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CPEC: Is the Belt and Road Initiative’s Crowning Project A Failure?

Image via China Ministry of Foreign Affairs

In October, China celebrated the 10th anniversary of the Belt and Road Initiative (BRI) with a global forum of partnered countries. The mood was triumphant, with China reporting that the initiative has resulted in as much as $1 trillion in financial assistance to its constituents. The event, however, glossed over the less flattering aspects of the BRI, sweeping its failures and setbacks under the rug. 

The China-Pakistan Economic Corridor (CPEC), one of the BRI’s cornerstone initiatives, has demonstrably failed to live up to its promise of “building an economic corridor promoting bilateral connectivity.” Massive Chinese loans for CPEC have done little to achieve the dream of creating an industrial partner in the region. Instead, the initiative has only compounded Pakistan’s economic ails by exacerbating corruption and creating a debt trap with no end in sight—a situation that harms China as well.

According to its website, CPEC is a multifaceted “economic and development initiative” covering a variety of areas such as infrastructure, energy, science, and technology. The project has two main goals: to connect China directly to its energy supply in Pakistan by land and to modernize and industrialize the partner nation. By building deep-sea oil ports in Gwadar and Karachi and connecting them to China’s Xinjiang Uyghur Autonomous Region (XUAR), CPEC would circumvent the existing maritime route through the South China Sea, which is costly and inefficient and lies in potentially contested waters if conflict were to arise in the region. Completing CPEC would save China roughly $2 billion per year on transportation costs and insulate its energy supply from temperamental geopolitics. 

Due to the ambition of CPEC, Pakistan is the biggest recipient of BRI funds, embroiling the country in corruption and budget overruns. China’s $62 billion investment in CPEC funds a wide range of schemes. Some of these programs have been successful, like the $1 billion coal power plant established in the Thar Desert. However, the vast majority of Pakistan’s BRI-funded projects have run into trouble—20 percent have been canceled completely or stalled indefinitely—and the slew of loans has further compounded Pakistan’s $100 billion foreign debt, a third of which is owed to China. Moreover, nearly a decade of work on CPEC has been mired in setbacks, such as the conflict between Pakistan and India in the Gilgit-Baltistan region along with several natural disasters. Today, the road is only partially operational. 

Further, the Pakistani government has carved out a host of special economic zones (SEZs)—similar to China’s in Shenzhen and Shantou—with lax regulatory environments in an attempt to spur foreign investment. Along with being linked to corruption and the proliferation of black-market weapons, these zones have done little to accomplish their intended aim: An anonymous Pakistani official revealed that Islamabad hoped Chinese companies would follow Beijing’s lead and invest in Pakistan’s SEZs, but that has not happened. Pakistan has experienced no visible increase in exports due to CPEC, and the fraction of its GDP amassed from manufacturing remains at 13 percent. Building infrastructure will do little if private Chinese investors do not follow through by using that infrastructure to propel Pakistan into global trade. 

Now, Pakistan spends half of its revenue trying to repay its foreign loans, $30 billion of which is owed to Chinese creditors. This has led to a pernicious and cyclic debt trap: Pakistan borrows more from China to pay back its current loans, but in the process incurs more debt—with no end in sight. The mass infusion of Chinese loans has thus done little to achieve CPEC’s vision of elevating Pakistan from poverty and making it a global manufacturing hub.   

This debt trap is hurting China as well. The debt Pakistani borrowers owe to Chinese banks—both state-owned and commercial—makes these banks more vulnerable to default. Keeping Pakistan’s economy afloat is in China’s best interest: China’s investments in Pakistan are so great that Beijing cannot decouple itself from the economic issues that arise in Islamabad. Recognizing this fact, China has continued to provide rescue lending to Pakistan, including a “currency swap” strategy that pumps Chinese currency into the Pakistani economy. Through this method, the two countries’ banks maintain cash flows in their respective currencies at a specific rate. Despite these efforts, Pakistan has opted for several loan rollovers, indicating that the country will not be able to pay back China anytime soon. 

This reality seems to have set in for Chinese President Xi Jinping: While he mainly celebrated China’s successes at a recent BRI forum, he also stressed China’s shift to “small but beautiful projects.” China has become stricter with its investments in Pakistan, likely because it realizes the risk of having to constantly prop up the Pakistani economy without ever actually reaping the rewards of what it has sown. Increasing stringency in loans to Pakistan is reflective of a broader pullback from international lending. In 2016, China’s overseas financing of government borrowers was valued at $87 billion, but that figure decreased to a mere $3.7 billion by 2021. 

Yet, China cannot separate itself from Pakistan completely without losing face—a problem of its own design. Given Pakistan’s strategic importance to the BRI, it seems unlikely that China will pull back completely. Moreover, an alliance with Pakistan may be used as a counterpoint to China’s burgeoning regional rival, India—especially because CPEC goes through disputed territory in Kashmir.

Perhaps China fails to see the fruits of its investments because it is throwing money at the problem—investing for show, not to meaningfully help Pakistan’s economy on a long-term basis. Chinese creditors have shown little interest in setting up Pakistani factories, which would furnish Pakistan with the foreign currency it desperately needs to escape its debt trap. Bilal Gilani, executive director of a Pakistani research organization, commented that China’s investments have created a “graveyard of economic zones” with no manufacturing activity. 

China’s large-scale infrastructure projects may be too ambitious. It would be more fiscally and politically beneficial for China to make loans more prudently and position BRI as an enabler of pre-existing projects in Pakistan. A little can go a long way, especially if China exercises its soft power and geopolitical clout instead of overreaching with financial resources it might not have. CPEC is supposed to be a key strategic project for China, but it can only fulfill its role if it starts producing tangible financial progress.