Belt-and-Road: The Chinese Albatross Around Pakistan’s Neck

The China-Pakistan Economic Corridor, a huge infrastructure project extending from the Gwadar Port to China via the Karakorum Highway, is arguably Beijing’s most intensive effort to show off its so-called Belt and Road Initiative to the world, a development strategy designed to highlight the push to take a larger role in global affairs with a trading network that puts Beijing at the global center.

But the CPEC, as it is known, has become an albatross whose cost has zoomed from US$46 billion to US$64 billion and may be about to bankrupt Pakistan. What the project has demonstrated instead is that the terms and conditions are all to benefit China, leaving Islamabad in crisis to its “all-weather” friend in Beijing.

Deep in hock to China in the form of development loans at exorbitant rates, the victim of a trade deal that has left it with a huge and growing bilateral deficit for a project built with Chinese labor and not Pakistani, it has also become the target of militants who have infiltrated into Pakistan to attempt to sabotage the project.

There are reports that Pakistan’s security agencies, at the request of the Chinese, are mounting secret raids to hunt down militants of the Eastern Turkistan Islamic Movement (ETIM), who are reported to have infiltrated into Pakistan to hurt Beijing’s interests i.e., the CPEC. Security forces are said to have conducted multiple secret operations, killing a number of militants including Hasan Mahsum, also known as Abu-Muhammad al-Turkestani, Ashan Sumut, Ubul Kasimu, Mohanmetemin Hazre, Ahmat Tuhit, Muhammat Wupur, Abudumijit Muhammat Kelim and Hudaberdi Haxerbik.

With Pakistan now having to do these operations, the conflict in China’s Xinjiang region is transferring to Pakistan – something that has the potential to turn Pakistan into a hotbed of anti-Chinese militancy.

Despite the claims by the current ruling coalition headed by Shahid Khaqan Abassi of a supposedly “divine impact” of the corridor, pressure has increased on net foreign exchange reserves held by the State Bank of Pakistan, which had fallen for the 13th straight week, to US$11.602 billion as of March 30, the latest figure available, sparking concern over Pakistan’s ability to meet debt payment obligations and manage a bulging current account deficit. The country has been forced to devalue the rupee by 9.5 percent over the past three months, adding US$7.6 billion in foreign currency-denominated loans.

In December, Harald Finger, the head of the International Monetary Fund’s Washington office, met with officials of Pakistan’s Ministry of Planning & Development and the Ministry of Finance over concerns about the country’s ability to repay its $6.1 billion outstanding loans to the fund.

That, according to critics in Islamabad, may force the country to seek help. Ironically enough, one of the friends Pakistan is banking on is again China to pay back the IMF loan and to keep the economy afloat. One of the reasons stated for seeking financial help from China is the negative impact of the CPEC on Pakistan and the way growing trade between the two has led to the massive and continuously increasing trade deficit.

An official from the Finance Ministry of Pakistan was thus reported to have said: “We have proposed to China to allow whole imports bills or at least half payment in Pakistani rupee as the trade deficit with Beijing ballooned to $12.5 billion last fiscal year. With this one provision, Pakistan could get relief in terms of reduced reliance on the dollar…”

An important reason why Pakistan is looking towards China is, as the prime minister’s adviser on finance said two weeks ago, that knocking at the door of the IMF would potentially hurt the ‘smooth’ implementation of the CPEC. The IMF doesn’t approve of the project because of the poor health of Pakistan’s economy and the resultant inability of Pakistan to pay-back Chinese loans.

In its recently concluded Executive Board meeting, the IMF had a clear message to Pakistan: that unless Pakistan could shore up its finances, its foreign exchange reserves could fall mere further, barely enough to support Pakistan’s imports for next 10 weeks.

Pakistan is aware of this eventuality. And to prevent this, it has sought ‘parking money’ from China to the tune of US$5-8 billion to be placed into the State Bank of Pakistan. Besides asking Saudi Arabia to sell them oil on deferred payments, Pakistan has been left with few to no other options but to seek loans from China.

Consider this: already, the US is considering permanently blocking military aid to Pakistan i.e., the coalition support fund. Pakistan is also facing the danger of being blacklisted by the Financial Action Task Force an intergovernmental organization with 32 member countries that was founded to develop policies to combat money laundering. If that happens, it would inevitably considerably shrink foreign direct investment in Pakistan.

Nowhere is this threat more obvious than in the European Union (EU), which is also considering blacklisting Pakistan. Germany, UK and France have actively supported the resolution to put Pakistan on the task force’s blacklist.

With the EU being Pakistan’s textile industry’s major destination, the latter is left with little to no space to maneuver, which it can do only at the expense of potentially risking its biggest market. Pakistan is, therefore, left with China – which, as a vice president of the money laundering task force – has done nothing to block the FATF’s threat.

While China is yet to respond to Pakistan’s request for loans, there is little to deny that this loan would further lock Pakistan into the Chinese orbit, and would have considerable long-term policy impacts, and potential costs as well.

Just as Pakistan’s involvement in the Soviet-Afghan war militarized the whole Pashtun belt from Pakistan to Afghanistan, Pakistan’s involvement in the CPEC isn’t just bringing money or Chinese labor, but also Chinese militants, who, according to official reports, are finding in the Baloch rebel groups immediate allies to hurt Chinese and Pakistani interests and are likely to spread militancy far beyond Baluchistan, Pakistan’s biggest province and known for the strategic port of Gwadar, which Pakistan has already handed over to China for the next 40 years.

Therefore, the pertinent question that must be raised about the possible impact of the CPEC on Pakistan isn’t just about its positive or negative economic impact, but also about the cost that Pakistan will have to defray in terms of tracking down these militants, as also in terms of allowing Chinese spy and security agencies to operate in Pakistan and help track and dismantle the growing network of Chinese militant and the Islamic State in Afghanistan and Pakistan and other locally based militant groups.

Will the Chinese agencies operate in collaboration with Pakistan or independently? Given the extent of money Pakistan owes to China, the country’s independent existence and operation are under threat. Therefore, it is not wrong to infer that it isn’t just the economy that is at stake due to the CPEC impact; it is Pakistan’s sovereignty as well.

Salman Rafi Sheikh is a Pakistan-based academic and regular contributor to Asia Sentinel