Then there is Pakistan’s close ties with China, cemented by CPEC.
Financed with government to government loans, investment and grants, the enormous infrastructure project is a gamble for both Pakistan and China.
For Pakistan, CPEC could help sustain economic growth and raise the living standards of its people.
For China, CPEC is part of the Belt and Road Initiative, where 22 projects of worth $ 28 billion have been actualized over the past 4 years. It will connect China’s western route to Middle East oil, and the riches of its ‘third continent,” Africa—to use Howard H. French’s characterization. It also serves Beijing’s strategic ambition to encircle India, something that makes Pakistan a natural ally.
But there are a couple of things these genuine partners have miscalculated, placing CPEC in trouble.
One of them is a serious misjudgment of the geopolitics of the region. CPEC runs though Pakistan-controlled Kashmir, an area claimed by India. That’s a huge problem for the project in the form of delays.
Then there’s corruption on both ends of the partnership, which boosts the costs of the project higher by the day, making Pakistan more indebted to China.
To be fair, Pakistani authorities dispute this claim. “CPEC is not imposing any immediate burden with respect to loans repayment and energy sector outflows,” says a spokesman for China Pakistan Economic Corridor. “CPEC outflows would start from the year 2021 and spread over 20 to 25 years with a maximum in the year 2024 and 2025. The resultant benefits of these investments to the Pakistan economy would far outweigh these outflows.”
Numbers tell a different story. External debt in Pakistan increased to 95097 USD Million in the second quarter of 2018 from 66395 USD Million in the first quarter of 2015. That’s well above the average of 54065.23 USD Million for the period 2002-2018.
Pakistan’s growing debt comes at a time of soaring current account deficits, falling currency reserves, and falling foreign capital flows, leaving few options for Islamabad.
“Pakistan is facing economic trouble and urgently needs to find extra funds,” says Jean-Francois Fiorina, Vice Dean, Grenoble Ecole de Management.“The new Khan administration has a few potential options: Saudi Arabia, United States, China or IMF. The geopolitical consequences are too complicated (on both sides), so they turn to IMF who will lend them the biggest loan they have granted to this country.”
But IMF’s loans will come with strings attached. “This is maybe the best solution at short-term but it could create a new bomb in the future,” adds Fiorina. “IMF indeed lends funds in exchange of “strict” economic conditions (such as the reduction of debt, liberalization of activities, privatization, etc.) Asian countries still have in mind the Asian crisis of 1997…”
And, perhaps, something more in the case of Pakistan: Transparency for the CPEC project.
Already, IMF has asked information about CPEC. But Pakistan has declined it, according to some sources, placing at risk the fate of the IMF bailout of the country and the future of CPEC.
That’s why IMF will either kill CPEC or help it build it right.