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Economy

Why Is Pakistan Cutting Funding from Belt and Road Projects?

Jul 15 , 2019

On 11th June, the government of Pakistan announced its budget for the fiscal year 2019-20. The total volume of the budget is Rs8.24 trillion ($50.18 billion), which comes with a record fiscal deficit of Rs3.15 trillion ($19.19 billion). This budget revealed the plight of the economic situation in Pakistan, where the GDP growth rate had fallen to 2.4 percent and inflation has increased to 11 percent. However, another major development coming out of the budget, which escaped media attention, was a significant cut in the funding of the Belt and Road Initiative (BRI) projects in Pakistan.

The China-Pakistan Economic Corridor (CPEC), the flagship project of the BRI, was signed between Pakistan and China in April 2015. Comprising of the total value of $62 billion, CPEC was designed to stimulate the economy of Pakistan by developing industries, infrastructure, and power generation projects. Gwadar port, in southwest Pakistan, is the starting point of the economic corridor which will run through Pakistan’s heartland to Xinjiang autonomous region in China. Initially, CPEC received a lot of fanfare and it was termed as a game changer in Pakistan. However, since the incumbent government of Pakistan took power in August 2018, CPEC has been put on the backburner. The funding cut for CPEC projects is the continuation of the same policy by the PTI government in Pakistan.

In the current budget, the federal government of Pakistan slashed the funding for CPEC projects by a staggering 60 percent. The government allocated only Rs83 billion ($505.42 million) for CPEC projects as compared to Rs198 billion ($1.20 billion) last year. This is a huge cut in funding and it will hamper the progress and timely completion of the CPEC projects. The impact of the funding cut is further compounded by the depreciation of Pakistani rupee. Pakistan’s currency lost 30 percent value against U.S dollar in the last 12 months.

Furthermore, the funding for projects in Gwadar has also taken a hit. Earlier this year, Pakistan and China organized the groundbreaking of the New Gwadar International Airport (NGIA) with much fanfare. However, in the budget, the funding for the airport was also cut down by two-thirds, compared with last year. No major allocations were made for Gwadar city, which is facing huge socio-economic problems. People in Gwadar are facing power cuts of 16 hours when the temperature rises to 40 degrees. This makes it even more puzzling that the government of Pakistan cut down the funding for CPEC projects when the need for resources is enormous.

There are multiple reasons that have shaped Pakistan’s approach towards CPEC. Firstly, Pakistan is facing a severe economic crisis. Pakistan has missed its economic growth targets and its inflation has entered double digits. According to economists, 1 million people in Pakistan will lose their jobs and 8 million will fall below the poverty line due to current economic turmoil. In these circumstances, Pakistan had no choice but to seek a $6 billion bailout package from the International Monetary Fund (IMF). The agreement of this package requires Pakistan to adopt austerity measures and cut down government expenditures, and that’s why the axe fell down on CPEC projects.

Moreover, Pakistan could have made cuts elsewhere and prioritized funding for CPEC despite the austerity drive, but it did not. The reason for this decision is a change of heart in Islamabad about CPEC. The current government of Pakistan is not a big fan of CPEC, like the erstwhile Nawaz Sharif government was. The incumbent government apparently believes that CPEC will not benefit Pakistan, and they are scaling it down. However, they can’t say this openly due to Pakistan’s strategic relations with China. Therefore, they are using the pretext of austerity to cut down funding for CPEC.

The third reason for funding cuts can be found in the financing model of CPEC. In April 2015, when the CPEC agreement was signed, it was implied that China would finance all projects in the form of investments and loans. Later, Pakistan would repay the loans to China once the projects are fully functional. Since then China has financed some of the energy generation projects with loans, but Pakistan is using its own resources to finance the majority of the infrastructure projects under CPEC. Due to the secrecy surrounding the CPEC agreements, there is no available documentation or stated policy as to why Pakistan, instead of China, is funding infrastructure projects. Pakistan is running out of cash, literally, and it does not have resources to allocate for CPEC. Therefore, presumably, the Pakistan government felt it appropriate to cut down funds when China is not contributing its implied share.

Likewise, this also raises a pertinent question why Pakistan, a host country, is using its own resources in the early stages of BRI projects? The common perception is that Chinese money is supposed to fund everything that involves BRI, however this is not the case in reality. This small technical detail questions the very basic foundations of BRI.

Furthermore, the funding cut for CPEC in Pakistan has escaped media attention due to other economic and political crises in Pakistan. However, it’s a clear setback for the progress of CPEC. With this cut in funding and the projected economic recession in Pakistan in the coming years, its least likely that CPEC projects will be completed by their agreed timeline of 2030. This clearly means that progress on CPEC is getting derailed, which could lead to the failure of the flagship project of the BRI Initiative. CPEC failure can very well be construed as a failure of President Xi’s ambitious BRI project. 

The BRI is facing criticism all over the world. Among the host countries, Malaysia became the first country to effectively force China to cut down costs of BRI projects. After Malaysia, Pakistan is also on a similar path, but with a different approach in the form of funding cuts. Malaysia does not host a flagship project of BRI, but Pakistan does. Therefore, Pakistan’s gradual withdrawal from CPEC can be the first major blow to the BRI, and this can have disastrous consequences for China’s project of the century.

Unlike the case from 2015 to 2018, there is not much enthusiasm for CPEC in both the Pakistan and the Chinese governments. That’s the reason that a 60 percent funding cut to CPEC projects has gone unnoticed. This is an indication that both China and Pakistan will further sour on CPEC, which will translate silently into further funding cuts. This means that CPEC is going to be a major stumbling block for the success of the BRI in the near future. This will definitely put heavy strains on Sino-Pak relations in the years to come. Currently, there is no apparent realization of this reality but it can’t be hidden from world view for very long.

 

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