• header EFSAS

EFSAS Commentary

Expansion of China-Pakistan Economic Corridor halted by China as Islamabad struggles to put its economy in order


Pakistan’s Interim Prime Minister Anwaar-ul-Haq Kakar in an interview with Bloomberg Television in New York on 21 September asserted that his country was engaged in “a very broad-based conversation” with China that went “beyond debt issues” and was aimed at expanding bilateral cooperation. That would have been welcome news for the people of Pakistan, who have barely been making ends meet over the past several years as their leaders have continued to persistently drag them into a vortex of economic crises of ever-increasing intensity. The same people, unfortunately, would have been left confused and incredulous this past week when reports in the Pakistani media painted a rather bleak picture of the prospects of further expansion of the China-Pakistan Economic Corridor (CPEC), the core element of the China-Pakistan economic engagement, due to China’s reluctance to play ball in several fields that were of direct importance to Islamabad. The people would wonder whether their Army-appointed Prime Minister, a new and relatively unknown face in Pakistan’s national politics, was being truthful with them, and indeed whether he, just like his several better-known predecessors, was yet again taking them for a ride. They would do well to realize where the real problem lies.

In his interview with Bloomberg Television, PM Kakar, whose caretaker government has a mandate to run the country until elections are held, had sought to convey optimism of his country’s prospects with China. China has financed billions of dollars in power plants in Pakistan as part of the CPEC, and extended loans to the country while Islamabad’s International Monetary Fund (IMF) negotiations were ongoing. Pakistan eventually secured a $3 billion loan program with the IMF in July after months of delays that brought it close to default. Kakar said that after the approval of the IMF program, China was evaluating what type of “intervention would be helpful for our economic health”. Kakar also stressed that Pakistan has been working to attract investments from Gulf nations into the mining, agriculture and tech sectors. He had recently said that Islamabad could lure $50 billion in investment from Saudi Arabia and the United Arab Emirates (UAE). To Bloomberg he said “$50 billion is just one figure, which I did mention, but it could be larger. If they see more business opportunity and if there is more to offer from our side, it probably could cross that figure”. Whether Pakistan’s recent track record would inspire the required confidence is moot.

Kakar’s interim government has faced protests over increases in power and fuel prices, which helped stoke the fastest inflation in Asia. Kakar, however, said he did not anticipate “huge social unrest” in the aftermath of electricity price increases as consumption was expected to decline in the winter months.  He added that his government was working to bring longer-lasting solutions to the country’s power sector, and it was determined to strengthen governance and curb cartels and mafias operating in everything from illegal currency trade to fuel and electricity theft. The aim, he said, was to “undo the artificial bubble of inflation, the artificial value of the currency, which was primarily driven by the demand in the illegal trade of the currency”.

Kakar’s version of ever-expanding cooperation with China came into question this past week when the mainstream Pakistani media published reports captioned ‘CPEC expansion plan in doldrums’, and the like. Shahbaz Rana, writing in The Express Tribune on 26 September, informed that “China has not agreed to further expand cooperation in areas of energy, water management, and climate change under the China-Pakistan Economic Corridor (CPEC), underscoring the challenges that both the sides are facing in deepening the economic ties. Moreover, Islamabad gave up its opposition to setting up a new imported coal-fired power plant in Gwadar and also agreed to a number of Chinese demands to address Beijing’s concerns, the signed minutes of the 11th Joint Cooperation Committee (JCC) of the CPEC showed. Although, the JCC meeting was held in Oct 2022, its minutes were signed on July 31, highlighting the difference of opinions on both sides that led to almost a year’s delay in reaching a consensus. The details showed that China did not agree to a host of measures that Pakistan had proposed in the areas of energy, water management, climate change and tourism in Giglit-Baltistan (G-B), Khyber-Pakhtunkhwa (K-P), Azad Jammu and Kashmir (AJK) and the coastal areas”. The ‘AJK’ reference was to Pakistan-administered Jammu and Kashmir

The JCC is a strategic decision-making body of the CPEC, and its 11th meeting was held virtually on 27 October 2022. Shahbaz Rana pointed out that the final draft shared with Beijing by Pakistan and the final minutes signed by both the sides were different in many ways. He explained, “China excluded cooperation in the areas of cross-border tourism in G-B, K-P and AJK and cooperation for promotion of coastal tourism from the final minutes of the 11th JCC, the details showed. China also did not agree to Pakistan’s proposal for inclusion of Water Resources Management and Climate Change and Urban Infrastructure Development in the CPEC framework. The proposal for setting up a new joint working group on water resources management and climate change was also rejected by China”.

Rana further informed that “China excluded the issue of financial challenges being faced by the power companies from the final minutes. The text related to the financial closing of 701 megawatts (MW) Azad Pattan hydropower project, 1,124MW Kohala power plant, and 1,320MW Thar Block 1 Shanghai Electric Co power plant was dropped from the final minutes. The draft minutes had mentioned that ‘the projects have achieved 90% milestones for financial closing; however, financial closing is dependent on Sinosure clearance’”.

He also pointed out that Pakistan had given significant concessions to China on the issue of setting up the 300MW Gwadar Power Plant. Islamabad wanted to either shelve the 300MW project or change its location to Thar to use the local coal. But China did not agree to Pakistan’s text about the Gwadar plant, which had mentioned that ‘both sides recognised that there was a need to examine the requirement, size, location and fuel type for 300MW Gwadar Power Plant in view of escalating international coal prices, which were resulting in exceptionally high prices of electricity, liquidity and foreign exchange issues for Pakistan and environmental concerns’. Pakistan had also wanted the conversion of the imported fuel-based Gwadar plant to Thar coal to address energy security and liquidity issues, to which China did not agree. The final minutes showed that ‘both sides agreed to advance the Gwadar Power Plant in accordance with the existing plan’.

The list of rejections did not end there. China also did not agree to a proposal to the inclusion of a 500kv transmission line from Hub to Gwadar to link the seaport city with the national grid in the CPEC framework. Similarly, China did not agree to “carry out joint studies for future development of Thar coal blocks, including development of mega power parks and power evacuation infrastructure, with a view to meet Pakistan’s energy needs from indigenous resources, conversion of coal into other products for domestic demand as well as exports”. Further, “China did not agree to the proposal for inclusion of 100MW KIU and 80MW Phander hydel power projects in the CPEC energy cooperation list and implementation through Chinese investors. China did not agree to the proposal of developing a policy framework for coal gasification to fertiliser projects based on Thar coal. Similarly, there is no mention of the South-North gas pipeline project in the final minutes. The draft minutes had mentioned examination of feasibility study and Chinese cooperation for the purpose. Pakistan had proposed Chinese participation in a strategic underground gas storage project but there is no mention of this mega project in the final minutes. Pakistan had also proposed participation of China in the national seismic study for sedimentary areas and sought Chinese equipment. But this idea is also shelved at the bilateral level. Pakistan proposed joint exploration, development, and marketing of metallic minerals and sought Chinese technology, but the final minutes were silent on this issue too”.

Pakistan, on its part, committed that it would follow the consensus reached by two sides, and will direct the Pakistani power purchase companies to stop deducting the capacity power rate and return the deducted power rate. To ensure the normal operations of CPEC power projects, the Pakistani side promised to take necessary measures to ensure timely exchange to US dollars for CPEC power projects to buy necessary fuels.

When The Express Tribune contacted Pakistan’s Ministry of Planning, it said that it was a “global practice” for the minutes of meetings between two countries to be signed only after due consultation and evolving consensus in order to ensure that the minutes accurately reflect the agreements and understandings reached by both the parties. The planning ministry further said that the 11th JCC meeting minutes were signed in July 2023 after a thorough consultation process. Both the sides reviewed and discussed the minutes in detail to ensure that they comprehended all these outstanding issues and future goals. The ministry emphasized that signing of the minutes of the 11th JCC meeting was a testament to the strong relationship between Pakistan and China. It was also a reflection of the commitment by both sides to work together to achieve their common goals.

After the report of The Express Tribune appeared, though, the Ministry of Planning adopted a more combative tone. It asserted in a press release that “Recent news articles have claimed that China does not want to expand the scope of the China Pakistan Economic Corridor (CPEC). These claims are factually incorrect and misleading”. It said China and Pakistan had a time-tested friendship, and the CPEC had greatly enhanced Pakistan’s energy, logistical, and physical infrastructure capabilities. “The benefits of CPEC are widely distributed throughout Pakistan”, the ministry said. It did not directly address the specific shortcomings and rejections underlined in the media reports.

Some experts believe that Pakistan’s ongoing efforts to secure financing from Saudi Arabia and the UAE, if successful, may end up eclipsing Chinese economic influence, but Pakistan’s leaders will still need to retain the goodwill of China to manage external debt repayment pressure, especially as a significant amount of Pakistan’s commercial debt is owed to Chinese institutions. Pakistan also needs to maintain a good relationship with the United States (US), as it retains the largest share of vote in the IMF board. The situation that Pakistan today potentially faces is to have to deal with regional stakeholders that are pulling it in different directions. For example, Islamabad seems to be assuming that the investments that have been promised to come in from the Gulf will supplement Beijing’s CPEC, and the two will not be in competition with one another. Pakistan’s leaders also seem to believe that they can somehow balance the expectations of China viz-á-viz those of the US.

Uzair Younus, visiting senior policy analyst for the South Asia program at the US Institute of Peace (USIP), rightly pointed out that “For Islamabad, it is important to recognize that succeeding in its geo-economic pivot requires pursuing meaningful reforms that improve Pakistan’s overall economic outlook. It is only by making tough choices that Pakistan can attract additional flows of capital that its economy needs in order to modernize and achieve higher rates of growth. Absent reform, the country will quickly find that even China is unwilling to continue bailing out a strategic ally”.

Unless Pakistan puts its own house in order quickly, its constant reliance on China or countries in the Middle-East or even the IMF for funds – loans and charitable donations alike – will mean that Islamabad will always be susceptible to the vagaries of the many moods and meandering inclinations of its “friendly” creditors, and that Pakistan’s interests will never be able or allowed to come first.