China Pakistan Economic Corridor(CPEC): Game Changer or a Debt Trap

I do not believe in the ill-famed Warm Water Theory of alleged aspirations of successive Russian emperors and later on their inheritors to reach the Arabian Sea/ Indian Ocean, an aspiration which led to the Soviet invasion of Afghanistan in 1979. However, even if we believe in its genuineness for argument’s sake, what Russian Empire and its successor, Soviet Union could not achieve even after losing more than 15000 soldiers and breaking into pieces in the process, China got it without sacrificing a single soldier through its China-Pakistan Economic Corridor(CPEC). Once completed, it is going to be a game-changer in the economic transformation of the entire region besides having far-reaching geopolitical implications.

First proposed by the Chinese Premier Li during his visit to Pakistan in May 2013, the proposed project of China Pakistan Economic Corridor will link Kashgar in Northwest China with Pakistan’s newly developed deep-sea Gwadar Port on Arabian Sea coastline in Baluchistan. During his visit to Pakistan in Apri 2015, President Xi Jinping raised the level of investment from $ 26 billion to $ 46 Billion including $ 33 billion worth other projects. Besides the energy sector, these projects are in information technology, commercial sea-lanes, special economic zones, dry ports and other infrastructure relating to rail and road development.

Gwadar, one of the least developed districts in Baluchistan province, is strategically located near the Persian Gulf. It is close to the Strait of Hormuz, through which 40 per cent of the world’s oil passes. Work on Gwadar deep-sea port had started in 2002 with China’s investment and its management was handed over to China’s Port Holdings in 2013. After development, it will be the largest deep seaport in the world. Three inter-connected routes, passing through various parts of Pakistan, have been marked to connect it with China.

Gains for China

Although CPEC is beneficial for both countries, it is more beneficial for China for several reasons.

  • Development of China’s Western Provinces: Mindful of the underdevelopment of its western provinces which are its soft belly, China wants their speedy modernization to bring them at par with more developed eastern provinces. For this purpose, China needs to connect them with its own national rail-road network on the one hand and their access to the Arabian Sea through Gwadar on the other.
  • Link of Global Connectivity: For China, it is part of more ambitious plans to beef up the country’s global economic muscle part of a broader policy — “One Belt, One Road” — which seeks to physically connect China to its markets in Asia, Africa, Europe and beyond. Connecting China to its markets in Asia, Africa, Europe and beyond, the New Silk Road will link China with Europe through Central Asia and the Maritime Silk Road thus ensuring a safe passage of China’s shipping through the Indian Ocean and the South China Sea. CPEC will be a crucial link in this multi-billion network.
  • Avoiding Malacca Choke Point: Linking China with nearly half of the population of the world, CPEC will enable China’s naval warships and merchant ships to bypass Malacca Strait. Presently passing through the Strait of Malacca, Chinese cargo takes 45 days to reach destinations in Europe via the Middle East. Once Gwadar port is fully functioning, this time will be reduced to less than half.
  • Geopolitical Significance: It will not only provide China an easy, short, convenient and extremely cost-effective access to the Indian Ocean to further her economic and trade interests but will be a force multiplier for her geopolitical ambitions Development of Gwadar seaport and improvement of the infrastructure in the hinterland would help China sustain its permanent naval presence in the Gulf of Oman and the Arabian Sea. At the same time, the new silk roads are bound to intensify ongoing competition between India and China –and to a lesser extent between China and the US – to invest in and cultivate influence in the broader Central Asian region. Gwadar port is one of China’s String of Pearls planned by China in Central, South and Southeast Asia to expand its political and economic influence and get these regions in its grip. The US has its pivot to Asia, to contain China’s economic and military expansion in the Asia-Pacific.

Pakistan’s Gains

CPEC has opened a vista of great opportunities for Pakistan and will greatly help in overcoming poverty, unemployment, inequities of smaller provinces and help Pakistan in overcoming its resource constraints and thus getting rid of its economic stagnation. How Pakistan has beneficed economically  and will continue to do so economically from Chinese assistance and investment under CPED  can be gauged from the infrastructure and energy projects completed so far or in pipeline. These can be enumerated under following four heads

  • Development of Gwadar Port: The flag ship of CPEC is the development Gwadar port as the biggest deep sea port in the world eclipsing its regional competitors. It will spur the growth of rapid industrialisation of Baluchistan as well as boost the maritime trade.
  • Energy Sector: With more than US $35 billion of investment going into energy sector of Pakistan, 11,000 megawatts (MW) of power was added to the country’s grid in 07 years as against 17,000 MW  added from 1947 to 2013. It will not only reduce the duration of daily load shedding but will also help diversifying our energy mix adding significant percentage of renewable sources of energy to the grid.
  • Transport infrastructure: Chinese investments is not only being utilised to construct new roads and railways but also upgrading of existing transport networks and connecting previously cut-off regions
  • Industrial cooperation: The most exciting prospect of CPEC,  is the opportunity to partner with China to enhance production through industrialisation. Chinese firms with excess capacity have shown interest in re-locating industries to Pakistan where labour costs are lower, as well as investing in existing Pakistani firms that stand to benefit from CPEC infrastructure.

Making China a real stakeholder in Pakistan’s stability and security, CPEC will not only expand the scope for the sustainable and stable economic cooperation between the two countries but also be a cornerstone of their geostrategic framework. It will radically alter the regional dynamics of trade, development, and politics. Being an integral part of China’s ambitious Silk Road and Economic Belt initiative, it is endorsed by the SCO and will highlight Pakistan’s role as a vital regional hub in the economic development of Central Asian states which have a strong presence in the SCO.

The CPEC connects the whole region and gives Pakistan focal importance for world trade, it holds promise to make Pakistan an economic power. The China-Pakistan Economic Corridor (CPEC) is not a network of roads and rail lines connecting Chinese hinterland to the Middle East and Europe. The CPEC is a holistic, comprehensive package of competitive economic initiatives from China, just the energy projects once initiated will kick-start an industrial boom in Pakistan.

Linking all the provincial capitals, it would further cement the socio-political integration of the country and improve the connectivity level of the regions. Besides solving the problems faced by the inhabitants of these far-flung areas of Pakistan due to inadequacy of transportation and communication, it will also diversify the sources of income for the people of hitherto neglected Gilgit-Baltistan.

The CPEC, passing through Khyber Pakhtunkhwa and Baluchistan can perform a critical function in conflict management in these areas. As poverty is one of the main drivers, if not the prime driver of militancy, development induced by CPEC will go a long way in minimizing it. The CPEC could revolutionize the existing socio-economic setting of Baluchistan by dramatically altering its communication & transport sector and revamping its infrastructure. Reinventing Pakistan as an energy corridor between South Asia, China, and Central Asia, the revival of the economy in the coming period will make Pakistan an attractive destination for foreign investors and will greatly help in removing socio-economic inequities of smaller provinces

Gwadar vs Chahbahar?

Both the ports are being developed for different reasons and in no way compete with each other. Development of Gwadar is the geopolitical and geostrategic necessity of Pakistan and China; Chahbahar is the economic necessity of Iran. Development of Gwadar and construction of CPEC are meant mainly for the transportation of Chinese imports and exports to and from the Middle East while Chahbahar will be catering to the Iranian merchandise. The market for Afghan exportable surplus is China, Pakistan, and Iran while its imports will be handled at Chahbahar in addition to Karachi (and not Gwadar).

This sudden renewed interest of India in Chahbahar was a knee jerk action in response to Chinese taking over of Gwadar and announcement of constructing China Pakistan Economic Corridor (CPEC). Otherwise, India has been developing this port and the road connecting it to Afghanistan since the 1980s. However, after the announcement of the 25-year cooperation agreement between China and Iran, it has been decided by Iran to complete these project by itself, ousting India.

Is CPEC a Debt Trap?

As China Pakistan Economic Corridor (CPEC) has entered its stabilization stage, detractors and critics have started levelling unfounded and baseless criticism of debt burden and debt servicing to be made by Pakistan.

According to the breakdown of Chinese investments in Pakistan, 22 early harvest projects under CPEC have been completed or are under construction, with a total investment of $18.9 billion. These projects aim at resolving two major bottlenecks hindering the economic development of Pakistan, including lack of transportation infrastructure and energy shortage. The financing details of 22 ongoing projects are as follows:

The Chinese government provided concessional loans of $5.874 billion for the Pakistan government’s major transportation infrastructure projects, with a composite interest rate of around two per cent in the repayment period of 20-25 years. Meanwhile, the Pakistani government provides a sovereign guarantee for the above loans and will start the repayment from 2021.

The Chinese companies and their partners invested $12.8 billion in energy projects in Pakistan. Among them, Chinese companies provided $3 billion from their own equity. The rest $9.8 billion is raised from commercial banks with an interest rate of about five per cent. The repayment period is 12-18 years. All the CPEC energy projects are an investment in nature, which is purely independent business behaviour of these companies. The companies are responsible for their profits and losses and repayment of loans. The Pakistani government does not repay these loans under CPEC. The business cooperation between the two sides is in full compliance with internationally accepted business practices.

The Chinese government provides interest-free loans for Express way East Bay in Gwadar. Moreover, the Chinese government provides a grant for some livelihood projects. About revival and up-gradation of Pakistan’s Railway track also called ML-I, Pakistan will repay only $6.017 billion and their interests to China.

Moreover, China has converted a $230 million loan for the development of Gwadar airport into a grant. Another $140 million loan for development of a 19 km express way connecting Gwadar to Pakistan’s coastal highway was also converted to an interest-free loan. China is also constructing Gwadar Vocational Training Centre and Friendship Hospital out of the grant. Additionally, China has agreed to provide more support to the people’s livelihood projects such as education, agriculture, poverty alleviation, healthcare and vocational training. Both sides have also signed a Memorandum of Understanding (MOU) on industrial cooperation and have agreed to jointly promote the construction of Special Economic Zones (SEZs). With this understanding, CPEC has entered a new phase of broadening and expansion in the next five years.

Conclusion

CPEC is a major and important economic cooperation project between China and Pakistan. All CPEC projects are based on the consensus of the two countries and fully comply with relevant laws and regulations. CPEC, as an important project for China-Pakistan cooperation, will not only help Pakistan to ease energy load shedding, improve infrastructure connectivity, promote economic growth, but also benefit the people of Pakistan and make an important contribution to the building of China-Pakistan Community of Shared Future

Keeping in view the importance of the CPEC, Pakistan should make all-out efforts to complete the various projects under CPEC on a priority basis and within time. The domestic investors should be encouraged to take part in these projects and all investment should not be done by the Chinese. The reservations of the stakeholders, particularly KPK and Baluchistan should be addressed.

Similarly, the maximum number of Pakistani engineers and managers should be engaged in the execution of these projects instead of the present practice of mostly engaging Pakistani labour. For this government should start special programmes of skill formation. At the same time, efforts should be made to include Iran and Afghanistan in this project to reap maximum benefits

 

From the ebook “ Political Economy of a Post-Colonial State: Pakistan Economy 1947-2020: A Case Study” by Shahid Hussain Raja.
Published by Amazon https://www.amazon.com/dp/B0844ZMKNW
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