As the CPEC investment is turning into a catalyst for shoring up the domestic economy, policy adjustments are — reluctantly or willingly — being made to spur Chinese capital spending; though this move is drawing criticism from local businesses not eligible for the same incentives.

As much of new foreign investments is CPEC-centric, project or industry-specific incentives are being extended to major national projects which form the core of the current development strategy.

For example, Chinese companies have been provided 17pc guaranteed return on equity on power projects. Nepra was forced by the government to hike its original tariff of 71 paisas per unit to 74 paisas after the Chinese contractor declined to take up the Matiari-Lahore transmission line project at the rate determined by the regulator.

Export-oriented industrialisation is giving way to a focus on making the domestic market more efficient through investments in physical infrastructure

Similarly, the Cabinet’s Economic Coordination Committee has approved incentives for the Lahore Metro Train Project. In short all major CPEC projects are being offered additional incentives to ensure Chinese participation and investment.

While fiscal incentives are normally industry-specific, exceptions have been made in the past in individual cases, like Hubco, which was assured guaranteed electricity purchases by Wapda (or compensation for them) and abnormally high tariffs. The tariffs were reduced sometimes later due to government pressure.

Earlier multinational companies were offered special fiscal packages to compensate them for ‘transfer of technology’ in a critical or important segment of the economy.

This often led to criticism by local businesses that foreign investors were patronised at the cost of domestic industry and trade. Some of these incentives were withdrawn with the domestic industry acquiring enough muscle to have a say in the corridors of power.

The spectre of the ‘East India Company’ did haunt the people directly involved in financing Hubco, similar to public perception about the CPEC now.

They were disturbed by the way successive governments cajoled public institutions to accept the terms and conditions of Hubco’s sponsors; but ultimately the major stakes in the company were bought by a well established local business house.

Rent-seeking is not a long-term, durable way of sustaining businesses, especially in this era of new ideas and new technology.

The focus on domestic investment has also impacted the foreign trade policy. The State Bank of Pakistan has imposed a 100pc cash margin on imports of non-essential items.

The objective is to cut imports and spare foreign exchange earnings and reserves for import of capital goods — plant, machinery and equipment — required for building vital infrastructure and overcoming critical energy shortage.

There is also a move to encourage China to invest in import substitution industries in the CPEC-related economic zones, particularly in manufacturing products that already have a market in Pakistan.

The possibility of the Chinese manufacturing goods which can be produced at a cheaper rate in Pakistan — to meet the domestic needs of their population living closer to Pakistani borders — cannot be ruled out. This will help reduce the imbalance in bilateral trade that is unfavourable to the country. Pakistan’s imports from China exceded $12bn while exports amounted to a mere $1.67bn.

Not to distort the viability of projects that could be impacted by volatile interest and exchange rates and to contain the cost of debt servicing, the stability of the rupee has been a major concern of policymakers while interest rates have been maintained at a historically low level.

An export-oriented industrialisation is giving way to a focus on investment in physical infrastructure— normally stimulated by cheap credit and a stable exchange rate — to make the domestic market more efficient and competitive.

While financial globalisation, fluctuating currency and interest rates and speculative trading in the capital market have helped shore up falling corporate profits for the past few decades, they have lost much of their former links with the real economy and productive pursuit. A buoyant capital market often co-exists with a stagnant economy.

One thing that is very important is that participation of local companies and labour in the CPEC projects needs to be maximised and Chinese capital and labour needs to be minimised, as far as feasible, to contain foreign exchange spending, foreign debt servicing and repatriation of profits.

With the economy’s external sector under constant pressure, risks of mounting foreign dependence have to be a concern for both Chinese and Pakistani authorities in order to maintain sustainable bilateral economic relations.

Published in Dawn, Business & Finance weekly, March 20th, 2017