Understanding COVID-19’s Impact on the China-Pakistan Economic Corridor
How has one of the Belt and Road Initiative’s signature projects fared?
In April 2020, Pakistan sent a request to China for massive debt relief on loans amounting to $30 billion under the China-Pakistan Economic Corridor (CPEC). The situation for CPEC is getting gloomier by the week as the coronavirus epidemic threatens to cause additional interruptions and setbacks to its various projects.
After more than five years of determined efforts on one of China’s flagship Belt and Road Initiative (BRI) projects, less than a third of CPEC projects have been completed to date. With Pakistan facing a high risk of debt distress in the coming years, it’s unlikely China is going to remain committed to the project financially, as previously reported. COVID-19 may prove to be too much for Pakistan and China’s so-called “all-weather” friendship, with the infrastructure project expected to hit a serious roadblock.
Work on CPEC before the COVID-19 pandemic was sluggish at best, with Pakistan repeatedly missing construction targets as it ran out of money and corruption scandals took center stage. There has virtually been no progress on the most important parts of the project, which involve the setting up of industrial estates and special economic zones across the country. The port of Gwadar, a key component of CPEC, has hardly moved toward the grand vision of making it the best seaport in the region.
There is practically no traffic at the port and staff usually wait for weeks for Chinese containers, which make up most of the port’s transportation traffic, to arrive. The city surrounding the port continues to lack basic necessities, including the availability of clean water, and development remains as bad as any other part of the underdeveloped Balochistan province.
During my visit to Gwadar city last year, I witnessed first-hand the misery of the port city’s 80,000 people. Besides a fortress built for Chinese workers, there is not much happening in the city. A trail of posters about planned housing complexes cannot be missed, except that the houses are nowhere to be seen. Fishing, which drives the port city’s economy, faces serious threats as more and more regulations and restrictions are put in place, hampering the ordinary business of fishermen. The process of getting access to the city and the port resembles that of entering a red zone, as thriving military checkpoints scan every single person coming their way.
Adding to the crisis is Pakistan’s depleted capacity and commitment to not only financing these projects, but also to containing the growing mismanagement and corruption that has inflated costs and adds to the country's sprawling debt. Amid the COVID-19 pandemic, Pakistan has announced that it will push ahead to construct the Diamer-Bhasha dam, a project considered technically unfeasible by Pakistani and Chinese engineers. Reportedly, China has already pulled out of the project, which is estimated to cost some 10 percent of Pakistan’s total GDP. Engineers and bureaucrats working on the dam know that it cannot be built, “so why not milk the gravy train of consultancy and engineering contracts that have been flowing from it anyway?” says Daanish Mustafa, a researcher in Politics and Environment at the Department of Geography at King’s College London.
Certainly, amid COVID-19, there is a growing sense of urgency on the part of Pakistan and China to speed up the work. However, this has only focused on the power sector and road projects, where Chinese lenders stand to gain financially. It’s important to note that about a third of Pakistan’s $28 billion foreign debt repayment obligations over the next few years are to China and a majority of that debt is tied to power and construction projects.
Arif Rafiq, in a recent article for the National Interest, argues that the entire idea of CPEC remains unsustainable as it is “heavily weighted toward debt-driven investments.” So far, Pakistan has completed projects worth $15 to 20 billion under the project, and “rather than transforming the Pakistani economy, CPEC has worsened the country’s pre-existing condition: perpetual economic disequilibrium fueled by consumption-driven growth.” This assertion is not without grounding: About three years ago, the idea of CPEC providing sustainable growth to the Pakistani economy took development indicators to around 6 percent. However, within a couple of years, these indicators have come crashing down with Pakistan’s economy now expected to grow by only 1.5 percent in 2020. Meanwhile, the country’s debt has grown by 25 percent over the past two years.
It’s unlikely that China is going to write off Pakistan’s debt due to the COVID-19 situation at a time when the former’s economy is slowing down and investment in a new phase of industrial and economic zones requires an additional $10 to $15 billion. Beijing understands that Pakistan can’t manage the funds for the next phase of the projects and that, as a result, it is China that will have to carry the burden.
But why will Beijing rush to lend additional financing when it is fighting to secure repayments on its previous investments whose future remains bleak? "[China] has largely figured out the terms of what a slimmed-down CPEC would look like and the current situation doesn't make it easier to deal with any of the continued obstacles,” noted Andrew Small, a senior transatlantic fellow at the German Marshall Fund, in an interview.
Sidra Tariq Jamil, the director of the CPEC center at the University of Management and Technology in Pakistan, believes that “China has always supported Pakistan in times of financial distress. This time it should not be different. China’s interests in Pakistan are far greater than the debate of likely controversy over the debt relief if the COVID-19 situation escalated in Pakistan.”
The narrative of an all-weather friendship between the two countries remains a central part of the public discourse in Pakistan. However, behind the scenes, the Chinese have been driving a hard bargain when it comes to securing their commercial interests in Pakistan. Experts warn that China is unlikely to offer Pakistan significant debt relief and, if any relief comes, it will only help Islamabad temporarily. "[Beijing] may cancel some of [the] lesser value [loans] and allow Islamabad to defer some of the payments, at best, " said Krzysztof Iwanek, who heads the Asia Research Centre at Warsaw’s War Studies University.
That said, for China, the stakes are high as it cannot afford to let a key project of the BRI just collapse. It is expected that Beijing will continue to provide some sort of material support to Pakistan to ensure that it has enough space to keep these projects afloat in some capacity. Going forward, the pace of the corridor’s development is going to be a lot slower than it already is; any projects that come next will be chosen very selectively and be subject to more financial scrutiny from both sides.
It should not be expected that any additional economic relief or assistance will come without added strings attached. Islamabad should expect a tough bargain from Beijing going forward and it should be ready to give away more negotiating space and working autonomy to China.
Beijing may offer economic support on selected projects rather than offering wholesale funding. In the short run, Pakistan may be able to gain some breathing space when it comes to repayment of loans to China. However, in the medium to long term, for Islamabad, the sustainability of CPEC will only become tenuous as China aims to use every fiscal crisis to tame Pakistan. It remains a fact that Beijing has forcefully resisted any idea of renegotiating the terms of CPEC agreements or loan repayments in the past. The arrival of COVID-19 may prove too much for Pakistan and China’s strategic partnership and CPEC as a consequence; it will force both partners to make decisions that they are not comfortable with. In any case, Beijing will make sure that the money it lends to Pakistan, however small, brings back more influence, rewards, and bargaining space for China.
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Umair Jamal is a writer for The Diplomat’s South Asia section.