When the China-Pakistan Economic Corridor (CPEC) was launched in April 2015, the event was highlighted as a history-defining development for Pakistan. It was echoed that the economic corridor projects would change the fate of the nation. The manufacturers behind the corridor expected the corridor to add 2.5% more to Pakistan’s annual growth rate.
Pakistan is synonymous with power shortages and long outages, but the Pakistan establishment had hoped that once the economic corridor was completed, its power projects would not only cover Pakistan’s energy needs but also generate additional capacity available for export.
The lower-middle-income country, facing problems of poverty and unemployment, had also hoped that through the Economic Corridor projects, it would see 2.3 million jobs by 2030 – setting Pakistan on a path to growth and social empowerment.
But six years later, all those high hopes for fairy tales seem to have faded.
The current phase of the China-Pakistan Economic Corridor is well behind schedule. Of the 15 economic corridor projects, which are now facing completion deadlines, only three have been completed, while Pakistan, which has so far been basking in the glory of completing the first phase of the economic corridor projects from 2015 to 2018, beholds another crisis . This goes deeper.
Loans from China are not coming for new and ongoing projects. The non-payment of about 300 billion Pakistani rupees ($1.59 billion) to Chinese companies already operating under the China-Pakistan Economic Corridor has become a sad point. Add to this the deep economic hardship the nation faces – managing its economy and paying its debts annually.
The China-Pakistan Economic Corridor is suddenly starting to look like a huge debt giant even to Pakistanis, an idea that many in the world have long believed in.
Riding on Chinese loans, the China-Pakistan Economic Corridor made good progress initially. On the basis of the overall progress of the corridor, Khaled Mansour, Special Assistant to the Prime Minister on Corridor Affairs, reported in September 2021 that 21 projects worth $15.2 billion had been completed and another 21 projects worth $9.3 billion were in the process of being operational.
But whatever looks good about the trail ends here. Pakistan, which is going through a deep economic crisis, cannot support ongoing or future PEC projects, at least for two years, many analysts say. However, this period may be longer due to the type of situation the country is in.
Pakistan has a huge external debt of $130 billion and the country needs $14 billion annually in annual debt installments (capital + interest). But given the situation, after Sri Lanka, Pakistan may be the next country in Asia to default on its foreign debt.
Foreign exchange reserves have fallen by more than 60%, from $20 billion in August 2021 to $7.5 billion now. Therefore, the country does not have sufficient funds in its foreign exchange reserves to pay its annual debt payments. According to State Bank of Pakistan figures, the country is required to pay $1.653 billion in FY 2022 Q1 (capital + interest), $4.357 billion in FY 2022 Q2, and $4.875 billion in FY 2022 Q3.
Combine it with the fact that Pakistan is an import dependent economy. But with the current forex level, its imports cannot exceed one month and some other days. Therefore, Pakistan is definitely not in a position to help finance CPEC projects anymore, especially when 90% of the money that China is supposed to provide for each project is not coming.
China faces its own set of problems. The resurgence of the Covid virus and its closure in many parts of China including Shanghai has slowed economic growth, and the country is taking a tough stance on Pakistani loans, repayments and more loan applications, including Pakistan Economic Corridor projects. Further complicating the situation are the attacks on Chinese workers and the Pakistan Economic Corridor’s property in Pakistan. Moreover, China blames Pakistan for the crisis and asks it to first get out of bankruptcy.
This leaves one option available to Pakistan to escape this crisis – IMF bailout. In fact, China, Saudi Arabia and the United Arab Emirates, the three largest lenders to Pakistan excluding multilateral agencies such as the World Bank and the International Monetary Fund, recommend that Pakistan do so.
But can Pakistan do it, when the circumstances associated with the IMF bailout mean that the country needs to put more burdens on the public? IMF conditions mean Pakistan needs to raise diesel prices by 35%, gasoline prices by 14%, and eliminate $1.5 billion in annual fuel subsidies. Following IMF practices means raising taxes and energy fees.
To be sure, Pakistani politics is not in a position to accept it. The Pakistani rupee fell to its lowest levels, touching a record low of 202 against the US dollar. This year, the Pakistani rupee saw a decrease of 22%. Pakistan has experienced three years of double digit inflation which currently exceeds 13% and is on the rise.
The ultimate victim is always the average citizen in these situations, and the Pakistani political establishment cannot risk burdening them with more taxes and price increases when the next election is only 12 months away.
This means that Pakistan is not in a position to even get bailout loans from the International Monetary Fund.
This in turn means that Pakistan has no other choice but to seek other loans, even commercial loans, to meet its international debt obligations and import needs. This would put more pressure on $130 billion. Therefore, Pakistan will not be financially able to participate in the Economic Corridor projects and the period may extend beyond two years given the political instability and the current debt burden on the country.
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