- With a focus on SEZs, CPEC Phase II is set to drive industrial growth, attract foreign investment, and create jobs across Pakistan
The China-Pakistan Economic Corridor (CPEC) was once seen as a groundbreaking project that promised to bring significant benefits to both China and Pakistan. Launched as part of China’s Belt and Road Initiative (BRI), CPEC was envisioned as a massive infrastructure development plan that would create new economic opportunities for Pakistan while also serving China’s strategic interests. However, in recent years, this once-prominent project has faded from the spotlight in Pakistan and its progress has been much slower than initially expected.
CPEC was designed to connect China’s northwestern region of Xinjiang to Pakistan’s Gwadar Port, located on the Arabian Sea. This connection was to be established through a network of highways, railways and pipelines, creating a corridor that would facilitate trade and energy transportation between the two countries. For China, CPEC held strategic importance as it would provide a shorter and safer route for transporting goods and energy supplies, bypassing the longer maritime route through the Strait of Malacca.
For Pakistan, CPEC was seen as an economic lifeline that could boost its economy by improving infrastructure, creating jobs and attracting foreign investment. However, despite the high hopes surrounding CPEC, the project has encountered several challenges over the years that have hindered its progress. One of the major issues has been the slow pace of implementation. Many of the planned infrastructure projects, such as highways and railways, either have been delayed or have yet to be completed. This has led to frustration in both China and Pakistan as the expected economic benefits have not materialised as quickly as anticipated.
Another significant problem facing CPEC is the issue of unpaid loans. The project has been largely financed by Chinese loans and Pakistan has struggled to repay them. The financial burden of these loans has added to Pakistan’s economic difficulties, leading to concerns about the long-term sustainability of the project. This situation has been exacerbated by allegations of corruption, with reports of funds being misused or siphoned off by officials involved in the project. Such issues have further undermined public confidence in CPEC and have led to questions about whether the project will ultimately deliver on its promises.
The security situation in Pakistan has also posed a major challenge to the successful implementation of CPEC. Parts of the country, particularly in the regions where key CPEC projects are located, have been plagued by violence and instability. Attacks on infrastructure projects, workers and security personnel have created a climate of fear that has deterred both local and foreign investors. The need to allocate significant resources for security measures has also increased the overall cost of the project, adding to the financial strain.
Since the beginning, the West, particularly the United States and India — an important Western ally and Pakistan’s long-time rival have opposed the China-Pakistan Economic Corridor (CPEC). They have labelled it a Chinese “debt trap,” with many US lawmakers warning that they don’t want Pakistan to repay Chinese loans with money from the International Monetary Fund (IMF).
CPEC is a major project under China’s Belt and Road Initiative (BRI). China and Pakistan have kept many details of the project secret, but it’s clear that China has been repeatedly disappointed by the various challenges CPEC has faced in Pakistan. In 2019, under Prime Minister Imran Khan, Pakistan reportedly revealed confidential details of Chinese agreements to the IMF, which may have led to a breakdown in trust between the two countries. Additionally, the ongoing terror attacks on Chinese workers involved in CPEC projects have become a serious concern for China. As Pakistan faces another financial crisis, Prime Minister Shehbaz Sharif visited China in June. During this visit, the two countries announced plans to upgrade CPEC and start Phase II of the project. However, many believe that the visit was more about Pakistan’s urgent need for financial assistance, especially through new Chinese investments in CPEC and restructuring Pakistan’s $15 billion energy debt to China.
Pakistan’s desperation for Chinese financial support is driven by its recent agreement with the IMF. On July 12, 2024, Pakistan and the IMF reached a preliminary agreement for a 37-month Extended Fund Facility (EFF) worth about $7 billion. However, this agreement still needs approval from the IMF’s Executive Board, which requires Pakistan to secure funding commitments from its partners, including China. Pakistan’s situation is difficult as it has little to offer China besides poor progress on CPEC, ongoing financial instability and governance issues. Moreover, under IMF pressure, Pakistan has promised not to allocate additional funds to pay off the $1.8 billion owed to Chinese power plants built under CPEC, violating a 2015 Energy Framework Agreement with China.
Pakistan’s debt restructuring request to China hinges on this issue. Additionally, Pakistan has agreed to phase out incentives for Special Economic Zones (SEZs), a key part of CPEC as part of its IMF agreement. China recognises Pakistan’s strategic importance and commitment to CPEC, despite the many problems Pakistan has failed to address. China also seems aware that Pakistan’s recent financial decisions regarding CPEC are due to its severe economic crisis and may not be permanent. However, China appears reluctant to continue investing in Pakistan at the same level as before. Some in China now view the political risk in Pakistan as extremely high, with one prominent Chinese scholar comparing it to countries like Somalia and Syria. This is a worrying sign for Pakistan, which sees Chinese cooperation, especially through CPEC as its best hope for long-term economic recovery.
In June, during Prime Minister Shehbaz Sharif’s visit to China, China rejected Pakistan’s request for new investments related to the China-Pakistan Economic Corridor (CPEC). A month before the visit, Pakistan had asked for an additional $17 billion for China-funded energy and infrastructure projects. Despite bringing a large delegation with hopes of securing new investments, China only agreed to proceed with a long-delayed $6.7 billion railway project and even then, only the first phase was approved. This shows that China’s interest in CPEC has waned and many blame Pakistan for this. In April, Finance Minister Muhammad Aurangzeb admitted that Pakistan had been slow in advancing CPEC over the past few years. He mentioned that the government was planning to move forward with Phase II of CPEC, focusing on revenue-generating projects. However, due to incidents involving the deaths and injuries of Chinese nationals on CPEC projects and Pakistan’s ongoing financial struggles, many doubts that China will continue its commercial interest in Pakistan or that Phase II will be significant.
The excitement about CPEC Phase II seems to be coming more from Pakistan than China. The Pakistani government is eager to continue to plan the projects, despite some delays and has stressed the importance of Phase II, that includes the development of Special Economic Zones (SEZs), agricultural improvements and science and technology cooperation. However, China’s response has been lukewarm, with analysts pointing out that China prefers to focus on the agricultural aspect of Phase II, while Pakistan is more interested in energy and technology projects. Chinese scholars, who believe Pakistan’s unrealistic expectations could harm long-term relations between the two countries, have flagged this difference in expectations as a major concern.
In the short term, Pakistan’s hope lies in getting China to restructure its energy debt. Finance Minister Aurangzeb’s visit to China in late July is crucial, as Pakistan is seeking a five-year extension on the repayment of Chinese energy debt, aiming to reduce foreign currency outflows by $750 million annually. However, this would increase Pakistan’s total energy debt to China to $16.6 billion by 2040. Pakistan is also seeking to profile $27 billion in debt and liabilities with China, Saudi Arabia and the UAE to secure an IMF programme. It remains uncertain whether Mr. Aurangzeb’s visit, following Prime Minister Sharif’s trip, will convince China to support Pakistan again. Pakistan is trying to highlight the government’s recent reforms and the agreement with the IMF to gain China’s approval. After the Finance Minister’s visit, Prime Minister Shehbaz Sharif wrote a letter to the Chinese government requesting debt profiling. Additionally, the Prime Minister announced that Chinese citizens would be exempt from visa fees, starting in August, as part of Pakistan’s efforts to secure Chinese support. However, it remains to be seen how China will respond.