Pakistan has a new savior – or at least someone who’s presenting himself as one. Gen. Asim Munir, the chief of army staff and country’s de-facto ruler, his supporters claim, is on a campaign to save Pakistan’s economy by crushing corruption and bringing in tens of billions of dollars in foreign investment.
Pakistan sure does need the help. Its economy is in a bad place. Inflation remains stubbornly high at nearly 30 percent. Bloomberg Economics ranks Pakistan with Ukraine and Egypt as the three countries most vulnerable to a debt crisis.
A stand-by arrangement with the International Monetary Fund is what’s saving the country from default. But it terminates in April and additional inflows, including from the IMF, are vital before and after the program ends.
Munir’s plan to tackle the crisis is to bring in upwards of $100 billion in investment from Gulf Cooperation Council (GCC) countries through the newly-created Special Investment Facilitation Council (SIFC).
The SIFC is an army-managed “one-window” vehicle to fast-track investment from the GCC into agriculture, mining, and other industries. While investment from the Gulf is much needed, and welcome, it is essential that Pakistan doesn’t make the same mistakes with the SIFC that it made with China’s Belt and Road Initiative.
In 2013, Beijing and Islamabad launched a bilateral connectivity initiative as part of the BRI, known as the China-Pakistan Economic Corridor. CPEC, Pakistani leaders said, would create a new north-south corridor connecting Pakistan’s Arabian Sea ports with China’s landlocked Xinjiang region. It would usher in a new era of growth, they claimed, propelling Pakistan into the ranks of the world’s largest economies. And the Chinese-run Pakistani port of Gwadar, located in the restive Balochistan province, would be the region’s next Dubai. Alas, terrorist attacks are more common at the Gwadar port today than visits of major cargo vessels.
To be clear, CPEC succeeded in fast-tracking vital electric power and infrastructure projects in Pakistan. More than $25 billion in projects have been initiated or completed through CPEC. But Pakistan privileged speed over sustainability, often through undermining regulatory authorities. As a result, the electric power generated through CPEC has largely been unaffordable for Pakistani consumers. As arrears owed by Pakistani power distribution companies to Chinese electric power producers mount, many of the CPEC power plants sit idle.
Rather than lead to a virtuous cycle, CPEC, Pakistani official data shows, created a bubble and crowded out investment from other foreign partners.
In the years since CPEC’s launch, net foreign direct investment peaked at $2.78 billion in the 2017-18 fiscal year, with the surge largely driven by Chinese investments in the power sector. Net FDI in Pakistan has since declined. Rather than transform Pakistan’s economy, CPEC exacerbated its imbalances, forcing the country back into the clutches of the IMF.
Exclusive incentives and privileges drew state-aligned Chinese businesses. But many foreign investors who did not benefit from CPEC’s privileges exited the country.
During CPEC’s peak years – from the 2013-14 to 2017-18 fiscal years – average annual net FDI from China grew by nearly seven-fold compared to the 2011-12 and 2012-13 fiscal years. Over the same period, net FDI from every major Western partner, including the UK, United States, and the Netherlands, fell by anywhere from 36 percent to more than 300 percent.
Clearly, Pakistan’s own history shows the risks of giving competitive advantages to new investors from a single geographical region at the cost of broader systemic reform. It can trigger a temporary surge in investment, but those left out won’t give Pakistan a look. And existing investors may just end up leaving.
The case of CPEC also includes a recent antecedent of the SIFC. At the army’s behest, the government of Pakistan established the CPEC Authority in 2020. Led by a recently retired senior army officer, the CPEC Authority, like the SIFC, was supposed to serve as a “one-window operation” to push CPEC projects through red tape. Rather than reforming its regulatory system as a whole, Pakistan chose to create a new bureaucratic organization solely dedicated to advancing investments from a single country. Suffice to say, it hasn’t succeeded.
Repeating similar mistakes will damage Pakistan’s prospects for sustained foreign direct investment. Pakistan instead needs predictability, transparency, and efficiency. Rules are not the enemy. They need to be clear, consistent, and fair.
To bring the most benefit to all of Pakistan, this renewed effort at attracting foreign investment must be paired with deep reforms to the judicial system and, in particular, its ability to adjudicate commercial disputes, enforce contracts, and protect intellectual property. The SIFC should eventually give way to an empowered Board of Investment and strengthened regulatory bodies, like the National Electric Power Regulatory Authority.
The GCC is essential to Pakistan’s economic future. With relatively high interest rates in the West, the GCC has become one of the world’s main sources of finance.
Bringing Saudi Arabia as a strategic partner in the Reko Diq mega copper mine project makes absolute sense. But like with CPEC’s Gwadar port, the success of Reko Diq is tied to resolving a separatist insurgency that desperately needs a political solution.
Ultimately, for Pakistan to prosper, its civilians, both its elected leaders and the people they represent, must take the lead. Institutional reform, political stability through representative government, and deep investments in human development can usher in an era of rapid, sustainable, and equitable growth.
Arif Rafiq is president ofVizier Consulting, LLC, a political risk advisory company focused on the Middle East and South Asia, and a non-resident scholar at theMiddle East Institute. X:@arifcrafiq
