Michael Kugelman
On Nov. 20, Pakistani Foreign Minister Shah Mehmood Qureshi boldly declared that the China-Pakistan Economic Corridor (CPEC)—the Pakistani component of China’s broader Belt and Road Initiative—was the country’s “top priority.”
Qureshi’s proclamation came just weeks after Yao Jing, China’s ambassador to Pakistan, announced that the first phase of CPEC—an infrastructure and connectivity project valued at $62 billion—was coming to a close, and that a second phase would soon begin.
Over the last month, Chinese and Pakistani officials have been strikingly specific about what this second phase will entail for CPEC, a project that is as opaque as it is expensive. While the first phase emphasized energy and roads, the second phase will focus on industrialization, agriculture, and socioeconomic development, with a particular emphasis on special economic zones. Chinese media reports have claimed that groundbreaking for one such zone, based in Pakistan’s Khyber Pakhtunkhwa province, will take place this month and “directly employ 150,000 people” in industries that include light engineering and food processing.
There’s an irony here. Back in 2017, the influential Pakistani newspaper Dawn published a document laying out a long-term plan for CPEC. The document, according to Dawn, proposed a far-reaching and unprecedented scope of future investments—such as agricultural projects, a national fiber optic “backbone,” and a new monitoring and surveillance system meant to oversee law and order in Pakistani cities. The plan, said the newspaper, “envisages a deep and broad-based penetration of most sectors of Pakistan’s economy as well as its society by Chinese enterprises and culture.” The Pakistani government rejected Dawn’s report, calling the documents aspirational and the article inaccurate. And yet, some of the very objectives identified in that master plan—specifically agriculture investments and special economic zones—have been identified in recent days as second-phase CPEC priorities.
Clearly, both capitals have long had big plans for CPEC. However, the launch of CPEC’s second phase comes at a moment when it faces growing challenges, particularly for a government that has appeared less enthusiastic than its predecessor about the project. Imran Khan, elected Pakistan’s prime minister last year, inherited the project from a government he had often criticized for corruption.
Islamabad must now walk a tightrope: corralling CPEC to ensure benefits—rather than damage—to the Pakistani economy, while reasserting its commitment to a project critical to both its own interests and its indispensable allies in Beijing.
Concerns abound about CPEC. They include a lack of transparency, high costs, a heavy dependence on Chinese labor, and major debt risks for Pakistan. These worries—frequently highlighted in research studies and even acknowledged in conversations with CPEC backers in Pakistan—formed the crux of a recent rare U.S. government rebuke of the project, issued by Ambassador Alice Wells, the top South Asia official at the State Department, in a speech at the Wilson Center on Nov. 21—coincidentally the very day after Qureshi declared CPEC to be Pakistan’s top priority.
Within the constellation of CPEC concerns, debt risk looms largest. To be sure, many CPEC loan repayment deadlines aren’t due for at least another decade, and a Chinese official recently stated that CPEC debt now amounts to less than a 10th of Pakistan’s total debt. Still, Islamabad risks a future fiscal train wreck by taking on so many Chinese loans at a moment when it’s already so deeply debt-ridden. Beijing has been trying hard to alleviate worries about Belt and Road-linked debt—but cases such as the seizure of a Sri Lankan port have unnerved many.
In Pakistan, public debt has already reached alarming levels. In mid-2019, it stood at a whopping a 86.5 percent of GDP—a 13.5 percentage point increase from the previous year. This problem can be attributed in part to the domestic debt of Pakistan’s floundering public companies—including the national airline and railway—which increased by nearly 250 percent between 2013 and 2018. These companies continued to borrow heavily in 2019, and Islamabad has made little headway in pursuing their privatization.
More broadly, Pakistan—which saw GDP growth fall to 3.3 percent in fiscal year 2019, a drop of 2.2 percentage points from the previous year—is in full-on austerity mode. Current and fiscal account deficits coupled with a new International Monetary Fund bailout package are obliging Islamabad to make major cost-cutting moves.
Against this backdrop of debt, slowing growth, and austerity, pushing ahead with CPEC spending risks further strains for an already-struggling economy.
Against this backdrop of debt, slowing growth, and austerity, pushing ahead with CPEC spending risks further strains for an already-struggling economy.
The ruling Pakistan Tehreek-e-Insaf party has telegraphed some unease about CPEC. Soon after taking office in August 2018, it announced a review of all CPEC agreements, in an effort to address allegations about special perks for Chinese companies and other corruption-related concerns. The next month, in an interview with the Financial Times, Commerce Minister Abdul Razak Dawood even suggested that Pakistan would suspend CPEC while Islamabad undertook its review: “I think we should put everything on hold for a year so we can get our act together. … Perhaps we can stretch CPEC out over another five years or so.” Dawood later said his comments were taken out of context, but the message was clear: Islamabad had very real worries about CPEC.
Subsequent months brought more indications of Islamabad’s desire to be cautious with CPEC. In March, the government reallocated about $170 million in funds meant for joint infrastructure projects with China to other types of construction projects. And in June, its new federal budget revealed a $645 million reduction in Belt and Road-related projects from the previous year.
The current government’s worries about CPEC shouldn’t be surprising. Pakistan Tehreek-e-Insaf is a populist party that has long expressed a preference for investments in people over infrastructure, and for a cleaner and more transparent form of governance. Khan has long claimed to be an anti-corruption crusader with dreams of weaning Pakistan off international support and transforming the country into a self-sustaining Islamic welfare state. CPEC goes against all of these principles and objectives.
Then there are the broader implications of Islamabad’s intensifying dependence on Chinese largesse and the leverage this confers on Beijing. Khan is an unabashed nationalist who made a name for himself as a fierce opponent of drone strikes and of foreign influence more broadly. He once declared that “Westoxified Pakistanis have been selling their souls … for a few million dollars.”
Khan hasn’t railed against China’s deep footprint in Pakistan—no senior Pakistani official would dare upbraid Beijing—but he can’t be pleased about the impunity enjoyed by its nationals there. Last year, just a few months before his government took power, a group of Chinese engineers in the city of Khanewal, furious they couldn’t leave their housing facility to visit a red-light district without a security detail, went on a rampage and attacked the police posted there to protect them. No action was taken against the men, who also cut off the electricity supply being used by the police at the facility.
Meanwhile, ever since Khan became premier, he has had to awkwardly feign ignorance when asked in television interviews about China’s abhorrent treatment of the Uighur Muslim people, and his government has had to pressure authorities to stop an investigation of Chinese nationals in Pakistan accused of selling more than 600 Pakistani women as brides and sending them to China. Antagonizing Beijing simply isn’t an option for the Pakistani government, and this can often make Islamabad look heartless.
Nevertheless, Pakistan has renewed its commitment to CPEC. Not only is it building out the project’s second phase, but—reportedly at the behest of Beijing—it has also formed a new CPEC authority meant to make the project’s decision-making process more efficient. This new body is led by retired Lt. Gen. Asim Bajwa, a former military spokesperson. This appointment is no small matter in a nation where the Army’s political power is unmatched.
For Islamabad, going wobbly on CPEC isn’t an option—not just because of Beijing’s determination to move forward and the development benefits that Islamabad hopes will emerge, but also because of Wells’s harsh criticism of the project (which prompted denunciations from Pakistani leaders and a unanimous Senate resolution condemning the U.S. diplomat’s speech). There can be no worse optics for Pakistan than defying its Chinese ally and caving in to pressure from Washington to rein in the project.
Fortunately, there is an opportunity here. Pakistan knows the IMF is expecting more transparency with CPEC. Islamabad can argue to Beijing that opening the books on the project’s finances can create an opening for the two sides to renegotiate problematic loans—thereby making them more financially viable for Pakistan, but also more desirable for China. Beijing doesn’t want prohibitive borrower debt to jeopardize the future of CPEC, the most operationalized element of the Belt and Road Initiative to date.
The stakes are high. A troubled but too-big-to-fail project has moved into high gear—and Islamabad, despite its misgivings, must find a way to keep it on course.
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