CPEC and COVID-19: Testing times for the all-weather friendship?

12718463143_d2e4bb7b08_4k.jpg

CPEC and COVID-19: Testing times for the all-weather friendship?


WRITTEN BY RISHAP VATS

27 May 2020

As China-Pakistan diplomatic ties mark its 69th anniversary, there is a growing eagerness in Beijing and Islamabad to reaffirm their strategic partnership in this rapidly changing world. In March, when China was facing the ire of countries across the globe for its role in the spread of COVID-19, Pakistan President Arif Alvi visited Beijing with the “singular aim” of conveying “strong support and solidarity” towards the Chinese government.

At a time when the Chinese premier was criticised for missing from his usual place of prominence, President Alvi’s two-day visit made him only the second foreign leader after the Cambodian Prime Minister to visit China after the COVID-19 crisis began. However, apart from reaffirming the long-standing bond between the two nations, the issues related to the China-Pakistan Economic Corridor (CPEC), and its progress did not lose its prominence in the bilateral talks.

With an aim to further strengthen the institutional framework behind CPEC, the high powered Pakistan delegation laid the groundwork for the 10th Joint Cooperation Committee with their Chinese counterparts. Both governments even emphasised on a new phase of “high quality of development” of CPEC that resulted in the signing of two MoUs for establishing two new joint working groups under the rubric of CPEC.

The fact that, even during such an unprecedented crisis, the focus on CPEC remains unwavering, only goes to show that leaders on both sides felt the necessity to expedite the completion of projects to counter any disillusionment due to increasing reports of delays.

Touted as a “game-changer”, CPEC is one of the earliest manifestations of the BRI, and despite the hurdles, we shouldn’t be neglecting the underlying strategic aspects of this grand project. For Pakistan, it is about transforming its economy and making sure CPEC becomes a harbinger of prosperity.

Despite overtly optimistic projections and statements by Chinese and Pakistani officials, the fact remains that since the official announcement as a flagship project under China’s ambitious Belt and Road Initiative in 2015, out of the 132 total announced projects, merely a quarter (32) of CPEC projects have been completed.

Having said that, apart from the initial delays in some of the “early harvest projects” in the first phase, the bulk of the energy projects – which comprise of nearly two-thirds of the total Chinese investment – have been completed or are near completion. Completion of such projects, along with some transport infrastructure and Gwadar port worth roughly $20 billion in total, suggest that not all is lost.

Nevertheless, the major problems – such as unsustainable debt levels and the subsequent issue of repayment of loans – facing the CPEC not only remain, but are expected to be exacerbated due to the coronavirus pandemic.

Pakistan’s macroeconomic situation was already bleak with estimated GDP seeing a decline to 3.3% in 2020 from 5.8% in 2018, and early projections for 2021 estimating further drop to 2.4%. Besides, projections made by the IMF of the negative growth rate of 1.5% combined with diminished exports and remittances, low source of revenue along with the already ballooning deficit suggest that repayment of loans will only get tougher from now.  And, unlike many other emerging economies, the chances of a significant post-pandemic economic bounce remain grim in Pakistan. Furthermore, with the government’s debt burden estimated to reach around 85-90% of the GDP in this fiscal year, Pakistan’s ability to debt service obligations will be hindered as external debt hovers around $111 billion.

Undoubtedly, for Pakistan, unsustainable debt levels are a long-standing issue and not entirely a direct consequence of Chinese predatory lending. In 2018, it received assistance form countries like Saudi Arabia and the United Arab Emirates. In the following year, it also received a 6 billion dollar bailout, its 13th since the 1980s.

Last month, Islamabad requested Beijing to ease its payment obligations of over $30 billion of 12000-megawatt power projects that fall under CPEC. Similarly, under a G20 initiative which aims to suspend the payment of debt and interest payments, Pakistan is attempting to negotiate debt relief with different multilateral and bilateral lenders, including China.

Despite the repeated assertion by Pakistani authorities that debt incurred under CPEC only amounts to 5.3%, it has to pay about $615 million to China by June 2021 under bilateral debt. Over the next three years, out of the $28 billion external debt which Pakistan has to repay, roughly third of it belongs to China. Also, the argument that these repayments primarily comprise of non-CPEC loans isn’t enough to let CPEC off the hook. Official documents released last year show that when for the first time, Pakistan fully disclosed the debt incurred from Chinese borrowing in a fiscal year, it was found that Chinese loans were equal to 75% of the total foreign loans. This happened because for the first time Chinese deposits in Pakistan’s central bank – which it uses to shore up its currency reserves – were included in the debt statistics of the Ministry of Finance.

Hence, to dismiss all the debt woes that Pakistan faces with regards to Chinese lending will be naïve and disingenuous.

Further, as CPEC moves to the second phase, with emphasis on Special Economic Zones (SEZs) to induce industrial cooperation and create around 700,000 jobs for the local population the gap between reality on ground and expectations becomes wider. Out of the 2.3 million jobs that were promised under CPEC for locals, as of today it has been able to generate only around 75,000 jobs thus far, according to Chinese embassy documents. Progress on the SEZs has also been slow, with only one out of the 11 promised zones being completed under CPEC.

Similarly, the energy projects which have been a top priority for the Pakistani government, aimed to benefit the people by bridging the energy deficit has seen only 34% project completion overall according to a study. Moreover, the western route of CPEC – that was supposed to be completed by December 2019 – lies in tatters as work on two out of the seven sections has been stopped due to non-payment of dues. Non availability of funds also shows rising domestic debt which has affected domestic state owned entities like Pakistan’s national airlines and railway. Due to continuous heavy borrowing debt has increased by nearly 250 per cent between 2013 and 2018.

To make matters worse, a leaked governmental report on CPEC shows that two Chinese power companies inflated costs which earned them around 50 to 70 per cent profit as against the 15% set by Pakistani authorities. The 278-page report, examined by a nine-member committee which included members of Pakistan’s spy agency, found that this malpractice resulted in steep fares for electricity and led to a loss of $630 million.

Such instances of Chinese malpractices will give credence to the argument many seem to be making of late in Pakistan that there needs to be a revaluation of certain aspects of the projects. Despite the near unanimity in the country on the need for CPEC and other related Chinese investment, there have been calls for greater scrutiny of the nature of investments. While many in Pakistan aim to ascertain whether CPEC augurs reciprocal benefits as claimed by the leadership on both sides, the growing Chinese apprehension about the commercial viability of its investments can’t be dismissed either. Maybe that is the reason why we no longer see any mention of the $62 billion pledge made by China and its officials.

China’s Consul General to Karachi, Li Bijian recently indicated that Beijing would need to see some prerequisites for further Chinese investments. Unless the Imran Khan government doesn’t provide better guarantees, a more viable regulatory framework and also a display of political will, Chinese companies will tread cautiously. According to him, private companies cannot be ordered but only encouraged. And as the focus will shift to business to business cooperation, he added that “it will not be persuasion but the profit expectation and risk coverage that will mobilise them.”

Apart from viability and security issues, for China, political consensus and cross-party support are also very crucial. To overcome the Pakistani government’s own inability to build consensus, China tried to engage Pakistani leadership at all levels directly. This led to the establishment of a CPEC Political Parties Joint Consultation Mechanism, where the Communist Party of China (CCP) tried to assuage fears of provincial leadership on allegations of unequal distribution of projects. However, the creation of a separate CPEC Authority (CPECA) by the Khan government through an ordinance can create further political divisions. Going against the advice of the Senate committee, the creation of such authority with immense powers has been opposed by all major opposition parties in Pakistan. 

On top of that, the appointment of former ISPR chief Lt Gen. Asim Bajwa (Retd), as not just the chairman of CPECA but also the special assistant to the Prime Minister, indicate the changes in the civil-military dynamic in the country. Although Beijing has a close relationship with all the powerbrokers in Pakistan and views the Pakistan Army as an efficient helping hand it will have to tread lightly.

Nonetheless, despite the cost overruns, delayed payments and teething problems faced by some marquee projects, it is unlikely that Beijing will abandon their ‘all-weather ally’ so easily. The CCP has never looked at CPEC with purely economic logic. Hence, whether it's their economic woes or Pakistan’s slow-paced progress, ultimately strategic concerns will override them all.

Touted as a “game-changer”, CPEC is one of the earliest manifestations of the BRI, and despite the hurdles, we shouldn’t be neglecting the underlying strategic aspects of this grand project. For Pakistan, it is about transforming its economy and making sure CPEC becomes a harbinger of prosperity. Whereas for China, CPEC is key to the BRI’s reputation, whose success or failure might have a spill-over effect on the long-drawn effort of turning the BRI vision into reality – especially now, when there is a growing scepticism around Chinese investments or influence.

Even if China cannot afford to be too generous to Pakistan, it is prudent to see that the convergence of strategic interest between the two Asian nations are simply too strong for CPEC to witness a major setback. And, at a time when China has launched a diplomatic blitz along with an aggressive propaganda campaign, the largest creditor in the world will not side-track itself from “winning hearts and minds”, definitely not from the country which holds the projects that are at the very heart of Xi Jinping’s vision of China’s role in the world.

DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.

Author biography

Rishap Vats is the Assistant Editor at Young Bhartiya Foundation and a faculty for Political Science at the School of Economics, NMIMS,Mumbai. He completed his Master's degree in Political Science from University of Mumbai. Image credit: Mark McCaughrean/Flickr.