China Pakistan Economic Corridor (CPEC) is in big trouble as Pakistan is heading into an economic crisis while Chinese investments are drying up, leaving the mega project in the lurch. Beijing has cut the funding to the CPEC by more than half in 2022, which will put the implementation of important projects in jeopardy. Similarly, the existing projects, mainly power plants, are likely to face disruptions as Islamabad struggles to secure the necessary funds to operate and maintain them. A majority of the CPEC projects, which are already delayed, appear to remain only on paper now. Protests, corruption, and delays are further contributing to the CPEC’s woes. This makes the CPEC a failure in achieving its goals—bringing prosperity to Pakistan and allowing China direct access to the Middle East.
China’s economic growth has slowed down to just 0.4 per cent in the second quarter of 2022, leading to the possibility of stagflation. Tianlei Huang, a research fellow at the Peterson Institute for International Economics said China’s economy was in a “very bad” shape and it may not be able to attain its target of 5.5 per cent in 2022. “Even in the most optimistic scenario, China will not be able to achieve its growth target for the full year,” he said. This has caused China to revisit the Belt and Road Initiative (BRI) and revise its funding to the projects, as loan defaults would exacerbate China’s financial stability risks.
Various reports and analyses suggest that the BRI, which was once termed the “project of the century” by Chinese President Xi Jinping has now turned into a mountain of non-performing loans. “This is the worst period of debt pressure since the start of the Belt and Road Initiative,” said Matthew Mingey, senior research analyst at Rhodium Group. According to the Green Finance and Development Centre at Shanghai-based Fudan University, new investment under the BRI has dropped significantly. Pakistan is one of the biggest recipients of BRI financing with loan support of USD 62 billion. With Pakistan on the verge of an economic crisis, China is staring at CPEC loans turning unsustainable. China is not in the mood to release the fund it had pledged to the CPEC. In the first half of 2022, the Chinese engagement in the CPEC has dropped by 56 per cent.
On other hand, Pakistan too does not have funds to support the CPEC. There are talks about Pakistan facing a fate like Sri Lanka as it is witnessing soaring inflation, falling Pakistani rupee (PKR), and shrinking foreign reserves. Moreover, Pakistan’s foreign debt has surged to USD 126 billion in 2022 while its currency lost 7 per cent of its value in just a week—the steepest since 1998. The foreign exchange of the State Bank of Pakistan (SBP) has fallen from USD 19.3 billion in September 2021 to USD 8.58 billion in July 2022. This amount of foreign exchange cannot even support less than one and half months of import.
The State Bank of Pakistan has cited the external debt as a big reason for the declining foreign reserves. Pakistan owes a quarter of its external debt to China. With the International Monetary Fund (IMF) showing no eagerness for financial assistance, Islamabad took another loan of USD 2.3 billion from China. However, it reportedly has come at a very high-interest rate. The debt repayment obligations at higher commercial rates only lead to more external debt in the future.
Pakistan lacks the funds that are required to pay Chinese workers for the operation and maintenance of CPEC projects. Now, Pakistan is struggling to provide essential commodities to its population, it seems the CPEC project would get neither attention nor funds from the Islamabad government. Pakistan does not have money to buy even coal for the CPEC-led power plants. Violent attacks on the CPEC projects and Chinese workers, and public protests have already become huge obstacles to the Chinese dream of an unhindered road route to the gulf countries. These kinds of protests could prove very destabilising for China’s presence in the country, said Mir Sher Baz Khetran, a senior research fellow at the Islamabad-based Institute of Strategic Studies. Now, the ongoing economic crisis in Pakistan and China’s growing disinterest will hurt the CPEC scheme in a long term.