India, Debt and Sustainability: The Major Risks faced by CPEC

India – the prospect of a stronger more prosperous neighbour should be a positive for its neighbour, but for New Delhi the China Pakistan Economic Corridor could mean a rail link through disputed Kashmir and the emergence of a solid Pakistan – China axis and even a friendly port in Gwadar for Chinese naval vessels. These threats might be overstated by New Delhi, but there is little doubt that Beijing seeks to maintain its considerable military, diplomatic and economic lead over its neighbour. Therefore Pakistan will have to watch Indian intentions towards CPEC will a large degree of suspicion.

Can Pakistan make a success of the CPEC projects? Although China has a track record of executing large complex infrastructure projects overseas, Pakistan has a record of economic underachievement, thanks to a history of instability, wars with India along with poor governance and a heavy serving of corruption, all of which has hobbled the country’s development. The last few years have seen an untick in GDP growth and a stock market boom but the economy faces many intractable problems.

The emergence of all these CPEC projects could result to greater temptation to indulge in corruption and when the country hits a rough economic patch the government and private businesses could face a financial crunch as they are suddenly unable to repay the stupendous funds lent to them (figures in the region of USD 40 billion are being used in relation to CPEC) – which will lead to Pakistan owing China an enormous amount of money.

Venezuela is a good example of this, large sums of Chinese loans were taken out with oil as collateral but the collapse in the price of crude floored the Venezuelan economy and the Caracas government was unable to repay China. While this might seem like a dangerous prospect, there is every reason to think China will not be overly worried, as long as its companies continue to do business in Pakistan recycling Chinese bank loans, the outstanding debt will give China a useful hold over Pakistan which it will not be easy to escape from.

The outstanding debt could allow China to use Pakistan for further geo-political gain, this could mean allowing the use of naval facilities, diplomatic support in regional disputes and further economic dependence through the unquestioning opening of local markets to Chinese goods. This might seem far-fetched in 2017, but debt crises are common place in emerging markets and Pakistan should be careful not to become overly dependent on Chinese largesse.

Are the projects going to make money? There is the very real danger that the rail, road and power stations are not used to their full potential. Mega projects, big money and ambitions have a tendency to throw up white elephants, projects that weren’t needed and sit idle or underutilised. Although Pakistan is crying out for fresh infrastructure there also has to be the will to upkeep and sustain these new projects, roads have to be maintained, rail links repaired and power stations refurbished. Pakistan has enormous capability in terms of its military forces, but whether it can develop and sustain an unprecedented infrastructure boom with Chinese help remains to be seen.



Categories: China Goes Global, Frontier Market Strategy

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