Foreign Affairs

The Folly of Pakistan’s China Gamble

Senior Fellow and Director for South and Central Asia
Haqqani Photo

In July, a popular uprising in Sri Lanka toppled the government and sent its president scurrying into exile. The revolt had been brewing for months in the wake of the country’s economic implosion, but it still caught observers off-guard. In surreal scenes, protesters took over the presidential palace, swam in the pool, dined in the kitchen, traipsed around the bedrooms, and held stylized meetings in the conference rooms.

Such images from Sri Lanka stunned cash-strapped economies across South Asia, a turbulent region plagued by unstable governments, toxic nationalism, violent extremism, and the unsettling consequences of China’s expanding influence. From Dhaka to Islamabad, governments in the region have looked at the chaos in Colombo and wondered if they might be next.

Sri Lanka’s dire situation stemmed from the collapse of its economy in the midst of spiking commodity prices and a staggering debt crisis. It offers a bitter lesson to other floundering economies in similar situations, especially those that, like Sri Lanka, rely excessively on China. Including Sri Lanka, 42 middle- and low-income countries, such as Djibouti, Kyrgyzstan, Laos, and Zambia, have reportedly taken on significant debt obligations to China worth over ten percent of GDP. The debacle in Sri Lanka is particularly chastening for Pakistan, a country that is heavily dependent on Chinese loans. Pakistan has hitched much of its hope for development to courting Chinese investment. But despite rising borrowing costs, Pakistani leaders still believe the country’s wager with China is worth it. If they are wrong, the relationship with China threatens to leave Pakistan vulnerable to rising political turmoil in the midst of an already dangerous economic downturn.

A Powder Keg

Thanks to the country’s size, the stakes are even bigger in Pakistan than they were in Sri Lanka Pakistan is home to the world’s fifth-largest population and a $340 billion economy. In the last six years, economic productivity has fallen to record lows, domestic revenues and foreign reserves have shrunk, the currency has depreciated, unemployment is soaring, and political corruption has increased. The country’s total foreign debt has nearly doubled since 2016, reaching a monumental $131 billion. Alarm bells are ringing even as Pakistan’s bickering leaders refuse to listen.

Scrambling to avoid a default, Pakistan has now been on a borrowing spree to fund its expenditures and meet its debt repayments. In June, Pakistan’s shaky new government borrowed another $2.3 billion from China to shore up its foreign reserves. It also negotiated the continuance of a $6 billion bailout package with the International Monetary Fund, which involved raising fuel prices and electricity tariffs, deeply unpopular measures that prompted a public backlash. The government has tried to get Pakistanis to accept the reality of straitened times, urging them to cut back on drinking tea to help reduce the country’s outstanding $600 million bill for tea imports.

Although these short-term measures could buy Pakistan time, they will not ensure its economic self-reliance. Pakistan risks an outcome far more dangerous than Sri Lanka; its politics have become increasingly turbulent in recent years thanks to the actions of its leaders, an overreaching military, and a deeply polarized population. A growing cadre of Pakistani leaders, subscribing to a brand of Islamic nationalism, has made Islamist militant groups increasingly mainstream; others are fanning dangerous anti-American sentiments to win public support. A powder keg of grievance may explode as ordinary Pakistanis become poorer and angrier.

China's Israel

Any consideration of Pakistan’s parlous financial situation must involve China; Islamabad owes nearly a quarter of its foreign debt to Beijing. But no Pakistani leader has dared to question the country’s unequal relationship with its neighbor to the north, silencing any criticism of China. Pakistan is quick to upbraid its neighbor India for attacks against and the marginalization of India’s minority Muslim population, but it has refused to condemn China’s gross mistreatment of the Muslim Uyghur population.

According to reports, a Chinese official once described Pakistan to a US counterpart as “China’s Israel,” a measure of the strength of the alliance. The main pillar of the economic relationship between the two countries is a $62 billion Chinese investment pledge—nearly one-fifth of Pakistan’s GDP—in the China-Pakistan Economic Corridor, a project that is the largest single-country program in Beijing’s sprawling infrastructure investment program known as the Belt and Road Initiative.

Launched in 2015, the economic corridor involves developing a large-scale infrastructure network in Pakistan, including a major seaport, a $7.2 billion railway project, a $2 billion metro system in Lahore, hydroelectric power plants, hundreds of miles of fiber-optic connectivity between the two countries (built and managed by Chinese telecommunications giant Huawei) and multiple special economic zones. China’s commitment exceeds the cumulative total of foreign direct investment and foreign assistance to Pakistan from other sources, including from the United States.

The scale of Chinese involvement is immense, but its consequences have been rather mixed. The nature of these investments has markedly bolstered the influence of Chinese companies and nationals in Pakistani politics. In the process, the Pakistani government has accepted to foot an overcharged bill of $3 billion for two power plants and has granted blanket tax exemptions to Chinese projects, causing a loss in national revenues. Because most of these projects require machinery from China, Pakistan’s imports bill has only grown larger. Meanwhile, Chinese projects have done little to boost indigenous employment inside Pakistan because many Chinese companies prefer bringing in their own labor and housing these workers in newly built residential colonies where they seldom interact with the local population. In some cases, Chinese investment projects have resulted in land grabs, threatened the livelihood of Pakistani fishermen, and displaced scores of local people, creating wider instability.

Slowly, Pakistanis are waking up to the trouble of getting so entangled with Beijing’s overseas investment machine. The initial euphoria that greeted Chinese investment is dissipating. Pakistani leaders are beginning to look warily at the scale of the country’s debt obligations, especially as China has become more reluctant over the last two years to invest more in Pakistan because of security concerns and worries about returns on investment. Despite a free trade agreement with China, Pakistani exports are largely stagnant. During the 2020–2021 fiscal year, bilateral trade totaled over $17 billion, but exports from Pakistan made up a mere $2.3 billion.

In the energy sector, the Pakistani government has struggled to pay Chinese power producers an overdue bill of more than $1.5 billion. Pakistan has instead sought more Chinese loans to meet these costs. Media reports indicate that over two dozen Chinese companies operating energy projects in Pakistan have threatened to cease operations if the overdue payments are not made. Meanwhile, a great portion of the funds earmarked for Chinese power projects have financed the building of coal-fired power plants reliant on imported coal, adding to Pakistan’s import bill.

A Port to Nowhere?

The travails of Gwadar port are emblematic of the troubles looming for Pakistan. The Chinese have placed special focus on building Gwadar, a seaport on the Arabian Sea coast in Balochistan province, promising to expand access to the Middle East. Leased for 40 years to the Chinese government in 2017, Gwadar is operated by China Overseas Ports Holding Company–Pakistan, a Chinese state-owned firm that receives 91 percent of the profits generated from activities at the port.

Yet, since the Chinese company took control, the port has made negligible progress in developing its commercial business. Chinese ships evidently frequent the port but carry much less than the originally promised 13 million tons of cargo annually. Basic issues like water supply and power shortages remain unaddressed. Instead, the Chinese firm has concentrated on supplying water and energy to only a few other Chinese companies operating in and around the port. The existing lack of water and electricity has ironically delayed, for years, a planned 300-megawatt Gwadar power plant. Furthermore, the company has refused to fund a desalination plant for the residents of Gwadar as it had originally promised, demanding that the Pakistani government do so instead. For now, the residents continue to depend on the arrival of expensive water tankers for their water supply.

Just as the Chinese-backed Sri Lankan port of Hambantota struggled to pay for itself, the Gwadar port has failed to attract much maritime traffic. China’s sizable investment may have appeared a symbolic victory for Pakistan, but lack of economic growth in the country and instability in neighboring Afghanistan— through which goods were expected to journey overland from Gwadar to Central Asia—has limited business. Pakistan’s overreliance on China perpetuates a vicious cycle typical of other countries drawn to China’s development model. The enormous debt owed to China, combined with negligible economic diversification in these countries, makes it increasingly likely they can turn only to China for any future bailout.

Brothers in Arms

Beyond these economic questions, concerns abound in India and the West about Chinese intentions to establish a naval base in Gwadar, which may become a dual-use port operated by China as both a commercial and military facility. Such a port would bolster Chinese maritime strength in the Indian Ocean, complementing its strong naval presence in Djibouti. Pakistan maintains a naval presence in Gwadar, but it has also stationed over 15,000 military personnel in the area to provide security to Chinese nationals.

Threats to Chinese nationals and projects have grown in spite of Pakistani security assurances. Baloch nationalists and other militant groups have targeted Chinese nationals. In April, a female suicide bomber attacked the Chinese Confucius Institute in Karachi, killing three Chinese nationals. Another explosion at a hotel in the southwestern city of Quetta targeted the Chinese ambassador. In July 2021, a bus blast killed nine Chinese engineers. These threats and the growing militarization in Balochistan has further weakened China’s appetite for investment in what is Pakistan’s poorest province.

In spite of these difficulties, China and Pakistan remain close partners. Although both Chinese and Pakistani authorities have denied plans to militarize the port in Gwadar, China has continued to be Pakistan’s largest arms supplier. Between 2010 and 2019, China supplied 70 percent of Pakistan’s arms imports, worth over $5 billion. Between 2017 and 2021, a staggering 47 percent of China’s total global arms exports went to Pakistan.

This cooperation has become more pronounced since China brought the Belt and Road Initiative to Pakistan. The Chinese appear to be helping Pakistan prepare for a possible conventional war with India, delivering, in violation of arms control agreements such as the Missile Technology Control Regime, a wide range of combat aircraft, armed drones, ballistic missile systems, air defense systems, submarines, warships, transport and reconnaissance helicopters, tanks, and guided munitions. The two armies have also conducted joint military exercises in recent years. For its part, India has protested the China-Pakistan Economic Corridor because it passes through the disputed Kashmir region.

For Pakistan, this growing cooperation is not without its technical challenges. For example, according to media outlets, some of Pakistan’s Chinese-supplied equipment is faulty. This includes the first version of Chinese Wing Loong drones, one of which crashed early in its deployment to Pakistan. The LY-80 Air Defense System, a missile-interception program, has also reported problems caused by poor-quality materials, oil leakages, and data disruption due to GPS malfunctions. Notably, Pakistan depends on Chinese manufacturers for proprietary software, spare parts, and maintenance.

Learn From Your Mistakes

Despite misgivings, bilateral cooperation continues to increase. In April, Gen. Qamar Javed Bajwa, Pakistan’s army chief, publicly declared that his country’s engagement with China is “growing” and rebuked the West for refusing to invest in Pakistan’s military and infrastructure plans. The military has increased its spending this year by over 11 percent despite the country’s financial woes. In the meantime, with rising attacks on Chinese nationals, China has begun deploying private security companies to safeguard its interests.

Pakistan is gambling on the fact that it is far more important to China, and the rest of the world, than Sri Lanka. The global repercussions of political chaos in Pakistan, following a similar economic collapse, would be greater than that of Sri Lanka, increasing Pakistani hopes that major powers would step in to keep the country afloat. That does not preclude the possibility that fuel and electricity shortages could stir massive urban unrest and street violence could break out between major political parties, blaming one another for the people’s misery. The military, which has often been the final arbiter in Pakistan’s politics, might not like having to shoot at fellow Pakistanis to quell violent protests.

Pakistan’s leaders are acting in a shortsighted manner similar to that displayed by Sri Lanka’s politicians. Their incessant squabbling for power, coupled with an overbearing military that refuses to change the country’s decades-old foreign policy paradigms, has left Pakistan dependent on China. Pakistan’s support for some jihadist groups and the Afghan Taliban has alienated Western governments, leading them to engage far less with a country that was once a close US ally.

Instead of offering benign neglect, the United States and its partners would do well to prepare for contingencies that might arise from Pakistan’s potential political and economic disarray. This preparation would include taking at least minimal steps to protect Pakistan from the fallout of economic collapse, which would include increased migration and the radicalization of Pakistan’s populace.

To avoid this fate, Pakistan’s leaders must reach consensus on long-delayed reforms such as reducing government expenditure and ending Pakistan’s association with jihadi terrorism, which is necessary to attract foreign investment. Opening trade with India—a controversial but potentially transformative move—would also relieve pressure on Pakistan’s external payment obligations. Above all, Pakistan must learn to live within its means rather than pursuing regional preeminence through dependence on China. The United States has so far resisted the temptation to out-invest China in Pakistan. That restraint, combined with a thorough reappraisal of US policy towards Pakistan, may be a better strategy for the United States and Pakistan in the long run, forcing Pakistan’s leaders into much-needed reappraisal of their own mistakes.

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