Pakistan-China post-election: Will Pakistan be forced to rethink its approach towards infrastructure?

Source: Reuters

Source: Reuters

What do Pakistan, Montenegro and Kenya have in common? The debt-to-GDP ratio of all three countries exceeds 70%; and in each case a significant proportion of that debt is owed to Chinese financiers who have lent money to fund infrastructure projects. In recent months, however, there has been growing concern that some countries have borrowed too much from the Chinese; and that their participation in the Belt and Road Initiative (BRI) has only resulted in the build-up of unsustainable amounts of debt. 

In our previous blog piece, we outlined the potential ramifications on costly BRI infrastructure projects if such concerns are left unchecked and newly-elected governments come into power. In the case of Malaysia, this fallout means that Chinese BRI projects worth around $20 billion risk getting scrapped. 

Pakistan will have fresh elections next week on July 25. The question that needs to be asked is; might Pakistan be the next in line to reassess its approach towards costly BRI infrastructure projects? Pakistan is supposed to be a poster child of the Belt and Road Initiative; and with Chinese investments of over $62 billion in energy, infrastructure, special economic zones and telecommunications, the China Pakistan Economic Corridor (CPEC) is the flagship BRI project in South Asia. 

In contrast to some other BRI projects, CPEC comprises more than just infrastructure. Documents laying out the long term plan for CPEC reveal that China envisages a strategic and complex role in Pakistan, penetrating not only most of its economy, but also its society. This ranges from Chinese involvement in agriculture through provision of seed and irrigation technology, to the set-up of surveillance systems in cities, to media cooperation and joint development of the internet industry. Chinese enterprises have established a solid market presence in sectors such as household appliances (Haier), telecommunication (Huawei, China Mobile) and mining (China Metallurgical Group Corporation). 

Source: Dawn

Source: Dawn

This illustrates two points: (1) CPEC is extremely multifaceted, influencing various aspects of Pakistani life and as a result is (2) Very likely to play an important role in the upcoming elections. The spur in economic growth, with rates of 5-6%, that Pakistan has seen during the last three fiscal years has been driven by Chinese investments and Pakistani government spending that matches CPEC’s aims to develop infrastructure. Nearly half of the total FDI inflows in 2016/2017 ($2.41 billion) came from China alone. Therefore, it comes with no surprise that the Pakistani political establishment has created a widespread consensus behind the initiative, and all major parties are supportive of the initiative. The two front-runners,  Nawaz Sharif, former Prime Minister and leader of the Pakistan Muslim League - Nawaz (PML-N) and his opponent Imran Khan, chief of the Pakistan Tehreek-e-Insaaf party (PTI), both intend to accelerate the development of CPEC.

Most of the Pakistani population holds a favorable view of CPEC as it has helped provide electricity and tackled the issue of chronic power shortages. It also extends to the public health sector. Last year, China and Pakistan built an emergency medical center in the port city of Gwadar, as well a desalination plant, aiming to increase healthcare as part of the Healthy Silk Road Initiative that is part of the BRI. 

Due to CPEC’s popularity, it is very likely that, regardless of the outcome of the election, the new administration will continue to champion engagement with China and oversee an increase in Chinese investments into the country. This stands in contrast to the Malaysian election in May; where Mahathir clearly ran on a platform that was lukewarm about big-ticket infrastructure and sought a policy reset

However, while the new Pakistani administration might seek further engagement with China and accelerate the development of CPEC, Pakistan may still have to change or even reverse its approach towards costly infrastructure projects. The decision may not be one that the new administration can make itself; and instead the deteriorating economic situation and mounting debt dictates Pakistan’s future course of action. 

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According to a recent poll by Bloomberg, economists cut Pakistan’s growth forecasts for 2018-2019, citing fiscal and external sector risks. In part, this relates back to the dependence on Chinese investments into CPEC and large infrastructure projects that have to be paid for in the future. Pakistan’s current account deficit reached a record $18 billion in 2017-2018; more than tripling versus two years prior. In order to shore up finances, the previous government cut infrastructure spending by 20% and to fend off a currency crisis Pakistan has received around $5 billion in emergency financing from China.

Problems have not yet been resolved even with these bail-outs; and as of July 13 2018, foreign currency reserves stood at $9.06 billion, a four-year low and only enough to cover two months worth of imports. As the situation continues to deteriorate, Pakistan may have no choice but to enter an IMF program that will prioritize controlling the current account deficit over enabling growth. The previous two governments - Pakistan People’s Party in 2008 and Pakistan Muslim League in 2013 - had also immediately approached the IMF for bailout packages after assuming charge.

With this outlook, the next government may have few alternatives but to approach infrastructure in a different way. It will have to tighten its spending and focus more on those projects that can bring immediate economic return. This is how Malaysia’s new approach to infrastructure could become more relevant to Pakistan. Due to lower costs, the new Malaysian administration has proposed to replace the expensive Singapore-KL high-speed rail project with upgrading an existing line (Keretapi Tanah Melayu line). This might not work in every case, but it will provide governments and investors across the region food for thought and alternatives to investing in new, big-ticket infrastructure.

Pakistan knows that while individual infrastructure projects might be adversely affected in the future, CPEC as a whole will survive due to its multidimensionality in scope. For China, the unsustainable amount of Pakistani debt should be a warning sign that it needs to develop strategies that allow it to develop BRI without the progress of projects swinging like a pendulum. Despite differences between countries such as Pakistan and Malaysia, it is costly infrastructure projects and resulting build-up of unsustainable debt and that creates a common problem for countries receiving BRI investments from China. Unlike Malaysia, it might not be a change in ideology, but a change in necessity that pushes Pakistan to rethink its approach towards BRI infrastructure and CPEC post-election.