A congregation of global leaders was hosted by Beijing this week to commemorate a decade of the Belt and Road Initiative (BRI). Amongst the several dignitaries who attended was the Caretaker Prime Minister of Pakistan, Anwar ul Haq Kakar.
Kakar, on behalf of Pakistan, represented one of BRI’s flagship projects, the China Pakistan Economic Corridor (CPEC). While the PM was all praises for the BRI and CPEC, the reality back home is a bit different.
Pakistan has not just struggled to capitalize on the full potential of the CPEC, but also has amassed a considerable amount of debt in the process. Further, the Chinese have also opted for a cautious approach as their concerns regarding the country’s political and security situation remain unresolved.
The Belt and Road Initiative
The Belt and Road Initiative began with significant Chinese state-led investment in infrastructure projects abroad, primarily focused on energy and transportation, like power plants and railways. While some goals, such as internationalizing the yuan and addressing overcapacity in Chinese companies, were partially achieved, the main economic benefit for China came through increased trade.
The initiative led to numerous agreements that provided China with access to important resources like oil, gas, and minerals, particularly as its focus expanded to include Africa, South America, and the Middle East. Over the past decade, approximately $19.1 trillion worth of goods were traded between China and Belt and Road countries. However, due to China's slower economic growth, the scale and funding of Belt and Road projects have either decreased or remained stagnant. This is occurring at a time when an increasing number of financially burdened countries, such as Ghana, are undergoing debt restructuring.
China-Pakistan Economic Corridor
The CPEC has also been underway for about a decade, with two phases: infrastructure and energy in the first phase, and Special Economic Zones (SEZs) focusing on industrial and agricultural cooperation in the second phase. Completion of projects in the energy and infrastructure categories varies, with some already finished, under construction, or still under consideration. Gwadar development has also seen progress but still has ongoing and future projects. Work on SEZs and SSD has been slow.
Former Pakistani diplomat, Husain Haqqani, in an article for Foreign Affairs explains that Chinese involvement in Pakistan has had a significant impact, both positive and negative. Chinese investments have increased the influence of Chinese companies and nationals in Pakistani politics. However, this has come at a cost, as Pakistan has had to bear a hefty bill for power plants, and provide tax exemptions to Chinese projects, resulting in a loss of national revenue.
Additionally, the reliance on Chinese machinery has led to a rise in Pakistan's import bill. Furthermore, Chinese projects have not contributed much to local employment, as Chinese companies often bring in their own labor, leading to minimal interaction with the local population.
There have also been instances of land grabs, threats to fishermen's livelihoods, and displacement of local people, causing wider instability. Pakistanis are now becoming more aware of the challenges associated with deepening economic ties with China.
The initial enthusiasm has faded, and Pakistani leaders are cautious about the country's debt obligations, given China's decreasing willingness to invest due to security concerns and uncertainties regarding returns on investment. Despite a free trade agreement, Pakistani exports to China remain stagnant, accounting for only a small portion of bilateral trade.
One prominent example of failing to meet the targets is the ML-1 railway track, which serves as a centerpiece of the CPEC project. This track is designed to begin from Karachi and traverse Punjab, covering significant population centers until reaching Peshawar. Furthermore, there are plans to create a branch of the ML-1 in northern Pakistan that will extend towards the Chinese border.
However, without a feasible business model capable of supporting a $10 billion loan, the ML-1 project is unlikely to serve the public interest and could potentially result in another debt crisis.
This leads us to the final and probably the most important conundrum that Pakistan faces in terms of the CPEC.
China, the leading bilateral lender of the developing world, is apparently paying a massive cost to safeguard its Belt and Road Infrastructure (BRI) projects. According to a paper published on China's role in global finance, the country has spent $240 billion between 2008 and 2021 on bailing out 22 developing countries. Amongst the top recipients were Argentina, Pakistan and Egypt with $111.8 billion, $48.5 billion and $15.6 billion in bailouts respectively.
Many around the globe are skeptical about debt from China due to stringent clauses attached to it. Among these are a few prominent ones including: cross-default, which allows Chinese lending authorities a right to demand immediate repayment in case a country defaults on loan repayments to other creditors (e.g. World Bank), and a stabilization clause that prevents a country from applying new laws to Chinese financed projects, along with a clause that restricts borrowing country to compel China from agreeing to terms similar to what has been agreed on with other creditors like the Paris Club.
However, Chinese analysts debunk allegations of manipulation stating, “many low and middle-income countries prefer Chinese investment to those from the West, not only because China appears more like a benevolent creditor, but rich countries typically brand developing countries as high risks plus low rewards, and impose onerous conditions that delay project implementation and increase costs.”
The problem in Pakistan’s case, perhaps, lies with the planning or the lack of it, while conceiving the projects under CPEC. Miftah Ismail touched upon the issue in a session with Brookings Institution stating that “the power plants being built, or roads and highways being constructed (under CPEC) aren’t generating enough dollars (to repay loans), and neither are they improving productivity by that much.”
Economist Atif Mian, on the Brookings panel with Miftah, shared the same views, “If you can’t pay the loans back, then it means that you aren’t growing, and the projects haven’t been that beneficial.”
However, both countries remain committed to the project as exemplified by Kakar’s recent visit to Beijing and the subsequent decision to revamp the ML-1 project, alongside the signing of multiple deals to broaden the scope of the CPEC. The continued collaboration stems from the mutual strategic interests of both parties thus, the willingness to overlook some failures at the execution front.