On CPEC revival

Since coming to power two months ago, PM Shehbaz Sharif has repeatedly emphasized the importance of the China-Pakistan Economic Corridor (CPEC). Besides the new leadership expressing high-level political commitment to CPEC multiple occasions, several recent developments also point towards the new government’s intent to revive the stalled bilateral investment projects in energy, infrastructure and special zone areas. Whether or not there is progress depends in large part on the health of the economy.

For instance, considering how the fate of existing Chinese investments under CPEC is tied to future investments, the new government has tried to resolve the issue of payables to Chinese power producers. By some accounts, those payables have risen to Rs340 billion. Reportedly, Rs50 billion has been paid in that regard (in a round-about manner). It’s a start, despite IMF’s reported pressure to renegotiate “excess profitability” of CPEC power projects, on the lines of non-CPEC IPPs’ settlement that took place last year.

The PM’s recent Gwadar visit was also perceived as sending an important signal. On one hand, it was an admission of Pakistan not delivering adequate development in the port city in recent years. On the other hand, it was an opportunity to jumpstart activities, especially related to New Gwadar International Airport, the Eastbay Expressway, and utilities projects including the much-stalled Water Desalination Plant.

The perspective in the Chinese state media towards the future of CPEC under the new Shehbaz government has also been relatively more optimistic over the past two months. This perhaps indicates there are hopes that the former CM Punjab might be able to revive the stalled bilateral cooperation at the federal level. After all, Shehbaz has experience delivering large-sized infrastructure development projects in Punjab, including with the help of Chinese investors under the framework of CPEC.

But the billion-dollar question still remains:given the ailing state which Pakistan’s economy is currently in, does it have the financial capability to accelerate and sustain CPEC? The last time around, towards the end of the PML-N government in FY18, turbo-charged CPEC investments had delivered significant infrastructure development, but at the cost of rising import bill, putting external stability at risk.

In that regard, the Shehbaz government in mid-2022 is facing a similar situation to the one faced by the Khan government in late-2018. There is now (asit was then) a serious import pressure depleting forex reserves and drowning the currency. The IMF is (as it was then) playing hard to get, demanding strict demand-strangulation measures, besides raising concerns over CPEC-related payments. The current state of geopolitics is (as it was then) attempting to pull the country in two different directions.

As the immediate concern for the new government is to avoid the country from default on its external debt obligations and foreign trade-related payments, one does not expect a sudden revival of CPEC anytime soon. However, by reiterating its commitment to CPEC projects, the Pakistani leadership is perhaps hoping to secure sizable balance-of-payment support from Beijing. After latest FATF decision, the next best news for the economy could be the arrival of much-awaited inflows from China. Let’s wait and see.