Global Courant
In 2015, there was enormous optimism around the China-Pakistan economic corridor (CPEC), expecting it to elevate Pakistan’s global standing and position it as a leading force in South Asia. However, what was initially hailed as a well-intentioned effort to strengthen bilateral relations has become one of the major factors contributing to Pakistan’s economic decline.
While there were a few major Chinese-backed infrastructure projects in Pakistan prior to CPEC, the Belt and Road Initiative (BRI) ushered in a new era for Pakistan’s struggling public sector projects and its chronically weak energy and transportation industries. For a long time, these sectors depended on government subsidies, which led to budget deficits.
After China announced its intention to support and ambitiously promote Pakistan Silk Road economic belt initiative, CPEC quickly emerged as the flagship project of the BRI.
Introduced in May 2013 during Chinese Premier Li Keqiang’s visit to Pakistan, the economic corridor was praised for its design, addressing Pakistan’s infrastructure gaps, establishing industrial zones and creating trade routes to China through the strategically located port from Gwadar on the Arabian Sea.
The project initially required a significant investment of US$46 billion, which quickly escalated to US$62 billion in commitments, accounting for about 20% of Pakistan’s GDP. It included several important Early Harvest Projects (EHPs) in a country in dire need of international investment.
From a geopolitical point of view, India has been an outspoken opponent of the BRI since its establishment in 2013. India viewed one of the key components of CPEC as a violation of its territorial integrity and sovereignty, particularly with regard to its claims to Pakistan-controlled Kashmir. .
The initiative was seen as part of China’s broader strategy to encircle India and gain influence in the region. Concerns also arose about China’s easy access to Pakistani ports and the possible establishment of a naval base, leading India to become very concerned about security.
India chose to oppose the BRI and focused on its own connectivity initiatives, such as the International North-South Transport Corridor and Iran’s Chabahar Port, although it lacked a comprehensive strategy to improve regional connectivity.
Initially, the introduction of the CPEC project brought hope and relief to the people of Pakistan who were struggling with this persistent power and energy problems. Widespread blackouts due to severe power shortages had crippled economic activity and shrouded busy market areas in darkness.
The energy crisis stemmed from exorbitant energy rates charged by independent power producers (IPPs), neglected power plants, deteriorating transmission lines, and years of populist government policies.
For more than three decades, citizens have experienced daily blackouts of around 10 hours in urban areas and up to 10 hours in rural areas. These power outages disrupted revenue-generating markets, industries, educational institutions, healthcare facilities and social activities.
Figure 1: Distribution of CPEC projects
Source: Planning Commission of Pakistan
China’s initial focus on building new coal-fired power stations in the context of CPEC was initially seen as a positive step. However, in late 2021, China changed its stance to join the goals of the United Nations Climate Change Conference (COP26), committing not to develop coal-fired power plants abroad and aiming for carbon neutrality.
This change had serious consequences for Pakistan’s coal-dependent population energy sectoras ongoing CPEC projects aimed at expanding the country’s power generation capacity by 20 gigawatts were halted or suspended.
The economic viability of CPEC projects, along with Pakistan’s ongoing financial problems and its involvement in the ‘war on terror’, further complicated the situation. Rumors of impropriety on the Chinese side added to the challenges, leading to project delays and a growing burden of unproductive debt.
While Pakistan’s unsustainable external debt and economic difficulties predate the CPEC agreement, the initiative exacerbated the country’s widening current account deficits and depleted foreign exchange reserves. Despite recommendations from the International Monetary Fund (IMF)Pakistan imported significant amounts of materials for the projects before looking for one $6.3 billion rescue operation of the intergovernmental body.
The establishment of CPEC, which relies heavily on Chinese equity ownership in Pakistani infrastructure projects, has made Pakistan liable for 80% of the investments related to the corridor. This has raised concerns that the BRI’s former flagship initiative is flawed and a costly mistake for China.
China has consistently refused to delay or restructure pending debt payments, fearing that doing so would set a precedent for other indebted countries and result in a collapse of bad loans. However, it is in China’s interest to help Pakistan maintain its image as a reliable ally to the developing world.
Given these circumstances, it is crucial for economies in the region, especially BRI countries such as Pakistan, to China’s debt in their total foreign debt.
Pakistan’s involvement in CPEC has led to impractical projects that rely heavily on foreign loans, exacerbating the country’s economic difficulties. Widening trade deficits and low levels of foreign direct investment have been caused by over-reliance on external borrowing without addressing underlying macroeconomic challenges.
Therefore, Pakistan must prioritize credit diversification and debt restructuring to regain control of its external sector and address pressing macroeconomic issues.
A more detailed article by this author can be found here: Debt to infinity: Pakistan’s macroeconomic catastrophe.
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