CPEC and local industrialization: challenges and opportunities
The China-Pakistan Economic Corridor (CPEC) is expected to usher in a new era of industrial growth in Pakistan. Going by the CPEC plan, it is expected that projects in the “early harvest program” — a phrase coined for projects to be completed in the short-term — will plug in critical gaps constraining the growth of local industry. These include energy deficits, a weak transport and logistics network and missing border-related trade infrastructure.
The next (current) phase of CPEC is then expected to help develop special economic zones (SEZs) in Pakistan and invite investment from the Chinese private sector while promoting joint ventures and result in increased agro-based exports to China, according to analysts.
During his visit to China, Prime Minister Imran Khan emphasized that Pakistan would welcome Chinese investment in areas of technology transfers and buy-back agreements where goods produced by Chinese enterprises inside Pakistan could be exported to China. He also emphasized that Pakistan would like China’s support in social sector development including education, health, poverty alleviation, water supply and vocational training programs.
While the plans are well-laid out, there is growing frustration among the private sector on both sides of the border that things at the federal and provincial government level in Pakistan are not moving expediently or cohesively.
The MoU on industrial cooperation signed between Pakistan and China in December last year provides the framework for promoting engagement in textiles, petrochemicals and iron and steel, and encourages Chinese investors to relocate to Pakistan. But there remains as of now no clear, executable plan of action, which makes it harder to visualize how any of this will happen.
The Chinese side told their Pakistani counterparts that a more coordinated effort was required to reform the land, energy, taxation, customs, and regulatory regime faced by Chinese investors. It is due precisely to this prevailing uncertainty that the buying mission which was expected to arrive from China in January has not yet materialized.
While the plans are well-laid out, there is growing frustration among the private sector on both sides of the border that things at the federal and provincial government level in Pakistan are not moving expediently or cohesively.
Dr. Vaqar Ahmed
Additionally, there is also no evaluation of outcomes from the visits of previous business delegations from China and a weak follow-up by Pakistani authorities to inquire into the lack of interest by businesspersons who visited in the past. The governance model of SEZs is also unclear to potential investors, and most Chinese companies recently coming into Pakistan chose to locate to pre-CPEC industrial estates.
On a recent visit to Lahore’s Chamber of Commerce and Industry, the Chinese Ambassador to Pakistan said that one reason behind the less-than-desired numbers of Chinese investors in Pakistan were inconsistent tax and trade policies. This is not very different to what Pakistan’s local businesses particularly small and medium enterprises, continue to inform the government.
CPEC can only benefit the industrialization of Pakistan if Chinese investment triggers lower business costs in inputs with high costs like energy, imported raw material and intermediate goods, which face huge regulatory duties and high general sales tax, further increased by the rupee devaluation.
There are a host of other crucial problems. Access to bank credit even for export-oriented sectors remains a lengthy and tedious procedure. There are also too many instances of double taxation on the same income base as provincial governments try to expand their revenue net even if this means cutting into the margins of the business community. For example, Punjab already has an infrastructure development tax. But if a consignment originating from Punjab is cleared in Sindh, the latter charges another, similar tax.
For small businesses, life after CPEC’s early harvest program has still not changed. Most representatives from the private sector point toward a lack of consistent policy. Somehow, the government has initiated work at the federal level and in industrial policy, knowing full well that provinces are framing their own individual strategies. It remains unclear if national level policy is what is required for subjects like industrial development, which currently stand devolved at the mercy of provincial governments.
– Dr. Vaqar Ahmed is joint Executive Director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press.
Twitter: @vaqarahmed
