Saniya Binte Rehman :
Pakistan’s Gwadar Port, built and managed by China, has run into rough weather due to inadequate cargo handled at the port and lack of use of port for transit to Afghanistan casting a shadow over Beijing’s Belt and Road Initiative (BRI) in the region. China’s COSCO Shipping Lines recently terminated its container liner services between Karachi and Gwadar due to slow construction of Gwadar Free Trade Zone leading to insufficient pick up in export and import volume at the port. Insufficient functioning of Gwadar customs, high inland shipping cost and non-acceptance of transit items by the Karachi Port have further contributed to the decision by COSCO. COSCO has alleged that inadequate policies and measures in Pakistan had seriously impacted market development and yield of COSCO’s Gwadar service, according to persons familiar with situation at Gwadar port. Port operator Gwadar International Terminal Limited, the subsidy of China Overseas Port Holdings Corporation (COPHC), had also expressed disappointment to the Pak Federal authorities over the recent developments.
The Karachi-Gwadar services launched as first container liner service at Gwadar Port in March 2018 was strategized to target the untapped market of coastal trade between sea ports in Pakistan, apart from eyeing Afghanistan transit trade. However, Chabahar port in Iran, and not Gwadar, has emerged as gateway to landlocked Afghanistan. India is helping expand and manage Chabahar port. The Gwadar port container liner service was launched to improve maritime trade of sea-food, fruit, vegetables, marbles and minerals that did not materialise and had been facing difficulties since its launch. The container liner service was heavily subsidized by COPHC for weekly vessel calls at Gwadar. Without much cargo and few containers being loaded, COSCO has now quit the Gwadar services for lack of economic feasibility. COPHC has conveyed to the Pak authorities that it would be impossible to restart a new liner services within Pakistani ports. The Chinese subsidised Gwadar container service was largely used to load and unload CPEC related construction equipment, machinery and other cargo. It has been learnt that China has warned Pakistan that the developments will adversely impact China Pakistan Economic Corridor as Gwadar is the jewel in crown of CPEC — the key pillar of BRI in South Asia.
Failing To Take Off
3. The China-Pakistan Economic Corridor (CPEC), a priority for both Pakistan and China, has hit hurdles at each phase. China has now and again assured Pakistan of its support for this infrastructure and development project but several CPEC initiatives have been delayed while others are facing fresh trouble. Though shared interests drive CPEC, financial confusion and concerns about delays are slowly changing the narrative into a purely cost-benefit analysis for both countries – more daunting for Pakistan because of its mounting debt crisis, making it increasingly dependent on loans from China.
How CPEC Is Financed
4. Neither country has publicized their financial mechanisms for funding CPEC projects, leaving much room for speculation. The general belief in Pakistan is that CPEC is a gift from China, making Pakistan only a beneficiary, with no financial responsibilities to shoulder. However, the available details, though blurry, suggest that the Pakistani government is expected to share the burden of CPEC financing in the long term. Additionally, most CPEC projects are funded by Chinese concessional loans, given mainly by China EXIM Bank and China Development Bank. These loans come with interest and for certain projects, Pakistan may have to repay China over extended periods of time, which will likely further Pakistan’s accumulating debt. Recent developments suggest that the financial uncertainties of the USD $62-billion CPEC may have left major dents in both China and Pakistan’s ability to make the corridor a success story.
Growing Discrepancies In Chinese assistance
5. The foremost concern is the lack of transparency and accountability of CPEC projects, particularly with regard to Chinese financial assistance. Analysts worry that benefits might be skewed in China’s favor, with Pakistan making several concessions for CPEC to become reality. Concessions already made include Pakistan importing heavy machinery and equipment from China and providing tax exemptions to Chinese companies, which violate procurement rules and shuts out local manufacturing, giving China a strong grip on these projects at all levels. Chinese companies also bring labor from their country, which has affected the job prospects for Pakistani youth. In this way, Pakistan’s reliance on China is increasing, adding to its financial woes, and raises questions about its overall gains from CPEC.
6. Pakistan began close scrutiny of CPEC projects following the realization that in return for Chinese concessional loans, it may have to give up ownership of its strategic assets. Most recently, Pakistan withdrew its bid for the Diamer-Bhasha Dam to be included in CPEC following Chinese conditions seeking ownership of the project. Another issue being raised is the increasing cost of the projects and higher estimates given by China. For instance, Pakistan Railways’ Mainline-I project, for which China was supposed to cover 85 percent of the cost with Pakistan paying the rest, was delayed after it failed to get approval from Pakistani authorities. This was attributed to the USD $4 billion project cost for phase one, which was USD $627 million higher than Pakistan’s estimates.
7. Several of CPEC’s infrastructure projects are currently on hold; for instance, a number of early harvest programs dedicated to highway infrastructure development have come to a standstill while Pakistan’s National Highway Authority (NHA) grapples with a serious financial crisis. Furthermore, Chinese focus remains overwhelmingly on CPEC projects in the Eastern Provinces, with Pakistan receiving 90 percent of its total 2017-18 funding mainly for three projects-the Sukkur-Multan Motorway (USD $904 million), Thakot-Havelian Motorway (USD $318.2 million), and the Orange Line Metro project (USD $359 million).
8. Meanwhile, infrastructure projects in the western provinces are overlooked, including Hakla-Dera Ismail Khan, Basima-Khuzdar, and the Karachi-Lahore Motorway. Not only can these delays lead to a rise in project costs that burden Pakistan’s economy with additional debts but they may also exacerbate the existing perception that CPEC will benefit only certain parts of the country, flaming ethnic tensions.
Pakistan’s Financial Fallout
8. A widening trade deficit and an external debt of around USD $92 billion, of which around one sixth is contributed by CPEC loans according to some estimates, has left Pakistan in a balance of payment crisis. Pakistan’s current account deficit rose to USD $16 billion in 2017-18 and in the coming fiscal year, Pakistan is planning to borrow an additional USD $13 billion, which is 63 percent more than the previous year. With the initiation of the CPEC mid-term projects (to be completed by 2025) and long-term plan (to be completed by 2030), it is estimated that the cost of CPEC will increase to USD $100 billion. Consequently, Pakistan will likely have to repay an even larger amount to China, further worsening the Pakistani economy.
9. Currently, Pakistan’s capacity for debt-financing is extremely low. Even though Chinese financial support of USD $3 billion at commercial rates has provided temporary relief to Pakistan in stabilizing its foreign exchange reserves, it may soon need an International Monetary Fund (IMF) bailout package for its economy to stay afloat. However, turning to the IMF at this juncture may prove to be tricky for China, as Pakistan will be forced to fall in line with IMF’s austerity measures following a bailout. This would mean less state spending and more transparency on CPEC projects. As these are largely funded by concessional loans from China, the Chinese government may be reticent to allow this to happen. It may instead allow Pakistan to borrow more from Chinese state banks, incurring even more debt for Pakistan.
Major objectives of China can therefore be summarized as follows:
1. Secure shipping lanes. As the world’s largest importer of oil and gas, China needs to ensure that its shipping routes are not vulnerable at the choke point – the Malacca Straits. Hence, Corridors 1 and 2 of OBOR have immense strategic value for China, not just for fuels and minerals, but also to access Central Asia, the Middle East and Africa.
2. Develop Western China. While the coastal areas are largely developed, Western China is somewhat neglected. For political harmony, policymakers need to focus on Western China, which explains why Corridors 1, 2 and 3 of OBOR originate out of the Western provinces.
3. Use China’s spare capacity. Building physical infrastructure has fueled China’s economic growth. With growing concerns that policymakers may have over-invested, China’s installed capacity in steel, cement, bulk chemicals and heavy machinery, is now under-utilised. Building infrastructure in neighboring countries would be a convenient way to use this spare capacity.
4. Create new export markets. China perhaps realizes that exports to the member countries of the Organisation for Economic Co-operation and Development (OECD), which have been driving its economic growth, may continue to fall. In effect, it needs to cultivate new markets in Africa and Central Asia, which have significant growth potential.
5. Create goodwill with neighbouring countries. OBOR entails establishing training institutes and schools in participating countries, which should support the project and be mutually beneficial.
10. The recent failure due to inadequate cargo handled at the port and lack of use of port for transit to Afghanistan is casting a shadow over Beijing’s Belt and Road Initiative (BRI) in the region. It is assessed that Pakistan’s effort for a regime change in Afghanistan by facilitating talks between Americans and Taliban is one of the fallouts of Pakistan’s dwindling importance in the region. However, from the indications it is obvious that Chabahar port of Iran is slowly raising its strategic and economic heft over the Gwadar Port.
(Saniya Binte Rehman, freelance journalist and researcher, writes from Karachi, Pakistan)
