This is a review of news and analysis pertaining to the China-Pakistan Economic Corridor and related regional connectivity and security issues, covering the period of July 11 – August 15, 2018.

Gwadar

  • New government in Islamabad could revive Gwadar LNG terminal and pipeline project.  The Gwadar LNG terminal project and an associated pipeline connecting to Nawabshah in Sindh were originally envisioned as part of CPEC. Pakistan and China signed a framework agreement during Xi Jinping’s 2015 visit to Pakistan to develop the two projects. The PML-N government even collected a levy to fund the construction of the pipeline. But it subsequently shelved the project. The Express Tribune now reports that the incoming Pakistan Tehreek-e Insaf (PTI) government could revive the two projects, partly motivated by threats by Iran to enforce a penalty clause that would punish Islamabad for not constructing its portion of the Iran-Pakistan natural gas pipeline. Islamabad could be liable for billions in penalty charges. The LNG terminal in Gwadar could serve as a stopgap measure that would allay Tehran’s concerns, as the Gwadar-Nawabshah pipeline would cover most of a future Iran-Pakistan gas pipeline. A connection from Iran to Gwadar could be retrofitted into it.
  • First export of marble leaves Gwadar Portreports The News. Balochistan is Pakistan’s second-largest producer of marble. A marble and minerals expo will be held at the Gwadar Port at the end of September.
  • Akhtar Mengal calls for 15 percent tax on Gwadar investment. The Baloch nationalist politician, whose party performed well in the July elections, said the funds should be used for the development of Balochistan’s two coastal districts: Gwadar and Lasbela.
  • Pakistan and Oman near MOU for Gwadar ferry servicereports the Times of Oman. The Pakistani envoy to Oman says the trip by sea would be around 12 hours. Oman has a sizable ethnic Baloch population, including dual Omani-Pakistani nationals.
  • For some perspective on Gwadar’s water woes, consider the predicament of Chabahar: “…’90% of the villages in the Chabahar coastal strip lacked water networks’ and…people received water via water tankers.”

CPEC and the IMF

  • Pakistan to reach decision on seeking IMF assistance in the fall. As Pakistan’s external financing challenges grow, Asad Umar — the  likely next finance minister  says a decision on returning to the IMF will be made by the end of September.
  • Pompeo says IMF bailout for Pakistan should not be used to repay Chinese creditors. U.S. Secretary of State Mike Pompeo in an interview with CNBCon July 31 signals Washington will use Pakistan IMF bailout discussions to press for Belt and Road changes. 

Pompeo: “Make no mistake, we will be watching what the IMF does…There’s no rationale for IMF tax dollars— and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself.”

  • Joint letter by U.S. senators echoes Pompeo’s concerns about IMF funds and the Belt and Road. Fifteen U.S. senators sign letter addressed to Pompeo to express concern over IMF bailout requests “by countries who have accepted predatory Chinese infrastructure financing.” Pakistan and the Gwadar port feature in the letter.
  • Former U.S. IMF representative Mark Sobel recommends a tougher approach toward Pakistan and CPEC in a commentary for CSIS.

Bottom line: “The fund should limit access to its resources under any possible new program. Exceptional access would be highly inappropriate. Access should not be front-loaded. The IMF should explore seeking the support of the Pakistani opposition. The fund must stand ready to halt disbursements at the first sign of problems. The fund must also ensure that its resources are not used to bail out unsustainable Chinese CPEC lending. The fund needs to have at its fingertips comprehensive data on all CPEC lending—its terms, maturities, and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims.”

  • Pakistan’s former finance secretary Waqar Masood Khan writes in The News

“Regarding Chinese loans and IMF support, it should be recognized that the net transfers (disbursement minus debt-servicing) from China are positive. Hence, Chinese loans won’t feature in Pakistan’s financing gap that is to be filled with IMF assistance.”

CPEC and CPEC-Related Projects

  • Chinese envoy to Islamabad pledges to help boost Pakistani exports in letter to new National Assembly members. In a letter published in The News, Yao Jing, Beijing’s ambassador to Islamabad, stated, “China’s focus of cooperation will be upgrading Pakistan’s manufacturing capacity and expansion of export-oriented industry.” Additional excerpts:
    • China will actively expand its imports from Pakistan.”
    • “China will strengthen cooperation and facilitate local trade between Gilgit-Baltistan and China’s Xinjiang Autonomous Region.”
    • “China will consider setting up an agricultural technology demonstration center in Pakistan to improve local agricultural technology, production efficiency and value-added agricultural industry.”
  • Pakistan’s Ministry of Finance expresses willingness to establish a revolving fund for CPEC of PKR 20 billion (or $160 million), reports Business Recorder. But the plan remains controversial, receiving pushback from a special Pakistani senate panel. Pakistan has agreed to form a revolving fund worth 22 percent of the estimated monthly tariff payments to Chinese independent power producers through CPEC to ensure timely payment. The top bureaucrat in Pakistan’s Power Division said that the size of the revolving fund should be decreased from the original 22 percent of payments down to 10-12 percent, given Pakistan’s improvement in bill collection.
  • Pakistan’s Central Power Purchasing Agency (CPPA) seeks addition of CPEC security surcharge on electric bills. The CPPA has requested for an additional 71-paise per unit (roughly half a cent) surcharge to cover the cost of providing security for Chinese workers on CPEC electric power projects, reports the Business Recorder. Pakistan’s National Power Regulatory Authority or NEPRA opposed the August 2016 decision by the PML-N cabinet to add a 1% cost on capital expenses for CPEC energy projects to cover security cost.
  • Analysis:

Economy and Trade

  • PTI officials say they’ve received assurances from Beijing that additional financing is available to shore up Pakistan’s foreign exchange reserves. A finance ministry official told the Financial Times“Clearly, we mustn’t put all our eggs in the IMF basket. At least for the sake of argument, our future plans should also include a back-up which is built on Chinese money.”

  • China and Saudi Arabia to aid Pakistan amid economic crisisreports The News.

The article states: “Pakistan has received assurances from China and Saudi Arabia for solving its foreign exchange crisis but first the incoming PTI-led government will have to take ‘tough corrective measures’ on front, reducing imports and slashing the budget deficit in a big way.”

  • Pakistan needs an agricultural innovation policyargues Mohiuddin Aazim in DAWN. But developing a comprehensive policy, he argues, requires better data tracking agricultural machinery imports and a livestock population census.

  • Guidance for PTI from leading Pakistani economists in Washington. Participants include Dr. Ishrat Husain (former, State Bank governor) and Masood Ahmed (ex-IMF director for Middle East and Central Asia).

The Belt and Road and the Rest

  • Pompeo launches new effort to counter the Belt and Road Initiative.

Secretary Pompeo: “Our strategy seeks to catalyze American businesses to do what they do best. President Trump also expects our commitment to generate greater support for a free and open Indo-Pacific from all countries that share our vision of a region rooted in sovereignty, the rule of law, and sustainable prosperity.” Read Pompeo’s full remarks at the Indo-Pacific Business Forum here.

  • Xinjiang becomes logistics hub of Belt and Road. A freight train logistics center in Xinjiang’s Urumqi is expected to handle 1400 trains to Europe, approximately double the number last year, according to the Chinese government’s State Council Information Office. Optimization with inspections authorities and customs has cut the trip from Europe from 22 days to 15 days. and to Central Asia from 66 hours to 44 hours.
  • Can Malaysia’s Mahathir Mohamad achieve economic balance with China on upcoming visit? (South China Morning Post)

Excerpt: “A Malaysian diplomat, who also requested anonymity, said that the intensifying economic and strategic rivalry between China and the US was a major concern for smaller Asian countries like Malaysia that fear being caught in the middle….Mahathir said he would seek to cancel China-backed projects like the gas pipelines and rail link along Peninsular Malaysia’s eastern coast, describing them as not viable.”

Excerpt: “We don’t want that [the Hambantota case] to happen to us, that we convert the loan to equity. We are trying to diversify as much as possible our funding sources to the extent that if we can handle that with local funds, we will do that.”

  • Soviet Collapse Echoes in China’s Belt and Road (Bloomberg

Security

  • Baloch separatist group targets Chinese workers in rare suicide attack. Six people, including three Chinese engineers, were injured in the attack, which took place in western Balochistan near the Saindak copper and gold mines district. The terrorist was the only fatality. Pakistani security sources told DAWN that “an Iranian-manufactured vehicle commonly used to transport oil.” The attack took place near the border with Iran. Baloch separatist militants have reportedly fled across the border into Iran.
  • Pakistan detains eight Chinese nationals who tried to enter southern Punjab power plant with gunsreports the South China Morning Post.
  • Commander of China’s People’s Armed Police visits Pakistan, meets with army chief, reports The News.

Regional/Strategic

  • The Afghan government is hoping for a U.S. sanctions waiver on Chabahar tradereports TOLO News.
  • China and India need to talk, navy to navy, to prevent Indian Ocean hostilities (South China Morning Post)
  • India Is the Weakest Link in the Quad (Foreign Policy) “India seemed less enthusiastic about the Quad following the Wuhan summit,” argues former Pentagon official Derek Grossman.
  • How India’s submarine strength matches up to its neighbors China, Pakistan (The Indian Express)

Excerpt: “When it comes to undersea naval fleet, Indian Navy’s submarine strength is way ahead of its neighbors Pakistan and Bangladesh, but pales in comparison to China. As per a report by Naval Analyses, India has 15 conventional submarines (SSKs), two nuclear-powered submarines (SSBs) with nuclear-tipped ballistic missiles (SSBNs) and one nuclear-powered submarine (SSN) INS Chakra. In terms of both quantity and technological advancement, China’s submarine fleet drastically outperforms India’s. The Dragon has a total of 78 submarines, which include six advanced JIN-class SSBNs armed with missiles with a range of 7,200 km. Besides, China has 14 nuclear-powered submarines and 57 conventional ones.”

  • Xinhua and Baltic Exchange release the 2018 International Shipping Center Development Index report. [Report]
  • Pakistan Navy ship visits Colombo Port in Sri Lanka.
  • Maldives seeks scaling back of Indian presence as it woos China (Reuters) 

Bottom line: “Yameen has invited China to do a lot of infrastructure building and he suspects that India is trying to keep a watch on what the Chinese are doing and so wants to keep the Indians out.”

  • India’s Modi calls for easing of political crackdown in Maldives (AFP)
  • China agrees to extend $1.25 billion concessional loan to Sri Lanka. The loan described as “below market” with an interest rate of 5.25 to 5.35 percent, a maturation period of eight years, and a grace period of three years.
  • U.S. to provide Sri Lanka with $39 million grant for maritime security. The aid is part of the U.S. $300 million Indo-Pacific initiative counter, reports the AFP.
  • China and Seychelles hold high-level diplomatic dialogue. Seychelles says it “supports the Belt and Road Initiative proposed by President Xi Jinping.”
  • Malaysia’s Mahathir calls on China to respect passage in South China Sea (Associated Press)
  • China Has a Stealth $410 Billion Stash to Boost the Economy (Bloomberg) “…that money could be used to boost economic growth in the event of further escalation of the trade war.”
  • STUDY – Development finance: Filling today’s funding gap (The Brookings Institution)

Excerpt: “With the new authorities given [to] the IDFC, the U.S. would be able to work with its allies as a co-equal development finance partner. The IDFC could join its peers in co-investing, co-lending, and blending finance. While these DFIs cannot match China’s commitments dollar-for-dollar, that is not necessary. Rather, they should play to their strengths by encouraging entrepreneurship and innovation backed up by private capital investment and private sector discipline. By working together, the DFIs can double or triple their individual capacity, avoid competing against each other for who can provide the most subsidy for a deal, and offer regional and sectoral financing programs that will quickly create critical mass.”

  • Pakistan-Maldives cooperation grows:

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Posted by CPEC Wire Staff

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