Trust Deficit

China-Pakistan friendship, from the word go, has stood the tests of time, helping Pakistan fill the lacuna in trust and unswerving bilateral relations which had bedeviled Pakistan in its nascent stages. China has consistently helped Pakistan over the years and has been striving to revitalize Islamabad’s moribund economy. However, recent socio-political developments in Pakistan has once again cast shadows on its relationship and the country is unable to reap the benefits of its friendship with China. That being said, it is pertinent for Islamabad to strengthen the bond it has with Beijing by bringing forth policies on the economic and diplomatic front; otherwise, Pakistan might see itself slowly ensnared within the icy clutches of a myriad of non-state actors trying to foment anarchy within the country.

The recently held 11th meeting of the Joint Cooperation Committee that reviewed wide ranging cooperation under the CPEC framework and the visit of PM Shehbaz Sharif sent a loud and clear message that the CPEC projects, and in retrospect, the unwavering friendship between the two countries needs to be further underpinned. Despite this encouraging message, there is still skepticism as to why no official announcement of the beginning of any significant projects, such as the anticipated multibillion-dollar ML-1 railway line project was made. The joint statement only ‘appreciated’ the project and called for its earliest implementations. The leaders also agreed to “speed up progress” on Gwadar port and Khunjerab border port. However, no specific projects were announced. When viewed through the prism of statecraft, one may infer that Pakistan is indeed entwined within a socio-political quagmire. This has impeded Islamabad to find any leverage from its friendship with Beijing for now and this entails for a surfeit of reasons.

One of the biggest reasons behind the widening gap between the efficacies of this bilateral relation is Islamabad’s swinging foreign policy which has created a trust vacuum between the two countries. This inconsistency is more profound due to Pakistan’s dependency on the IMF. On the global level, China and the United States have indeed locked horns; whether it is Nancy Pelosi’s visit to Taiwan, the emergence of global bloc politics, the US policy of containment of China within the Indo-Pacific, or the great game between the US and China that is gradually planting its foot within the Middle East. Therefore, any visible lean towards one side could drastically place Pakistan in a quandary of trust deficit with the other country. Hence, Pakistan needs to be cautious when dealing with China and the USA and uphold its policy of neutrality.

Another reason for Pakistan’s inability to garner any visible benefit from the cordial friendship with China is due to the recent proliferation of terrorism and the perpetually aggravating security situation within Pakistan. This can be seen from an upsurge in terrorist attacks in various regions of Pakistan; namely the region of Dasu, North Waziristan and various other areas of the merged districts after the 25th amendment in the Constitution of Pakistan. Moreover, the recent terrorist attack upon the Confucius institute of Karachi also tried to drive a wedge between the bilateral relations between the two countries.

The perpetually diminishing foreign exchange reserves and Pakistan’s incapacity to pay back loans has not only become a bone of contention for the Pakistani economy but has also become the bane of existence for future Chinese projects to formally initiate within the country. By March of 2023, Pakistan had about a meager sum of USD 4.3 billion worth of liquid foreign exchange reserves. Just for reference, in August 2022 alone, Pakistan’s imports amounted to USD 6.9 billion. Pakistan now faces a much more volatile cyclic depletion trend in its foreign exchange reserves.

Foreign exchange reserves’ depletion also exacerbated depreciation pressure on Pakistan with the Rupee plunging close to the 300 mark when juxtaposed with USD. This led to the Consumer Price Index (CPI) based inflation rise to 35% in the month of March. It is very unlike that any country could set up viable investments in a country where inflation is this high. This can be seen from a decrease in Foreign Direct Investment (FDI) over the course of time. Up to 19 companies had expressed their interest in building the second phase of CPEC, but with the economic instability, these companies have not gone ahead with the project.

Pakistan is clearly a rentier economy and one can reasonably infer that economic progress can not be imported or borrowed, and in the pursuit to curtail the widening gap in its balance of payments, the country did adopt protectionist measures by banning imports. Even though, on paper it might help control the worsening balance of payment crisis but it also has an adverse effect of forcing companies to close their businesses. This in turn leads to a lower production sector and the country slowly finds itself in a rather paradoxical situation where many companies can not set up their business with imports closed. The ease of doing business therefore, also gets worse with Pakistan ranking 147 on the overall ‘doing business’, according to the statistics provided by the government of Punjab. This is not a welcoming situation for any investor, especially Chinese investors.

The China-Pakistan Economic Corridor (CPEC) is greatly impacted by Pakistan’s political unrest as well. The political unrest has also been highlighted in one of the IMF’s staff country reports which states how ‘amid a tense political landscape’, the programmed fiscal adjustment was undone and several key EFF commitments were reversed. Beijing closely watches the developments in Pakistan, and this is becoming the cause of halt in construction of the second phase of the USD 62 billion CPEC project with only 28 projects worth USD 18.8 billion have been completed.

Rampant corruption and a plethora of bureaucratic hurdles within Pakistan also can result in a lack of trust of investors and slow pacing of projects within the country. According to Transparency International in 2022, Pakistan ranked 140 out of 180 countries with a score of 27 out of 100. This shows the prevalent corruption within the country and one of the primary reasons why Pakistan is unable to gain any sort of benefit from the alliance which might become unholy due to Pakistan’s own economic and political policies.

With Pakistan in dire need of foreign loans and investments to shore up its dwindling foreign exchange reserves to stabilize its currency and external sector, the resumption of the CPEC will provide relief to its moribund economy. The country’s political leadership should avoid past mistakes and convince Beijing to share complete information on the deals made and costs involved with the people and bilateral leaders.