THE commerce ministry is pushing a fresh approach of “trade-balancing industrial investment”, articulated by the Secretary of Commerce Younus Dagha, to contain the building up of pressure on the balance of payments in the second phase of the China-Pakistan Economic Corridor (CPEC).
Currently, according to the State Bank of Pakistan, imports from China stand at $9.32 billion and the exports from Pakistan to China are around $1.4bn. Under the commerce ministry’s proposal, the focus should be on both import substitution and export-oriented industrialisation.
Efforts are to be made to ensure that the total annual foreign direct investment inflows from China should not be less than the yearly total repatriated profits and loan repayments to the Chinese investors and government.
Estimates of Dr Ishrat Husain, shared by economist Sakib Sherani, show that the average outflow to the Chinese investors and government under the current Rs46bn CPEC outlay would be in the range of $2.5-3bn per annum.
The International Monetary Fund has estimated that the peak outflows will reach $3.5-$4.5bn by 2024-25. Barring some volatility, the gap between moderate FDI inflows, including those from China, and increasing overall repatriation of profits abroad have been shrinking over time.
Some economists say businesses are stepping into what they describe as the age of “alliance capitalism” helped by a surging number of joint ventures worldwide
In the first ten months of fiscal year 2018, the profit and dividends repatriated abroad stood at $1.773bn and the total FDI was recorded at $2.237bn. So far, the bilateral free trade and the currency swap agreements between Pakistan and China have not been of any help in containing the surging bilateral trade imbalance.
But the Chinese, who have built the world’s factory on their home territory, might be relied upon to push up Pakistan’s industrialisation. They have demonstrated their commitment and efficiency in early-harvest delivery of infrastructure and energy projects.
However, it may be pointed out that there are more challenges in the second phase of the CPEC — as industrialisation would be driven by the private sector in China — unlike in the first phase in which state interventions by both sides played the primary role.
In the case of industrial investments, the Chinese companies will make their own decisions. Then, the free fall of the rupee will raise the cost of investment substantially where imported capital goods are involved.
Much will depend on the Chinese investors’ perception of the business outlook here. The domestic private sector, which is well entrenched in the country’s industrial sector, is still not clear about its role in this new phase of industrial development.
The CEO of a leading company says local businesses are looking “for transfer of technology and development of entrepreneurship through creation of joint ventures.” Corporates are interested in investing in value-added emerging industries.
A proper policy framework is required to facilitate joint ventures. Some Chinese business delegations, which have visited Pakistan from time to time, have also stressed the need for frequent interactions with their counterparts in Pakistan to facilitate understanding and enter into business collaborations.
In January, a delegation from China’s Shanxi province visited Pakistan for the first time to explore business opportunities. It spelled out the areas for joint ventures in a meeting with officials of the Islamabad Chamber of Commerce and Industry.
The sectors included pharmaceuticals, automobile,engineering,communication and solar energy. According to the latest Security and Exchange Commission of Pakistan’s record, five new foreign companies were registered in Karachi, Lahore and Islamabad in March.
During the same month, FDI was reported in 59 new companies which included an unspecified number of Chinese firms. The newly incorporated firms show a marked preference for joint ventures for possibly acquiring technologies or brands with an edge.
The trend witnessed during March has been an enduring one for the last few years. Some economists say businesses are stepping into what they describe as the age of “alliance capitalism” helped by a surging number of joint ventures worldwide.
Over past few decades, a skewed focus on liberalisation of foreign trade to build a competitive economy- designed to boost exports- and self-serving financial sector reforms to shore up the sagging banking sector resulted in slower credit off-take by the private sector and pre-mature de-industrialisation.
The aggravating imbalances so created in the economy trumped economic development. Pakistan was unable to sufficiently diversify local production of goods and services to secure a fair share in the international market.
And now, as opposed to trade liberalisation, imports of non-essential items are being curbed in a phased manner and FDI is to be encouraged in priority areas to balance trade. However, there is a strong official lobby in Pakistan against protectionism.
A Domestic Trade Wing was set up in the commerce ministry more than four years ago, but it has yet to come up with an effective policy to streamline and shore up domestic commerce which contributes about 32 per cent to the GDP and employs 20pc of the labour force.
Published in Dawn, The Business and Finance Weekly, June 19th, 2018