The Federal Minister for Water and Power and Defence Khwaja Asif was tasked to rebut Imran Khan's claim that the 34 billion dollar contracts on energy, roads and transport sector that were to be signed during the scheduled visit of the Chinese President were loans rather than foreign direct investment (FDI). And that the cancellation of the visit would hurt the economy. Unfortunately, however, this clarification should have been tendered by Federal Finance Minister Ishaq Dar instead of the Water and Power Minister whose understanding of financial subjects is naturally limited and he has unwittingly generated a considerable controversy. To determine who is right some definitions are in order.
FDI is a cross-border long-term transfer of capital to develop a specific project and it is pertinent to note that FDI has contributed to the development of infrastructure in many developing countries of the world. In this context, it is relevant to note that China itself is the fourth largest recipient of FDI in the world with the stock of over one trillion dollars FDI in 2013. Pakistan's stock of FDI was estimated at 22.7 billion dollars in 2012 while India's was estimated at 310 billion dollars in 2013. US, however, remains the largest recipient with FDI stocks of 2.8 trillion dollars. Portfolio investment is not considered FDI as it is investment in equity as opposed to any physical operations and is particularly susceptible to political investor perceptions of turmoil.
External debt/loans are owed to creditors outside the country including foreign governments, corporations and banks while debtors may be the government, corporations or even private citizens. External debt can be guaranteed by the government or banks or it can be private non-guaranteed loan. In other words, the prevailing confusion is understandable given some overlap between FDI and external debt. However, according to the World Bank and the International Monetary Fund, "a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth". In other words debt owed by the private sector to external players is a component of debt sustainability.
One major difference between FDI and external loans is the fact that the former is considered an outcome of the state of the economy or in other words FDI is attracted to a liberal economy that has implemented the necessary structural reforms, developed its natural domestic resources like, in our case, coal and, is not subjected to political turmoil or security concerns. It is largely the private sector that generates employment opportunities and fuels growth within the recipient country; and generates profits as well as political clout for the investing country. Pakistan does not meet any of these criteria: growth remains hostage to a budget deficit reduction policy and energy shortages, while security concerns as well as political turmoil have simply made us more unattractive as a destination country for FDI. Thus for China to propose 34 billion dollar FDI or even a loan must be supported. In contrast loans that are contracted by the government whether bilateral/multilateral have a time bound action plan, and a rigid repayment schedule which is reflected in the budget.
China's investment in Pakistan's infrastructure must have government engagement as infrastructure operates in the domain of the public sector yet it is unclear how the FDI would translate into profits for the Chinese investors. That needs to be clarified. In addition, it is unclear whether the Chinese investors would have a shareholding/ownership (and how much) or simply extend finances and undertake the technical aspects of the project as has been the case with Chinese investment in Pakistan in the past.
China's FDI in the rest of the world was 230 billion dollars in 2009 and it is roughly doubling each year with the forecast being that by 2020 it would amount to between one to two trillion dollars. Pakistan needs to get in on this. Be that as it may, the PML-N government has been engaged in talks on developing an economic corridor between the two countries and is correct in pointing out to its critics that at present there is no other investor interested in Pakistan given the security situation as well as the ongoing political turmoil and hence Chinese interest is very important. Secondly, China is not expected to extend a high interest loan and if past precedence is anything to go by the Chinese would charge concessional interest rate on the loan. And finally whether this amount comes in the form of FDI or loan the fact remains that it would be used for development of deficient infrastructure that would spur growth and therefore, must be fully supported.