Mishandled China-Pakistan Economic Corridor Could Misfire

It has been a tumultuous two years in Pakistan and China’s regional interactions. Since it was launched on April 20, 2015, the China-Pakistan Economic Corridor has sparked praise, skepticism, and even violence. The result is widespread confusion about what is driving this $55 billion energy and infrastructure effort, and how it will impact the region.

Praise has been heaped on the initiative by leaders of both countries. In a speech to Pakistan’s parliament two years ago, Chinese President Xi Jinping described CPEC as central to an “all-weather strategic cooperative partnership.” The China-Pakistan friendship, he said, is “higher than the mountain, deeper than the sea, and sweeter than honey.”

Pakistan’s leadership agrees. Officials have cast CPEC as the solution to many of Pakistan’s economic woes, from solving energy shortages to boosting manufacturing and exports. In November, Pakistani Prime Minister Nawaz Sharif called the opening of Gwadar port “the dawn of a new era.”

Outside observers have reacted with a mix of cautious optimism and skepticism. The International Monetary Fund as well as the U.S. credit rating agency Moody’s and others have underscored CPEC’s potential to drive growth. But they also caution that success depends on Pakistan improving its overall business environment, making structural reforms in the energy sector, and adopting more flexible exchange rate policies.

India is skeptical. CPEC includes projects in Gilgit-Baltistan, a disputed territory that India claims and Pakistan administers. Indian Prime Minister Narendra Modi implicitly criticized this aspect of CPEC earlier this year, when he said, “Only by respecting the sovereignty of countries involved, can regional connectivity corridors fulfill their promise and avoid differences and discord.”

India’s concerns are fueled by CPEC’s contradictions. CPEC has been framed as a corridor, but connectivity is its weakest dimension. Roads, telecommunications, and other connectivity projects make up a small portion of the overall effort. In contrast, more than 60% of CPEC’s announced funding relates to domestic energy projects.

CPEC’s connectivity projects face serious challenges. Gwadar will struggle to compete with established shipping hubs that are closer to existing shipping routes. The Karakoram Highway, which traverses the rugged Pakistan-China border, is being upgraded and expanded. When complete, it will still be closed every winter due to heavy snowfall. “All-weather” might work as a metaphor for China-Pakistan relations; taken literally, it will be a stretch for CPEC.

These gaps between CPEC’s rhetoric and reality have fed suspicions among some observers. If these projects have shaky economic rationales, they reason, military motives must be the true drivers. Deepening these concerns is the fact that roads, railways, and ports are all dual-use, open to commercial goods as well as military forces. Eventually, some experts have speculated, Gwadar could become a Chinese naval base.

The strongest reactions to CPEC have come from within Pakistan. Megaprojects always spark competition among domestic interest groups. There are construction jobs, services contracts and other spoils at stake. Projects can also create new patterns of commerce. The path that a highway takes, for example, can advantage certain communities and disadvantage others.

In Pakistan, that competition is heightened by regional disparities and separatist tensions. Much of CPEC’s spending to date has been concentrated in Punjab, an eastern province from which many of the ruling party’s leaders hail. In the sparsely-populated western province of Baluchistan, separatist groups have targeted CPEC construction workers, most recently in early April.

Security incidents

In response, Pakistan has deployed some 15,000 military personnel to secure CPEC-related projects. Government reports and satellite imagery suggest that construction in areas of western Pakistan, including those with a history of attacks, has been moving forward. These efforts will help to complete individual projects, but they are unlikely to convince many global companies to send their freight through CPEC’s risky terrain.

Security incidents make headlines, but CPEC’s biggest risk is slower-moving and economic in nature. Pakistan is borrowing heavily for these massive projects, and paying off that debt will require steady growth. Pakistan’s plans assume annual growth in gross domestic product of between 6% and 7%. That implies an optimistic view of the future that leaves little room for error, let alone unexpected events. GDP growth this year is forecast at just over 5%.

Two recent developments make Pakistan’s rising debt more troubling. The first is the government’s claim that energy loans are incurred by the private sector, and therefore should not be counted toward Pakistan’s ratio of public debt to GDP. While this is correct in a narrow technical sense, overreliance on this argument suggests a willingness to dismiss risk by redefining it rather than dealing with it directly.

Pakistan is also struggling to track Chinese investment. In its most recent quarterly report, the Bank of Pakistan noted a 54% decline in Chinese investment. “The decline in Chinese investment so far this fiscal year is somewhat intriguing,” the Bank wrote, “as it does not seem to resonate with the extent of visible, on-the-ground CPEC-related activities in the country.” The Bank’s awareness of this issue and willingness to speak publicly about it is encouraging. But it also suggests that greater institutional capacity will be required to monitor Pakistan’s debt risk.

Capacity building is an area where the international community has much to contribute. Helping Pakistan to improve its ability to evaluate, implement, and monitor infrastructure projects and related financial flows would reduce the likelihood of missteps and surprises. At this stage, many projects have already been approved. But even those where construction has started could benefit from stronger oversight and implementation. Surely there will be difficult decisions in the future about how to handle under-performing projects.

There is no doubt that Pakistan could gain greatly from projects that have been placed under the CPEC banner, particularly in the energy sector. The real question is whether Islamabad has taken on too much, too fast. Delivering large infrastructure projects on time, at cost and with all intended benefits is rarely achieved, even in the best business environments.

Rhetoric about the China-Pakistan friendship also carries a warning. Mountains are high, and oceans are deep, but like large amounts of debt, they are also dangerous. Honey is sweet, but like stimulus spending, it provides a temporary boost that soon wears off. Public goods such as infrastructure and energy projects are critical for economic growth, but they can be harmful if mishandled.

Jonathan Hillman is the director of the Reconnecting Asia Project at the Center for Strategic and International Studies in Washington, D.C.

This article originally appeared in the Nikkei Asian Review