Development of Gwadar projects now face un-foreseen uncertainties as the ongoing economic crisis and political instability in Pakistan is hitting Chinese investment sentiments. Of late, China, the sole investor in the Gwadar projects is hesitating to invest. Further the Chinese investors now seeks to maintain their bank accounts in RMB in Gwadar Free Zone without converting money into local currencies in the wake of fast depreciating Pak currency rupee (PKR).
The depreciation of PKR is the most important reason that is deterring Chinese investment. The recovery in the value of PKR following the receipt of IMF’s next tranche loan was short lived. Pakistani currency nosedived to 215 against the US dollar in the inter-bank market, a significant loss consequent upon continuing political uncertainty as well as sinking economic indicators. The dip in PKR value is mainly attributed to continued high demand for the dollar and the steadily declining foreign currency reserves of the State Bank of Pakistan (SBP). The demand for dollar increased mainly due to surging imports, which rose to around USD 80 billion in the FY 2021-22, and the growing need for currency on account of current debt repayment obligations.
The Gwadar projects are also facing other constraints and everyday new issues are cropping up. Pakistan has flaunted the CPEC as a game changer for the Pak economy. Even Prime Minister Shehbaz Sharif stated that Pakistan’s economic future hinges on CPEC. Gwadar port is its main component and its implementation is facing problems.
Under Prime Minister’s special direction, the federal government is reviewing progress in implementation of the Gwadar project, especially removing various impediments including shortages of water and electricity under its short-term strategy. These shortages have so far slowed down implementation and development of the project.
Islamabad’s forex crisis is very critical and the government wants to arrest its depreciating currency. To avoid further dip in forex reserves, the State Bank of Pakistan (SBP) had already started choking the outflow of dollars in small amounts that are less than USD 100,000. The SBP is also discouraging imports being made through the Letters of Credit (LCs) and against open accounts like Cash Against Document (CAD) import schemes. Through all these means, the SBP is following the tactics of delaying import clearance to save the dollar and arrest falling value of PKR.
The decision of Chinese companies to retain RMB account would impact several projects in Gwadar. At present various development projects in Gwadar worth USD 1.44 billion are under implementation.
One of the important ongoing projects is the 1.2 MGD Reverse Osmosis Desalination Plant that has been awarded to the Chinese contractor (CHEC). The work has started and the project is due for completion in March next year.
The Gwadar project also suffers from inherent bad administration qualities. The Pak authorities are taking much time in finalizing modalities for providing on-grid and off-grid solar solutions. The final decision for setting up of small sized desalination plants where provision of drinking water through pipes is not feasible in Gwadar, is also not in sight. One of the major reasons for the delay is that the local government is unable to identify lands near grid stations for the project to facilitate power evacuation.
Pak administrative bottleneck is proving a road block in the construction of Breakwater at Gwadar Port despite availability of funds from the Chinese government in the form of grant and soft loan. There are many instances. One of them is Pak authorities’ efforts are not fructifying as new regulatory issues are cropping up and delaying decisions for want of quick redress. Another example is Afghan Transit Trade containers at Gwadar Port, which are delayed clearance due to delay in cross stuffing rules that are pending for vetting.
Pakistan has also failed to create a secure environment for investors and implementers of the projects. The law and order situation in Balochistan is most vulnerable and there are incidents of contractors being assailed and kidnapped. Contractors related to telecom, railways and other development related projects had faced brunt of this law and order situation in the area.
There are connectivity issues as well. The alignment of Gwadar with CPEC routes, for example, is expected to take long time to be completed. Though some the road connectivity from Gwadar Port already exists, they are in very bad shape and in most cases, road are incomplete and not capable for heavy transportation. With regard to rail connectivity, land acquisition is getting delayed and thwarting speedy project execution. Land measuring 165 acres required for the freight terminal at the port has not mutated, despite making payments.
Pakistan is also keen to seek Chinese investment in establishment of a 5-MMT per annum oil refinery and other petrochemical project at Gwadar as the Saudi refinery is not taking off. But an all-round deterioration in the Pak economy and with political uncertainty writ very large, all these investment plans are stuck up. Pakistan’s fate is fast becoming gloomy.