Economic Woes Drive Pakistan Back to Chinese White Elephant

A decision on the part of the Trump administration in Washington, DC to stop paying the Coalition Support Fund established for Pakistan’s help in the Afghan war, along with the government’s hapless economic policies, appears to be driving Islamabad back into the arms of the Chinese and providing the impetus to restart the debt-strapped China-Pakistan Economic Corridor.

When the Pakistan Justice Party (PTI) headed by Prime Minister Imran Khan came into power in August of 2018, Khan ordered a temporary halt to the grandiose project, which had played a major role in driving Pakistan’s total public external liabilities to $85.4 billion – a quarter of that to China in what has been described as a classic debt trap.

The US suspended Coalition Support Fund in September of 2018, charging Pakistan wasn’t doing enough to combat terrorism. Certainly, over the years, Pakistan, particularly its Inter-Service Intelligence, or ISi, has frustrated US intentions repeatedly in Afghanistan, suspected of providing safe haven to Islamist rebels against the Kabul regime. However, the US has been stuck with either dropping aid to Pakistan or facing worse without their cooperation.

Blockage of the fund, otherwise a major source of military funding and closely tied with the Afghan war, has taken a significant toll on Pakistan’s foreign exchange reserves. As of today, over US$9 billion of Islamabad’s claims are still pending before the US administration.

Pakistan’s Ministry of Finance has incorporated zero funding from the US in the shape of reimbursement from the CSF during the current fiscal year’s budget for 2019-20, the underlying assumption being that CSF will not be revived. Hence, the increasing need for reviving what can still be revived: CPEC.

Since coming to power in August of 2018, the PTI government headed by the onetime cricket champion has been caught in a cycle of lofty aims, broken promises and a worsening economic position, all threatening to generate a political backlash that might soon consume Khan’s coalition.

Political allies are shifting and a recent judiciary vs. executive tussle over the extension of the tenure of the Army chief, Gen. Bajwa, has once again exposed the PTI’s extremely shaky foundation. Reviving the economy appears to be the only way out, and the only way the government believes it can be done is to revive the huge infrastructure project, which begins at the Gwadar Port and runs across the roof of the world to China’s Yunnan Province, with a long series of expensive ancillary projects.

As such, notwithstanding the prime minister’s flamboyant claims about “positive growth” in the economy, indicated through an increase in exports and decrease in imports, no significant real-time growth is apparent. The slight decrease in imports at this particular stage signals a rather dismal state of the economy. The real reason for a decline in car imports is not high domestic production but rather decreasing demand (by almost 27 percent) of cars and motorbikes in the first quarter of this fiscal year.

As a November 13, 2019 report in Pakistan media indicated, overall car sales plunged by a whopping 44 percent compared to the same period last year. This decline in demand is not only due to a 20 to 30 percent increase in car prices, due largely to a rupee devaluation, but also because of poor business and economic conditions which are fast eroding consumer purchasing ability.

This is apart from the fact that big industry and large-scale manufacturing shrank in August over 7 percent for the fifth month in a row, forcing leading assembly plants in Pakistan, including Toyota and Honda, to massively cut production.

The worsening economic situation, despite an IMF bailout package and loans from “friendly countries,” has almost forced the PTI government to revive the flailing CPEC, the capstone of China’s belt and road development scheme.

Political changes over the past two weeks indicate renewed interest. The PTI government has brought back its previous pro-China finance minister, Asad Umar, as minister for planning and development, the apex ministry overlooking CPEC projects, previously headed by Ahsan Iqbal.

Asad Umar was, as could be expected, greeted happily by Chinese officials given Umar’s dismissal of US criticism of the CPEC that it was meant to benefit China only, trapping Pakistan in a never-ending debt net. Accordingly, not only is CPEC being revived, the Pakistan military has decided to steer it directly.

The newly established “CPEC authority” is to be head by a retired general who previously headed the Army’s public relations and media wing, Inter-Services Public Relations. The National Highway Authority (NHA), an office that works closely with Chinese construction companies, is already headed by a retired captain.

The CPEC Authority was established through a presidential ordinance in October 2019, just before Imran Khan's visit to Beijing during which Pakistan assured China of its determination to complete the scheme. The appointment of an ex-military official means that Pakistan will now follow CPEC or run out of resources.

Let’s not forget here that the idea of a “CPEC authority” had first been floated in 2015-2016 during the tenure of the now jailed Nawaz Sharif. Nawaz Sharif, who heads an anti-military-establishment Pakistan Muslim League-Nawaz, had rejected this idea out of the fear of CPEC becoming an exclusively “military-run business.”

While CPEC revival has its own politics, there is little gainsaying that this won’t contribute much to Pakistan’s economic revival. While Pakistan may have numerous reasons to reject US criticism of Chinese funding and investment, calling this criticism a “conspiracy,” the underlying logic of the Belt and Road Initiative, which envisions spending trillions of dollars to tie the world to Beijing, and the CPEC remains the expansion of the Chinese economy on Chinese terms, a fact that first led the PTI government itself to seek a review and eventual scrapping of it.

In other words, while the PTI government seemed to have grasped the CPEC-trap, political expediency and the worsening economic situation have left it hapless. Hence the politics of the revival of the CPEC.