at the National Press Club. “Right now, Pakistan’s debt is not at a sustainable level,” she said.
In his briefing to the parliamentary committee, the planning secretary maintained that the government stood committed to the ML-I project and was looking into its modalities for implementation.
But he added that “at the time of making PSDP 2019-20, there was a thinking that the ML-I project might not be taken up in this fiscal year,” said the planning secretary. There was also a flaw in the ML-I framework agreement, which put financing issue at the end instead of taking it up upfront, said Hasan.
Due to increasing number of accidents, the government was considering taking up the ML-I project in the next CPEC Joint Cooperation Committee meeting with China, said the planning official.
“Only Rs16 billion total development budget of Pakistan Railways makes me think that the ML-I project has been abandoned,” said former planning minister Ahsan Iqbal.
After firming up the design and scope, the Ministry of Railways has submitted the third proposed PC-I (Project Cycle-I) of the ML-I project with the Ministry of Planning for review and placement before the Central Development Working Party (CDWP) for clearance.
The railways ministry has estimated the cost of package-I of the project at $2.4 billion, showed official documents. The original cost of the full project had been estimated at $8.2 billion. The project has now been split into three phases besides reduction in its scope. ML-I is the only project of CPEC that has been declared “strategically important” by both China and Pakistan but it has faced delay of at least four years.
PML-N performance
The planning ministry also informed the standing committee about the outcome of the 11th Five-Year Economic Plan implemented during tenure of the previous Pakistan Muslim League-Nawaz (PML-N) government.
Against the allocation target of Rs3.04 trillion, the actual spending remained at Rs3.2 trillion, which was 5% higher than the target, the planning ministry informed the standing committee. The 11th plan period (2013-18) was one of the best development periods of Pakistan, said Iqbal. The committee directed the ministry to present comparison of the last three five-year plans.
The secretary also briefed the meeting about the proposed targets of the 12th Five Year Plan, which was already facing delay of one year.
Things were in a flux at the moment and the planning ministry had to modify the previously projected 4.6% economic growth rate for this fiscal year, said Hasan. There was discussion about economic growth of 2% to 2.5% this year, he added.
“The government is bringing realism to its 12th economic plan and targets are being set broadly in line with IMF projections,” said the planning secretary. The over-ambitious targets could never be met, therefore, the government had decided not to set ambitious macroeconomic goals, he added.
Published in The Express Tribune, August 6th, 2019.
https://tribune.com.pk/story/2028965/2-imf-deal-overshadows-cpecs-ml-railway-project/
By Shahbaz Rana
Published: August 6, 2019
ML-I is the only project of CPEC that has been declared “strategically important” by both China and Pakistan but it has faced delay of at least four years. PHOTO: FILE
ISLAMABAD: The financing issue of the multibillion-dollar Mainline-I (ML-I) project of the China Pakistan Economic Corridor (CPEC) remained unresolved due to ambiguity over taking new loans under the International Monetary Fund (IMF) programme, said a top official on Monday.
The Ministry of Planning and Development did not have clarity about whether the country could sign a new loan deal with China for the construction of $8.5-billion ML-I project of the Ministry of Railways, said Planning Secretary Zafar Hasan in a parliamentary committee meeting.
There were also “flaws” in the ML-I framework agreement signed between China and Pakistan in May 2017, said Hasan while speaking during a meeting of the National Assembly Standing Committee on Planning and Development. The secretary’s statement would pour cold water on the ambitions of Railways Minister Sheikh Rashid Ahmad, who has lately involved Prime Minister Imran Khan to get the ML-I project cleared from the planning ministry.
“PC-I of package-I for the upgrade of Pakistan Railways’ existing ML-I and establishment of a dry port near Havelian, submitted by the Ministry of Railways to the Planning Commission, shall be processed for consideration of the CDWP and Ecnec in two weeks,” read an order of the PM Office. The order was issued on July 29.
The PM issued the directive after the planning ministry’s bureaucracy showed reluctance to process the ML-I project due to increasing probe by the National Accountability Bureau (NAB) into CPEC affairs. “There is no clarity on whether we can take more loans or not under the IMF programme and only after getting this clarity we can start negotiations with China,” said Hasan.
The IMF has not directly stopped Pakistan from entering into any new CPEC deal but it has brought CPEC under the overall debt sustainability matrix of Pakistan.
“Our goal is to help countries to keep debt at sustainable levels and we do not advise any country from whom to borrow,” said Teresa Daban, Resident Representative of the IMF, on Monday while interacting with media at the National Press Club. “Right now, Pakistan’s debt is not at a sustainable level,” she said.
In his briefing to the parliamentary committee, the planning secretary maintained that the government stood committed to the ML-I project and was looking into its modalities for implementation.
But he added that “at the time of making PSDP 2019-20, there was a thinking that the ML-I project might not be taken up in this fiscal year,” said the planning secretary. There was also a flaw in the ML-I framework agreement, which put financing issue at the end instead of taking it up upfront, said Hasan.
Due to increasing number of accidents, the government was considering taking up the ML-I project in the next CPEC Joint Cooperation Committee meeting with China, said the planning official.
“Only Rs16 billion total development budget of Pakistan Railways makes me think that the ML-I project has been abandoned,” said former planning minister Ahsan Iqbal.
After firming up the design and scope, the Ministry of Railways has submitted the third proposed PC-I (Project Cycle-I) of the ML-I project with the Ministry of Planning for review and placement before the Central Development Working Party (CDWP) for clearance.
The railways ministry has estimated the cost of package-I of the project at $2.4 billion, showed official documents. The original cost of the full project had been estimated at $8.2 billion. The project has now been split into three phases besides reduction in its scope. ML-I is the only project of CPEC that has been declared “strategically important” by both China and Pakistan but it has faced delay of at least four years.
PML-N performance
The planning ministry also informed the standing committee about the outcome of the 11th Five-Year Economic Plan implemented during tenure of the previous Pakistan Muslim League-Nawaz (PML-N) government.
Against the allocation target of Rs3.04 trillion, the actual spending remained at Rs3.2 trillion, which was 5% higher than the target, the planning ministry informed the standing committee. The 11th plan period (2013-18) was one of the best development periods of Pakistan, said Iqbal. The committee directed the ministry to present comparison of the last three five-year plans.
The secretary also briefed the meeting about the proposed targets of the 12th Five Year Plan, which was already facing delay of one year.
Things were in a flux at the moment and the planning ministry had to modify the previously projected 4.6% economic growth rate for this fiscal year, said Hasan. There was discussion about economic growth of 2% to 2.5% this year, he added.
“The government is bringing realism to its 12th economic plan and targets are being set broadly in line with IMF projections,” said the planning secretary. The over-ambitious targets could never be met, therefore, the government had decided not to set ambitious macroeconomic goals, he added.
Published in The Express Tribune, August 6th, 2019.
https://tribune.com.pk/story/2028965/2-imf-deal-overshadows-cpecs-ml-railway-project/
Multi-billion dollar fine on Pakistan puts the spotlight on a secret court
By Saad Hasan
The Reko Diq mine case shows the overreach of a secretive arbitration system.
Last month, the International Centre for Settlement of Investment Disputes (ICSID), a global quasi-court, slapped more than a $5 billion fine on Pakistan in an arbitration case involving a gold and copper mine.
But the ICSID, which is part of the World Bank Group, didn’t initially announce its decision. There was nothing on its website. Except for perhaps the lawyers involved in the case, hardly anyone had seen the judgement*.
Instead, the news of the award came through Antofagasta and Barrick Gold, the two multinational mining companies seeking compensation, which is one of the largest ever awarded by the ICSID.
ICSID is part of what is known as the Investor State Dispute Settlement (ISDS) mechanism, which was formed to address the grievances of foreign investors.
The controversial system allows multinational companies to sue countries - but the countries can’t sue the companies.
In recent years, ISDS tribunals, such as the ones at the ICSID, have faced increasing scrutiny. The secret nature of the proceedings, the hefty legal fees, the impartiality of lawyers, and how compensation awards are decided have all come into question.
Pakistan’s case has generated an unusual buzz among people who follow such legal issues as the award is sure to hurt a country reeling from an economic crisis — its currency has lost more than a third of its value, the stock market is one of the worst-performing in the world and GDP growth has tapered off.
There are billions of dollars worth of rare earth minerals buried under the site of Reko Diq.(Reuters)
ICSID’s award is almost as much as the $6 billion bailout loan that Prime Minister Imran Khan’s government will receive from the IMF over the next three years.
“It is extremely rare to see awards of this size even though it has happened in a few cases,” says Dr Lauge Poulsen, an associate professor in international political economy at University College London.
Poulsen wrote a book that looks into the impact of ICSID decisions on developing countries, including Pakistan (the book cites a previous case).
The fine has left experts wondering if the three-men tribunal considered Pakistan’s economic woes or if Islamabad’s lawyers, including Cherie Blair, wife of former British Prime Minister Tony Blair, brought up the possibility that paying such an award could cripple the country.
For Islamabad, which is struggling to pay off its foreign debt, the mine at the centre of the dispute has become a mirage — Pakistan saw riches and a path to prosperity, but when it got closer, it disappeared and became a liability. Many are wondering how it all came to this.
Mountain of Gold
In 1993, Australian mining giant BHP (formerly BHP Billiton) began exploring gold and copper prospects in Balochistan, Pakistan’s insurgency-hit province that borders Iran and Afghanistan.
The Reko Diq mine is located in the Chagai district where Pakistan carried out its nuclear tests two decades ago. The area is a desert overlooked by an imposing peak called Koh e Dalil (which translates to 'the Mountain of Evidence').
When exploration teams landed there for the first time, there were no roads, no water and no electricity. People in nearby villages lived in tents made of goat and sheepskin. The dust storms were blinding.
“There is no doubt the mining company invested in the project. They built an entire airfield and there used to be daily flights bringing in engineers and supplies,” says Sardar Shaukat Popalzai, head of a Balochistan-based think tank.
The mine, which is part of the geological Tethyan belt, is considered one of the richest in the world.
BHP drilled dozens of holes, dug out samples and concluded that the mine could produce substantial quantities of minerals at a profit.
In 2006, the ownership of the project passed on to a consortium of Chile’s Antofagasta and Canada-based Barrick Gold, the world’s largest miner of the precious metal.
They began work on the mine under a subsidiary called Tethyan Copper Company (TCC).
But in 2011, the Balochistan government refused to permit the mining companies to start digging for the minerals, saying it was not getting a good deal.
Aslam Raisani, the then chief minister of the province, says he wanted the companies to smelt the metals in the country instead of exporting the concentrate.
"In the first meeting I had with them they brought a proposal to build a long pipeline to transport the slurry and export it. I couldn’t allow that. The mining rules didn’t allow export of the concentrate,” Raisani told TRT World.
“Then they came again a short time later with the same proposal. I said no, I won’t let this happen.”
Former Balochistan Chief Minister Aslam Raisani insists Barrack and Antofagasta were not giving his province a fair deal in the Reko Diq mining project.(Getty Images)
On their part, the investors feel they have sufficiently compensated Balochistan, which has a share of 25 percent in the expected profit from the mine.
Raisani is not alone in insisting that the mineral ore be processed within the country. Pakistan doesn’t have labs to adequately test samples and confidently estimate the quantity of minerals that can be extracted from the ore.
In recent years, mineral exporting states such as Tanzania and Zambia have taken multinational companies to court in similar situations.
They say mining firms siphon off profit through a web of offshore subsidiaries that bloat up the cost of mining operations - a practice known as transfer pricing.
A bilateral conundrum
Failing to get a mining permit, Antofagasta and Barrick took Pakistan to international arbitration at the ICSID in late 2011.
The ICSID Convention was adopted on October 14 1966, to appease rich countries concerned with their investments in developing nations. Pakistan signed the convention two days later, among a handful of countries to do so that year.
But the convention didn’t guarantee that a country where an investment is being made will necessarily allow an ICSID tribunal to arbitrate in case of a dispute.
This gap was inadvertently filled by what is known as Bilateral Investment Treaty (BIT) agreements that governments sign to promote private investment from other countries, Andreas F. Lowenfeld, who helped draft the convention, said in a 2007 speech.
“[The] developed world was worried about protecting their corporations. There was a lack of trust about local governments, courts and about being getting treated fairly,” says Dr Kyla Tienhaara, a Canadian academic, who was among the first to express concern about ICSID’s decision in Reko Diq case.
“So the West wanted to protect their firms going abroad, and they came up with bilateral investment treaties.”
And here again, Pakistan took the lead when it signed the world’s first BIT with West Germany in 1959.
Criticism of ISDS has increased in recent years and some EU parliamentarians say the system must be revamped.(Getty Images)
For more than three decades, ICSID was almost dormant with only a handful of investors reaching out to seek arbitration. That began to change in the early 2000s and ever since there has been a steady rise in arbitration requests.
Experts say that’s primarily because creative lawyers saw a loophole in the BITs, which allowed companies to threaten and sue governments. More than 60 percent of the arbitrations heard by ICSID tribunals stem from BITs.
The Reko Diq case in Pakistan has been decided under the BIT that the country signed with Australia in 1998.
“This is a textbook case. We have companies, which are from Chile and Canada but they have a subsidiary office in a third country - because Australia has this investment treaty with Pakistan,” says Nicolas Roux of Bilaterals.org that keeps tracks of trade treaties.
It is only in recent years that governments have realised the negative impact of such deals and a few countries like South Africa and Indonesia have started to cancel them.
Pakistan has more than 60 BITs with different countries - one of the largest portfolios held by a developing country. Many of them were signed by officials who had no idea what they were doing.
“Even government records admit that the Pakistani government did not fully appreciate the nature of the obligations they were undertaking,” says Poulsen of University College London.
“In many cases, Pakistani officials in the past looked at the BITs mainly as a photo opportunity; something for the press, a kind of a diplomatic token of goodwill.”
Pakistan’s former Attorney General Makhdoom Ali Khan has on record said that he had to Google what BIT and ICSID were when the country was first hit by an arbitration case in 2001 by Swiss firm SGS.
Voodoo finance
Antofagasta and Barrick had long written off their $220 million investment in the Reko Diq project. The companies no longer mention it in their financial statements.
It remains unclear what parameters the tribunal considered to award multibillion-dollar damages based on that investment.
“I find it so appalling. This is a ridiculous sum of money,” says Tienhaara, the Canadian academic. “I don’t know how can you come up with this kind of award if you had taken into consideration the implications for the country.”
Barrick Gold runs large mines in countries such as Tanzania where activists complain the Canadian miner hasn't done much for the local.(Getty Images)
In previous cases, the arbitrators have considered what an investor might have earned from a project over its life to decide the compensation.
But Robert Howse of the New York University calls it “junk science”.
“How do we predict how a particular business is going to do in 20 years? Do we take into account climate change? What presumptions do we make about technology and how it will change?” Howse said in a recent interview.
While both sides bring experts including financial consultants, the arbitrators who make the final decision, are mostly lawyers who are not well-versed in such complex financial projections.
Back in 2011, the consortium was planning to invest $3.4 billion over a period of three years to develop the mine. It also said Pakistan would earn a revenue of $25 billion over the 56-year lifespan of the project.
But Antofagasta and Barrick’s history, which involves allegations of corruption and manipulation of tax records, raises a lot of questions about what the companies say publicly in their published statements.
Barrick was in a long dispute with the Tanzanian government, which accused the Canadian miner of hiding the real profits at its mines, says Jamie Keen of the watchdog Mining Watch.
“A big problem is how do you verify what the companies say. In Tanzania, there was a network for customs officials who were conspiring with the company to hide the quantity of gold in the concentrate.”
The ISDS system also faces criticism for not taking up disputes that involve the concerns of local communities and the environmental degradation where these mining companies operate.
“The irony of the whole arbitration system is that the citizens have no access to it,” says Keen.
Not a happy ending
Soon after the award was announced, Antofagasta said it was willing to negotiate a settlement. Pakistan responded positively - the country was left with no other option.
Reaching a settlement is a drawn-out process. And if Pakistan fails to pay, then the companies can try to seize its international assets as is happening in the case of Venezuela.
The consortium has already approached a US court in the District of Columbia to enforce the award.
Khan wants to investigate the entire matter and pin responsibility on the officials who put Pakistan into a difficult, possibly crippling, situation.
It remains unclear whether Islamabad told the tribunal that it was almost impossible for the country to pay the compensation considering its foreign exchange reserves are barely enough to pay for a few weeks of imports.
“There’s no way but to come to some sort of settlement,” Ahmar Bilal Soofi, who was part of Pakistan’s legal team, said in brief remarks to TRT World.
What that means financially for Pakistan is something only the lawyers can tell us.
*Editor's Note: The judgement was made public in August this year around the same time the companies filed a petition in a US court to enforce the award.
Multi-billion dollar fine on Pakistan puts the spotlight on a secret court
By Saad Hasan
The Reko Diq mine case shows the overreach of a secretive arbitration system.
Last month, the International Centre for Settlement of Investment Disputes (ICSID), a global quasi-court, slapped more than a $5 billion fine on Pakistan in an arbitration case involving a gold and copper mine.
But the ICSID, which is part of the World Bank Group, didn’t initially announce its decision. There was nothing on its website. Except for perhaps the lawyers involved in the case, hardly anyone had seen the judgement*.
Instead, the news of the award came through Antofagasta and Barrick Gold, the two multinational mining companies seeking compensation, which is one of the largest ever awarded by the ICSID.
ICSID is part of what is known as the Investor State Dispute Settlement (ISDS) mechanism, which was formed to address the grievances of foreign investors.
The controversial system allows multinational companies to sue countries - but the countries can’t sue the companies.
In recent years, ISDS tribunals, such as the ones at the ICSID, have faced increasing scrutiny. The secret nature of the proceedings, the hefty legal fees, the impartiality of lawyers, and how compensation awards are decided have all come into question.
Pakistan’s case has generated an unusual buzz among people who follow such legal issues as the award is sure to hurt a country reeling from an economic crisis — its currency has lost more than a third of its value, the stock market is one of the worst-performing in the world and GDP growth has tapered off.
ICSID’s award is almost as much as the $6 billion bailout loan that Prime Minister Imran Khan’s government will receive from the IMF over the next three years.
“It is extremely rare to see awards of this size even though it has happened in a few cases,” says Dr Lauge Poulsen, an associate professor in international political economy at University College London.
Poulsen wrote a book that looks into the impact of ICSID decisions on developing countries, including Pakistan (the book cites a previous case).
The fine has left experts wondering if the three-men tribunal considered Pakistan’s economic woes or if Islamabad’s lawyers, including Cherie Blair, wife of former British Prime Minister Tony Blair, brought up the possibility that paying such an award could cripple the country.
For Islamabad, which is struggling to pay off its foreign debt, the mine at the centre of the dispute has become a mirage — Pakistan saw riches and a path to prosperity, but when it got closer, it disappeared and became a liability. Many are wondering how it all came to this.
Mountain of Gold
In 1993, Australian mining giant BHP (formerly BHP Billiton) began exploring gold and copper prospects in Balochistan, Pakistan’s insurgency-hit province that borders Iran and Afghanistan.
The Reko Diq mine is located in the Chagai district where Pakistan carried out its nuclear tests two decades ago. The area is a desert overlooked by an imposing peak called Koh e Dalil (which translates to 'the Mountain of Evidence').
When exploration teams landed there for the first time, there were no roads, no water and no electricity. People in nearby villages lived in tents made of goat and sheepskin. The dust storms were blinding.
“There is no doubt the mining company invested in the project. They built an entire airfield and there used to be daily flights bringing in engineers and supplies,” says Sardar Shaukat Popalzai, head of a Balochistan-based think tank.
The mine, which is part of the geological Tethyan belt, is considered one of the richest in the world.
BHP drilled dozens of holes, dug out samples and concluded that the mine could produce substantial quantities of minerals at a profit.
In 2006, the ownership of the project passed on to a consortium of Chile’s Antofagasta and Canada-based Barrick Gold, the world’s largest miner of the precious metal.
They began work on the mine under a subsidiary called Tethyan Copper Company (TCC).
But in 2011, the Balochistan government refused to permit the mining companies to start digging for the minerals, saying it was not getting a good deal.
Aslam Raisani, the then chief minister of the province, says he wanted the companies to smelt the metals in the country instead of exporting the concentrate.
"In the first meeting I had with them they brought a proposal to build a long pipeline to transport the slurry and export it. I couldn’t allow that. The mining rules didn’t allow export of the concentrate,” Raisani told TRT World.
“Then they came again a short time later with the same proposal. I said no, I won’t let this happen.”
Former Balochistan Chief Minister Aslam Raisani insists Barrack and Antofagasta were not giving his province a fair deal in the Reko Diq mining project.(Getty Images)
On their part, the investors feel they have sufficiently compensated Balochistan, which has a share of 25 percent in the expected profit from the mine.
Raisani is not alone in insisting that the mineral ore be processed within the country. Pakistan doesn’t have labs to adequately test samples and confidently estimate the quantity of minerals that can be extracted from the ore.
In recent years, mineral exporting states such as Tanzania and Zambia have taken multinational companies to court in similar situations.
They say mining firms siphon off profit through a web of offshore subsidiaries that bloat up the cost of mining operations - a practice known as transfer pricing.
A bilateral conundrum
Failing to get a mining permit, Antofagasta and Barrick took Pakistan to international arbitration at the ICSID in late 2011.
The ICSID Convention was adopted on October 14 1966, to appease rich countries concerned with their investments in developing nations. Pakistan signed the convention two days later, among a handful of countries to do so that year.
But the convention didn’t guarantee that a country where an investment is being made will necessarily allow an ICSID tribunal to arbitrate in case of a dispute.
This gap was inadvertently filled by what is known as Bilateral Investment Treaty (BIT) agreements that governments sign to promote private investment from other countries, Andreas F. Lowenfeld, who helped draft the convention, said in a 2007 speech.
“[The] developed world was worried about protecting their corporations. There was a lack of trust about local governments, courts and about being getting treated fairly,” says Dr Kyla Tienhaara, a Canadian academic, who was among the first to express concern about ICSID’s decision in Reko Diq case.
“So the West wanted to protect their firms going abroad, and they came up with bilateral investment treaties.”
And here again, Pakistan took the lead when it signed the world’s first BIT with West Germany in 1959.
For more than three decades, ICSID was almost dormant with only a handful of investors reaching out to seek arbitration. That began to change in the early 2000s and ever since there has been a steady rise in arbitration requests.
Experts say that’s primarily because creative lawyers saw a loophole in the BITs, which allowed companies to threaten and sue governments. More than 60 percent of the arbitrations heard by ICSID tribunals stem from BITs.
The Reko Diq case in Pakistan has been decided under the BIT that the country signed with Australia in 1998.
“This is a textbook case. We have companies, which are from Chile and Canada but they have a subsidiary office in a third country - because Australia has this investment treaty with Pakistan,” says Nicolas Roux of Bilaterals.org that keeps tracks of trade treaties.
It is only in recent years that governments have realised the negative impact of such deals and a few countries like South Africa and Indonesia have started to cancel them.
Pakistan has more than 60 BITs with different countries - one of the largest portfolios held by a developing country. Many of them were signed by officials who had no idea what they were doing.
“Even government records admit that the Pakistani government did not fully appreciate the nature of the obligations they were undertaking,” says Poulsen of University College London.
“In many cases, Pakistani officials in the past looked at the BITs mainly as a photo opportunity; something for the press, a kind of a diplomatic token of goodwill.”
Pakistan’s former Attorney General Makhdoom Ali Khan has on record said that he had to Google what BIT and ICSID were when the country was first hit by an arbitration case in 2001 by Swiss firm SGS.
Voodoo finance
Antofagasta and Barrick had long written off their $220 million investment in the Reko Diq project. The companies no longer mention it in their financial statements.
It remains unclear what parameters the tribunal considered to award multibillion-dollar damages based on that investment.
“I find it so appalling. This is a ridiculous sum of money,” says Tienhaara, the Canadian academic. “I don’t know how can you come up with this kind of award if you had taken into consideration the implications for the country.”
In previous cases, the arbitrators have considered what an investor might have earned from a project over its life to decide the compensation.
But Robert Howse of the New York University calls it “junk science”.
“How do we predict how a particular business is going to do in 20 years? Do we take into account climate change? What presumptions do we make about technology and how it will change?” Howse said in a recent interview.
While both sides bring experts including financial consultants, the arbitrators who make the final decision, are mostly lawyers who are not well-versed in such complex financial projections.
Back in 2011, the consortium was planning to invest $3.4 billion over a period of three years to develop the mine. It also said Pakistan would earn a revenue of $25 billion over the 56-year lifespan of the project.
But Antofagasta and Barrick’s history, which involves allegations of corruption and manipulation of tax records, raises a lot of questions about what the companies say publicly in their published statements.
Barrick was in a long dispute with the Tanzanian government, which accused the Canadian miner of hiding the real profits at its mines, says Jamie Keen of the watchdog Mining Watch.
“A big problem is how do you verify what the companies say. In Tanzania, there was a network for customs officials who were conspiring with the company to hide the quantity of gold in the concentrate.”
The ISDS system also faces criticism for not taking up disputes that involve the concerns of local communities and the environmental degradation where these mining companies operate.
“The irony of the whole arbitration system is that the citizens have no access to it,” says Keen.
Not a happy ending
Soon after the award was announced, Antofagasta said it was willing to negotiate a settlement. Pakistan responded positively - the country was left with no other option.
Reaching a settlement is a drawn-out process. And if Pakistan fails to pay, then the companies can try to seize its international assets as is happening in the case of Venezuela.
The consortium has already approached a US court in the District of Columbia to enforce the award.
Khan wants to investigate the entire matter and pin responsibility on the officials who put Pakistan into a difficult, possibly crippling, situation.
It remains unclear whether Islamabad told the tribunal that it was almost impossible for the country to pay the compensation considering its foreign exchange reserves are barely enough to pay for a few weeks of imports.
“There’s no way but to come to some sort of settlement,” Ahmar Bilal Soofi, who was part of Pakistan’s legal team, said in brief remarks to TRT World.
What that means financially for Pakistan is something only the lawyers can tell us.
*Editor's Note: The judgement was made public in August this year around the same time the companies filed a petition in a US court to enforce the award.
Multi-billion dollar fine on Pakistan puts the spotlight on a secret court