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Economy

Pakistan's Rapprochement with the US Is a Move Away From the Belt and Road

Aug 23 , 2019

The first meeting between Pakistan’s Prime Minister Imran Khan and US President Donald Trump on July 23 was a triumphant moment for the relations between the two countries. President Trump not only hinted towards resuming financial aid to Pakistan but also offered to mediate between India and Pakistan on the Kashmir issue. Most of the analysts are perceiving this resumption of good relations between both countries from the prism of the Afghan endgame, where the US government needs Pakistan’s help. However, what is not being discussed is that this is also a move by Pakistan to move away from China’s Belt and Road Initiative (BRI).

In April 2015, Pakistan officially joined the Belt and Road Initiative by signing onto an agreement for the China-Pakistan Economic Corridor (CPEC), the Pakistan chapter of the BRI. Valued at $62 billion, the CPEC was dubbed as an economic game-changer for Pakistan. PML-N, a center-right party in Pakistan, was responsible for bringing the BRI to Pakistan. For the next three years, the CPEC remained a large part in the national discourse of Pakistan and was considered a popular agreement beyond criticism. At the same time, Pakistan’s relationship began deteriorating with the US, and in early 2018, President Trump suspended military aid to Pakistan. At that time, Pakistan was not concerned about this, because it was under the impression that China would replace the USA as its financial benefactor in all spheres.

After the elections on July 25, 2018, PML-N was voted out of power and PTI, another center-right populist party, replaced it. As soon as PTI took power, their lawmakers expressed displeasure towards the CPEC. PTI ministers claimed that the CPEC agreements were not in the interests of Pakistan, and therefore should be reviewed. Given the long-term strategic relationship between Islamabad and Beijing, the PTI government could not openly pull out of CPEC agreements. Hence, PTI lawmakers decided to resolve the issue another way – by mending relations with the US and reducing economic dependence on China. As a result, rapprochement with the US was implemented. The US Government readily accepted rapprochement because they needed Pakistan out of the Chinese camp and also needed its assistance in the Afghan peace process.

The Sino-Pak relationship is often dubbed as ‘sweeter than honey and deeper than oceans’. So, what went wrong that made Pakistan reconsider its approach to the CPEC, at the cost of drawing the wrath of President Xi’s government? There four main reasons which led the PTI government to back away from the CPEC.

The first reason is that the CPEC was not developing in the way Pakistan’s government had expected. Despite four years of development, the CPEC did not bring in the economic prosperity that had been promised to Pakistan. There was no substantial increase in foreign direct investment in Pakistan, and the CPEC did not contribute to massive job creation, which was frankly an unrealistic expectation of the PML-N government. In fact, the only thing that increased as a direct result of the CPEC was Pakistan’s foreign debt. Therefore, Pakistan’s lawmakers started to develop a critical opinion about the CPEC.

Second, after a few years it became apparent that the terms and conditions of the CPEC were not friendly to Pakistan. The way the PML-N government had negotiated CPEC agreements granted that it would benefit from China and its firms that were involved in this enterprise. The CPEC, which was originally sold to the Pakistani public as a massive investment project, turned out to be a series of loans for Pakistan. Experts believe that Pakistan has to repay $90 billion against the $62 billion provided by China as loans for CPEC projects. Additionally, Pakistan’s annual debt servicing costs also spiked up, with the CPEC reportedly the reason behind it. Therefore, it did not leave a good impression on decision-makers in Pakistan.

The third reason is that Pakistan feels that it did not get much from China after joining the CPEC. Pakistan made a huge policy shift by joining the BRI at the expense of severing its ties with the US. In return, Pakistan expected Chinese help not only in the form of CPEC investments but also outside of that. From September 2018 onwards, Pakistan faced a severe financial crunch. It only had foreign exchange reserves to pay for two months’ worth of imports. Therefore, Pakistan’s new government knocked on Chinese doors for a generous financial bailout package. Pakistani decision-makers were expecting that China would provide them a huge loan, which would avert a balance of payment crisis. However, China refused to help Pakistan with loans out of the CPEC framework. Consequently, Pakistan sought a $6 billion bailout package from the International Monetary Fund (IMF) with very strict conditions.

The fourth reason that made Pakistan reconsider its commitment to the CPEC was the hostile approach of the IMF and the western countries towards CPEC. Ever since Pakistan joined the BRI, it has been facing pressure from the US and its allies. They have not directly asked Pakistan to reconsider this decision but implicitly made it difficult for Pakistan to get any help from global financial institutions. For instance, US Secretary of State Mike Pompeo warned that the US government would not allow the IMF to bail out Pakistan if the money would be used to repay Chinese loans. Likewise, the IMF also made it mandatory for Pakistan to share all the details of CPEC loans before it could get a bailout package. This hostility of the west towards the CPEC made Pakistan reconsider its decision when it was not getting anything substantial out of the CPEC in the first place.

Now that Pakistan has openly made an attempt to restore its ties with the USA, it’s starting to reap the benefits. Just days after the Khan-Trump meeting, the US State Department approved $125 million in financial support for Pakistan’s F-16 fighter jets. This means that Pakistan does not have to financially and strategically rely on China anymore now that the US government has opened its doors for Pakistan.

Furthermore, this means that Pakistan is no longer interested in the CPEC, but it cannot pull out of it abruptly for two reasons. Firstly, Pakistan has signed binding agreements for CPEC projects until 2030, and secondly, Pakistan does not want to risk its strategic relationship with China by removing itself from these agreements. Therefore, on paper, the CPEC will continue to exist until 2030, but in practice, it will gradually be brought to a complete halt. This will result in a negative reaction from China, and it will not bode well for Sino-Pak relations; however, Pakistan has already made its decision, and it will now have to deal with these consequences.

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