The IMF, CPEC, and Pakistan: Will the Chinese save Islamabad yet again?

The China-Pakistan Economic Corridor (CPEC), once heralded as a “game-changer,” has almost disappeared from the spotlight in recent years in Pakistan. The multibillion-dollar project aims to connect China's northwestern region of Xinjiang with Pakistan's Gwadar Port on the Arabian Sea through a network of highways, railways, and pipelines, offering strategic dividends to China and an economic lifeline to Pakistan. In recent years, the project has faced slow implementation, unpaid loans, corruption, and a dire security situation in Pakistan.

Since its inception, the West, especially the United States, and India, a key Western ally and Pakistan’s arch-enemy, have voiced opposition to CPEC. Calling it a Chinese “debt trap,” many US lawmakers have repeatedly warned that they do not wish to see Pakistan repaying Chinese loans using money from the International Monetary Fund (IMF).

CPEC is a flagship project of China’s massive Belt and Road Initiative (BRI) infrastructure plan. Both China and Pakistan have long maintained secrecy around the project’s details. However, it is no secret that the Chinese have expressed their disappointment time and time again at the myriad issues CPEC has faced in Pakistan. In 2019, during the tenure of Prime Minister Imran Khan, Pakistan reportedly disclosed the details of confidential Chinese agreements to the IMF, which, some believe, led to the trust deficit between the two countries. Most crucially, the recurring terror attacks on the Chinese working on CPEC projects in Pakistan have become a major concern for China.

With Pakistan standing on the cusp of bankruptcy yet again, Prime Minister Shehbaz Sharif visited China in June, during which the two countries announced plans to upgrade CPEC and initiate Phase II of the project. However, it is widely believed that the visit had less to do with CPEC and more to do with Pakistan’s desperate plea for funds, ideally in the form of new Chinese investment in CPEC-related projects and reprofiling of Pakistan’s $15 billion energy debt owed to China.

What’s propelling Pakistan’s desperation for a Chinese bailout is its newly inked agreement with the IMF. On July 12, 2024, Pakistan and the IMF reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) arrangement of about $7 billion. A “staff-level” agreement implies that the agreement is yet to be approved by the IMF’s Executive Board. Pakistan will need a “timely confirmation” of necessary funding from its development and bilateral partners (read China) for the agreement to receive the sanction of the Executive Board.

Unfortunately for Pakistan, it has little to offer China except a disappointing scorecard on CPEC, unceasing financial instability, and a plethora of governance challenges. Worse, under pressure from the IMF to adopt austerity and fiscal discipline, Pakistan has assured the IMF that it does not plan to allocate additional budget to settle the Rs. 493 billion ($1.8 billion) dues of Chinese power plants built under CPEC. According to the 2015 Energy Framework Agreement between Pakistan and China, Pakistan is bound to allocate “sufficient money” to a special fund to keep Chinese investors immune from the circular debt. By allocating only Rs. 48 billion to the fund this year and capping monthly withdrawals at Rs. 4 billion, Pakistan is violating the Energy Framework Agreement. This issue of the arrears of Chinese power producers in Pakistan is central to Pakistan’s debt restructuring plea to China. Furthermore, in the agreement with the IMF, Pakistan has also agreed to phase out incentives for the Special Economic Zones (SEZs), a key part of CPEC. As per the Federal Board of Revenue of Pakistan, SEZs and other CPEC-related projects are among the most tax-exempted entities in the economy.

The important question, then, is: how is China responding to Pakistan’s poor handling of CPEC, its perpetual financial troubles, and its periodic demands on China to bail it out?

China understands Pakistan’s geostrategic significance and its commitment to CPEC, notwithstanding the myriad issues affecting the project that Pakistan has failed to resolve. China also seems cognizant that Pakistan’s recent financial decisions regarding CPEC emanate from its unprecedented economic crisis and are, therefore, not permanent. However, China does not seem eager to continue pouring money into Pakistan, or at least to the extent it did previously. Many in China have come to believe that the political risk associated with Pakistan is very high, with one prominent Chinese scholar deeming it “only slightly better than Somalia and Syria.” This should be deeply concerning for Islamabad, which sees Chinese cooperation, especially via CPEC, as its biggest hope for a long-term economic revival.

During Prime Minister Sharif’s visit to China in June, China rebuffed Pakistan’s proposal for new CPEC-related investments. A month before his trip, Pakistan had requested an additional $17 billion for China-funded energy and infrastructure projects. Prime Minister Sharif and a massive entourage that accompanied him to China were hoping to secure new investments from the latter through the launch of an “upgraded version” of CPEC during their visit. However, China declined to announce any new investments in Pakistan and only agreed to go ahead with a long-delayed $6.7 billion railway project, which is expected to be completed in three phases. China has only agreed to the first phase. It is obvious to many that China is not as excited about CPEC as it once was. The blame squarely lies with Pakistan.

In April, Finance Minister Muhammad Aurangzeb admitted that Pakistan had been “slow” over the last few years regarding CPEC. He emphasized that the government was planning to move forward with Phase II of CPEC, enabling the revenue-generating parts of the project. However, with a significant number of Chinese nationals killed or injured on CPEC projects and Pakistan’s never-ending financial woes, many doubt the Chinese would continue to have a commercial interest in Pakistan or that Phase II of the project would have much substance in it.

The recent enthusiasm regarding CPEC Phase II is coming more from Pakistan than China. The government of Pakistan is keen to emphasize its willingness to continue the implementation of the planned projects, even if some have experienced delays. It has repeatedly emphasized the significance of Phase II of CPEC, which focuses on the development of SEZs, agricultural enhancement, and science and technological cooperation. However, China’s response has been lukewarm, and analysts have highlighted that China prefers to emphasize the agricultural aspect of Phase II, unlike Pakistan, which is keen on energy and technology projects.

In fact, the overall differences in expectations regarding CPEC between the two countries have been highlighted as a “major concern” by Chinese scholars, who see Pakistan’s “exaggerated and unrealistic expectations of CPEC” as potentially harmful to the two countries’ long-term relations.

At this juncture, at least in the short term, the only hope for Pakistan lies with China agreeing to restructure Pakistan’s energy debt. Finance Minister Aurangzeb’s visit to China in late July is, therefore, crucial. Pakistan is seeking a five-year extension on the repayment of Chinese energy debt. Pakistan aims to curtail foreign currency outflows of $750 million annually by stretching out the timeframe of repayments. However, doing so will increase the payment to China by an additional $1.3 billion, bringing Pakistan’s total energy debt owed to China to $16.6 billion by 2040. Pakistan is seeking to reprofile $27 billion in debt and liabilities with China, Saudi Arabia, and the UAE to secure the IMF program.

It is uncertain whether Mr. Aurangzeb’s visit, following Prime Minister Sharif’s trip, will suffice to convince the Chinese to rescue Pakistan yet again. Pakistan will try hard to sell the recent reforms undertaken by the government to improve macroeconomic indicators and the recently concluded staff-level agreement with the IMF to receive the Chinese nod of agreement. Regarding the latter, the finance minister noted in his post-China visit presser on July 28 that China supports Pakistan’s agreement with the IMF. However, interestingly, he did not mention whether Beijing had agreed to Pakistan’s request for debt reprofiling.

Five days after the finance minister returned from his trip to China, on Aug. 2, Prime Minister Sharif wrote a letter to the Chinese government requesting debt reprofiling. On Aug. 1, Prime Minister Sharif told a high-level Chinese delegation that his cabinet had decided to exempt Chinese citizens from visa fees, starting Aug. 14.

While the government of Pakistan is going to great lengths to secure Chinese support, it remains to be seen how that support will manifest.

 

Syed Abdul Ahad Waseem served as the United States Institute of Peace (USIP) Foreign Policy Consultant to the outgoing Standing Committee on Foreign Affairs of the National Assembly of Pakistan.

Photo by Huang Jingwen/Xinhua via Getty Images