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Pakistan is looking down a deep, dark hole
It needs more than mere economic reform. It needs the root-and-branch overhaul of its institutions. But there's no sign anyone's capable of leading it.
By Vivek Y. Kelkar, Mumbai
Last month, China and Pakistan celebrated the tenth anniversary of the US$64 billion China-Pakistan Economic Corridor with bonhomie and backslapping. But a warning from Syed Tariq Fatemi, special assistant to Pakistan’s prime minister Shehbaz Sharif, belied the joviality. “Overdue payments to the Chinese IPPs [the independent power plants built and operated by China in Pakistan] currently stand at US$1.5 billion,” he wrote. “This is causing huge concern among Chinese businesses.”
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Fatemi’s message, sent to Pakistan’s Planning Commission, referred to three power plants in Hub, Sahiwal, and Port Qasim. Hub is in Pakistan’s Balochistan; Sahiwal and Port Qasim are in Punjab and Sindh Provinces, respectively.
The much-vaunted CPEC is not going quite as planned, and it’s not just the recent economic and political crises in Pakistan that have queered the pitch. The CPEC’s fate has once again raised serious questions about Pakistan’s state capacity and internal stability. Its deep-seated problems have now spilled beyond the economic sphere to the social. They have even begun to affect its “all-weather ally” China and the CPEC, its showpiece project.
Fatemi’s missive highlighted two problems. First, Pakistan didn’t have enough foreign exchange to buy the grade of coal these power plants required; second, it had no money to pay its debts to China—its biggest benefactor. A recent IMF report estimated that China is owed about US$30 billion of Pakistan’s US$126 billion overseas debt.
Other gas-based power plants are facing a crisis, too, with Pakistan unable to import LNG, although Balochistan has abundant reserves that are inefficiently tapped. Over half the country is facing a severe power crisis. Both businesses and the people are suffering.
The CPEC involved much more than rail and road infrastructure. Besides the trade corridor linking the port of Gwadar in Balochistan to China’s Xinjiang province, the CPEC was meant to build the power plants required to electrify large parts of a country long starved of that basic good. There were plans to create special economic zones to boost Pakistan’s exports and provide global transit hubs, and several mining projects, notably in troubled Balochistan.
A Basket State
The CPEC projects were meant to add between 2 and 2.5 percent to Pakistan’s economy and create at least 2.3 million local jobs by 2030. Those targets look distant. Ten years later, barely 46,500 jobs have been created. Andy Khan, Patron-in-chief of the Pakistan Institute of Constitutional Studies, says that because of insurgent activities in crucial areas and Pakistan’s inability to provide the needed funding, only about 20 percent of the projects have been completed. Other sources—based in Sindh, Balochistan, and Khyber Pakhtunkhwa—concur. (More often than not these days, sources in Pakistan, particularly in Balochistan and Khyber Pakhtunkhwa, refuse to go on the record, fearing for their lives.)
Many, including China, blame the resistance groups, insurgents, and terrorists who operate in Pakistan. Others argue, more ominously, that the blame can’t be placed entirely on these groups. The real problem, they say, is lack of state capacity: Pakistan is unable to manage its economic and administrative affairs efficiently enough to build and generate adequate returns from complex projects like the CPEC.
Mining companies like the Sindh Engro Coal Mining Company have written to the federal power ministry that delays in opening letters of credit and questions over foreign remittances have severely affected mining operations. Much-touted contracts at Reko Diq, in the Chagai hills of Balochistan, involved Chinese, Australian and Canadian companies mining for copper and gold. They are at a standstill. “Nothing is happening at Reko Diq. The projects are on hold,” says Khan.
Even when goals were met and power plants built, sources said, they suffered from poorly negotiated contracts. Most of the power plants were to be run on specific grades of imported coal that offered China economic benefits, rather than using domestic sources such as coal from Pakistan’s Thar desert.
Even the showpiece of the CPEC, Gwadar port, is supported by power supplied by Iran through a nearly thirty-year-old arrangement whereby some of Pakistan’s western provinces were electrified through imported power.
Pakistan government data shows that eleven power projects involving investments of around US$12 billion have so far been completed; another 27 worth US$19 billion are at various stages of implementation; and 36 are targeted to come up by 2030. But CG’s sources in Pakistan indicate that this data is misleading. A large part of these planned infrastructure projects are in Balochistan, a province that forms nearly 44 percent of Pakistan’s landmass. Recently Munir Mengal, President of the Baloch Voice Association, charged the federal government in Islamabad with “creating propaganda.” None of the CPEC projects had been completed, he alleged. (His may be an extreme viewpoint: Some power and infrastructure projects have indeed been completed, though they might not be operating at capacity.)
Sources say that completion dates have been advanced and the completed projects are operating at half-capacity, like most power plants. Worse, Pakistan’s financial crisis may force it to consider further delaying projects unless China steps in with the needed capital and agrees to accept deferred payment once the projects are up and running. Both are unknown for now.
Data for the infrastructure sector is cloudy. Government data shows that seven projects have been completed. Six more are to be completed by 2025, and another 12 are meant to be completed by 2030. None of the nine special economic zones, including the one at Gwadar meant to develop both the port and the city as a major industrial and transit hub, are finished. The first four are slated for 2025, but these deadlines may not be met.
Our sources in Balochistan and Sindh argue that the deadlines aren’t feasible—not just financially, in the wake of the economic crisis, but because of the often violent local resistance. The state of Pakistan’s industry is exacerbating questions about the feasibility of infrastructure projects. Infrastructure costs include not just what’s required to build a project but the lifetime costs of operating, maintaining and enhancing it. The lifecycle costs are far more than what’s required to build a road, railway, or bridge. They require constant streams of revenue. The IMF warned in April last year that Pakistan faced “de-industrialization.” This decline would be worse under today’s economic scenario.
The lack of foreign exchange is telling—both about Pakistan’s relationship with Chinese companies and about its relationship with other multinationals. With about US$4.3 billion in foreign exchange reserves, enough to cover just one month of imports, the country’s central bank has clamped down on overseas repatriation of funds, even those legitimately accruing to parent companies abroad, like dividends. State Bank of Pakistan data shows that repatriation dropped to US$182.5 million in July-December of financial year 2022-23 from $794 million the prior year.
Forex reserves are not being buttressed by economic earnings but by overseas loans, largely from China. In late February, China provided a US$500 million loan. Recently the Industrial and Commercial Bank of China approved the rollover of a US$1.3 billion loan. The bank had already lent US$700 million to Pakistan earlier this year. Pakistan has abou US$7 billion in debt repayments coming up in the next few months. Will it default?
The protestors argue that the economic spoils don’t benefit the areas through which CPEC infrastructure passes. A whopping 91 percent of the revenue from Gwadar port accrues to China, for instance, not Pakistan. Sources said that even though the port is still being expanded, little cargo—if any—transits through it. Locals see Gwadar as the perfect metaphor for the CPEC.
Mullah Hidayat Ullah of the Haq Do Tehreek is fighting for the rights of the locals of Gwadar. They accuse Chinese commercial fishing trailers of taking away all the fish, leaving local fishermen with fewer than five fish a day, sometimes as little as two. “They use nets that catch even small fish, which quickly leads to a depletion of marine life. Worse, the local population doesn’t have drinking water. It’s being supplied only to the port and the contractors, who live behind chain-link fences. Medical and education infrastructure is not in place. When the Haq Do Tahreek under the leadership of Hidayat Ullah protests and demands their fundamental rights they are often confronted with bullets and tear gas by the police and military,” says one source.
Even the completed projects, especially in Balochistan, the Federally Administered Tribal Areas, and part of the Khyber Pakhtunkhwa province, are troubled and operating inefficiently. The three provinces are ridden with violent protests by Baloch activists and destabilized by terrorist organizations such as the Tehreek-e-Taliban.
The fault may not lie with the activists or insurgents alone, however, said Ahsan Y. Chaudhary, a political analyst based in the United States. His argument that state failure, too, is at work bodes ill for Pakistan. “I don’t think the Baloch rebels are as big a hurdle as they are generally perceived,” he said. “To me, the biggest hurdle is Pakistan’s political instability, deepened by a centralized state structure which is simply unviable for any modern nation-state. Even if more revenues are allocated to Pakistan there is little possibility that they will end up benefiting the people, simply because government accountability is null and officials stand to exploit them.”
Chaudhary’s case is compelling. Neither the current ruling coalition led by Shahbaz Sharif of the Pakistan Muslim League party nor the previous incumbent Pakistan Tehreek-e-Insaaf party led by Imran Khan have so far shown the skills required to overhaul the economy and carry out the major structural reforms it needs. Terrorist activity is burgeoning. Negotiations with the IMF for much-needed loans are perpetually “ongoing.” The IMF has bailed out Pakistan 22 times in 75 years. The army continues to dictate the lion’s share of Pakistan’s defense, foreign and economic policy.
Elections are supposed to take place later this year. Imran Khan’s PTI offers a panacea, the Islamic version of the welfare state. There’s simply not enough money in Pakistan’s coffers to deliver on his promises. Many accuse Pakistan’s entrenched bureaucracy and army of usurping economic returns that should rightly accrue to the state. As Chaudhary and other analysts have pointed out, efforts to change this keep failing because the election process never yields genuine leadership. No party ever gets a government with a clear mandate and then completes its tenure.
The army has ruled Pakistan for nearly half of its 75 years as an independent nation. The “establishment,” as locals call the army, frequently indulges in “political engineering” to bring compliant leaders to power through the electoral process. No Pakistani prime minister has ever completed a five-year term. Political parties have done so only twice.
China now seeks to maintain a 2,000-strong security force to protect its investments. The Pakistani government has yet to respond officially. According to CG’s sources, China’s forces already man key sites like the Gwadar port. They say the federal government will have no choice but to give them official permission. Many in the Arab world and India would be uneasy if China’s troops were stationed in Pakistan alongside its navy’s ships, which often berth at Gwadar.
Pakistan is looking down a deep, dark hole. It needs more than just economic reform. It needs institutional reform if it’s to develop the capabilities and policies it needs to grow. Absent such reform—soon—its instability presents a growing risk to the whole region, from Afghanistan to India and, perhaps, Iran.
Vivek Y. Kelkar is the co-founder of the Cosmopolitan Globalist.
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