China’s Belt and Road rejuvenated in Pakistan, $11 billion deals signed

China’s Belt and Road Initiative (BRI) program appears to be back on track in Pakistan, with $11 billion worth of projects signed in the last month.

As part of the China-Pakistan Economic Corridor (CPEC), the nations signed deals on June 25 and July 6 for two hydro-power generation projects in disputed Kashmir worth $3.9 billion. A separate $7.2 billion deal plans to overhaul Pakistan’s colonial-era railways – in what is the most expensive Chinese project in Pakistan to date.

CPEC, China’s 15-year $62 billion investment in Pakistan, is seen as the economic lynchpin in a wider strategic relationship between the two countries, with the goal of transforming Pakistan into a prosperous regional trade hub.

The flurry of deals come after a long period of tepid activity since Pakistani prime minister Imran Khan ascended to power in 2018. It was understood that Khan’s government had sought a reset of CPEC, which was seen as closely aligned with the previous regime.

The man in the middle of the CPEC’s reinvigoration is Asim Saleem Bajwa, appointed last year to run the CPEC Authority, which oversees more than $70 billion in projects from highways to power plants.

The CPEC is a planned network of roads, railways and energy projects linking China’s resource-rich Xinjiang province with Pakistan’s strategic Gwadar Port on the Arabian Sea.

Through the CPEC, Islamabad seeks to leverage Chinese capital, production capacity, and know-how in order to upgrade Pakistan’s infrastructure and build a mechanism for sustainable economic growth.

In return, Beijing acquires a connection to the Arabian Sea, offering a contingency trade route to the risk-prone Malacca Strait in Southeast Asia.

With the CPEC seen as the flagship project for China’s BRI and its wider strategic commitment in the region, the need to display progress is imperative.

However, the reality was that until this point much of the CPEC, like BRI more broadly, was in a state of paralysis.

Fork(s) in the road?

Entering 2020, the second phase of the multibillion-dollar project is projected to generate massive employment opportunities and assist cash-strapped Pakistan to upgrade its key industrial and agricultural sectors.

Although the transport corridor has been the primary international focus, power generation makes up the bulk of completed projects.

The MERICS database shows that $25.5 billion worth of projects completed, 75 percent of them were energy projects. This included solar, hydro and wind powered generation, while fossil-fuel fired capacity constituted around 60 percent of the added mega-wattage, excluding nuclear.

Many of the so-called “early harvest” projects completed in 2020 have come in delayed or over budget.

After facing another balance of payments crisis in 2018, Khan was forced to go to the International Monetary Fund (IMF) for a $6 billion bailout. While Pakistan’s economic troubles predate the CPEC, it is an ambitious gambit that heightens any risk and disproportionately contributes to its financial distress.

Debt sustainability aside, whether Pakistan is well positioned to reap any of the potential benefits of the CPEC as its second phase gets underway, remains an open question.

Its poor ranking in human development indexes, combined with a lack of soft infrastructure and poor rural connectivity in place, makes attracting necessary investments in the industrial sector an uphill climb.

There are also the ongoing security costs of the project, amid a resurgence of deadly attacks by separatists in Balochistan province, where the Gwadar port is located.

Last Tuesday, three soldiers were killed in an attack on a paramilitary convoy in Panjgur district – the third such attack since May. In August 2018, militants from the Baloch Liberation Army (BLA) killed three Chinese engineers and wounded five others in the town of Dalbadin, in the most lethal attack on Chinese personnel since CPEC was launched in 2015.

Beijing also struggles with local politics and bureaucracy. Even when Gwadar was facing power outages, the provincial government of Balochistan took over three years to approve construction on the Gwadar power project.

There is also the issue of corruption and the outsized influence of the military.

After promising to review the terms of CPEC during his electoral campaign, Khan and his incoming government saw swift pushback from China and the Pakistani military to maintain CPEC as the nexus of their bilateral relationship.

The army stated that the project was “destined to succeed despite all odds” and that it would ensure its security at all costs.

It might hardly be a coincidence then, that retired general Bajwa, formerly the head of Inter-Services Public Relations (ISPR), the media wing of the Pakistan Army, was named the head of the CPEC Authority – set up by Khan in 2019. Bajwa has since also been named the special assistant to the prime minister on information, a cabinet level position.

Pakistan’s army, which notably controls a number of industries in the country, stands to benefit financially from the CPEC. Reporting for the New York Times, Maria Abi-Habib claimed that the army “stands to fill its coffers with millions of dollars through CPEC as the military’s construction companies win infrastructure bids”.

In May 2020, Pakistan’s government awarded a $5.8 billion dam-building contract to a joint venture of a Chinese state-owned company with the commercial unit of the Pakistani army.

Strategic pitfalls

Deference to China extends beyond CPEC.

For a country that claims to speak up for the rights of Muslims worldwide, Pakistan has turned a blind eye to Beijing’s “re-education” and internment camps for Muslim Uighurs in China’s Xinjiang province. 

As a result, it has opened itself up to charges of hypocrisy. But for Khan, it is a strategic silence underpinned by economic reason.

Chinese investments have also come with another type of baggage. The Associated Press reported that more than 600 Pakistani women have fallen victim to trafficking networks after marrying Chinese men.

Given its own escalation with China, it is unsurprising that the US has been critical of CPEC.

In a discussion at the Atlantic Council on May 20, senior diplomat Alice Wells reiterated US concerns and argued Pakistan should attempt to renegotiate the terms of CPEC with China in light of the economic fallout caused by Covid-19, calling the lending terms “predatory, unsustainable, and unfair” and calling out its lack of transparency.

Apart from being a counterweight to India and the US, Islamabad hopes for a number of tangible benefits in the near term from its close relationship with Beijing.

One is a favourable turn in Pakistan’s status with the Financial Action Task Force (FATF), an international watchdog that combats money laundering and terrorist financing. Pakistan has been on the FATF “greylist” since 2018, and a blacklisting would deal a major blow by reducing investment and growth capacity.

With China the FATF president since 2019, Pakistan hopes that it will be removed from the greylist as its status comes under review.

Strategic considerations aside, the jury is still out on whether Pakistan will be able to reap the windfalls of Chinese investment. In the 5 years since the CPEC was established, there’s little evidence of its ambitious and grand vision being realised.