While CPEC might actually be a game-changer for Pakistan, nobody seems quite sure what the game really is.

The China Pakistan Economic Corridor (CPEC) is best described by the Trumpian expression “covfefe”: everyone has some idea of what it is, but no one is quite sure what it is. No surprise then that while some people in Pakistan are excited over what they think CPEC means, others are apprehensive.

In December 2015, the governor of State Bank of Pakistan admitted that he had no idea about how much of the money that the Chinese were committing on CPEC was debt, how much was equity and how much was in kind. More than two years later, it now transpires that even the government of Pakistan is not clear about the composition of funding for CPEC projects.

A couple of weeks ago, the federal cabinet was informed that “the amount of money, whether in the form of loan or grant, coming through CPEC is not known.” Clearly, if even the government of Pakistan is clueless about the structure and composition of CPEC funding, the sums they have worked out to sell CPEC as the greatest thing to happen to Pakistan are quite flaky.

In other words, while CPEC might actually be a game-changer for Pakistan, nobody seems quite sure what the game really is.

Growing disconnect

Increasingly, there appears to be a disconnect between what the Chinese expect from CPEC and what their “iron brother” Pakistan makes of this grand scheme. The Chinese insist that CPEC is an out-and-out economic project and not charity. If at all there is a strategic dimension to CPEC, then it is nothing more than stabilising a tottering Pakistan.

According to the Chinese, Pakistan’s economic collapse would destabilise the entire region and wouldn’t be good for any country, not even India. For their part, the Pakistanis claim that CPEC is emblematic of the partnership between the two countries. They scoff at suggestions of “debt-trap diplomacy” of China and claim that what they are getting is investment, not debt.

Unlike the Chinese, the Pakistanis don’t deny the strategic import of CPEC, not just for China which gets access to the Indian Ocean and the oil-rich Middle East, but also for Pakistan which gets into an even closer embrace and mutual dependency with China, thus giving it a boost in its confrontation with India.

While for their own reasons, the Chinese would like to downplay the strategic aspect of CPEC, and Pakistan would like to overemphasise on it, the real disconnect is on the economics of the project. If CPEC is not charity, then it must yield the expected returns on investment in different projects.

The problem is that Pakistan is broke even before these projects have come on stream. That is to say, even before Pakistan starts paying for CPEC projects, it is finding itself going around with a begging bowl to friendly countries to meet its current external financial obligations. Once the CPEC payments start, the financing gap will only widen, making it impossible for Pakistan to repay the Chinese investors.

Of course, given that the Pakistanis have forever lived on other people’s money and treated debt as disposable income, they seem pretty blasé about paying back the Chinese. The Pakistanis are convinced that when payback time comes, the Chinese will be their sugar daddy and will find some way to write off or reschedule payments owed to them.

If reports in the Pakistani press are any indication, the Pakistanis think they have got the Chinese right where they want them. The ways the Pakistanis see it, if the Chinese don’t want to lose their money, then they will have to bail Pakistan out by throwing more good money after bad.

According to one report, Pakistan’s finance ministry has let it be known that “Islamabad considers that CPEC could only run in a smooth manner if Islamabad successfully avoids bailout package from the IMF so China will have to come forward to allocate special provisions for keeping Pakistan’s economy afloat.”

Critical projects

Another report quotes a Pakistani economist as saying that “Beijing cannot afford to bankrupt Pakistan, in part because of the country’s importance as a counterweight to India… for China repayment of the debt burden will be secondary to maintaining a good political and economic relationship with Pakistan”.

It isn’t quite clear if the Chinese see things the same way. While they certainly value their relationship with Pakistan, they haven’t as yet given any indication that they are willing to foot the entire bill and give the Pakistanis the sort of free lunches they got from the Americans.

Already there are signs of the Chinese rethinking some of their investment plans in Pakistan. Some very critical projects, including a $9 billion (₹60 crore) railway project which was to be one of the flagship projects of CPEC, has been put on hold because of financial reasons.

Circular debt

Other smaller projects have also been refused funding by the Chinese. Even on the power projects, there are concerns on payment of tariffs. The Chinese are already breathing down Pakistan’s neck to set up a revolving fund so that their projects don’t become victims of the crippling “circular debt” that has wreaked havoc in the energy sector.

There are also reports that the Chinese private companies and even bankers are asking serious questions about the viability of their investments in Pakistan. Even at the official level, while the magniloquence around CPEC remains unabated, a reality check was clearly visible during the 7th Joint Cooperation Committee meeting in November last.

From the very beginning, the economics of CPEC didn’t make much sense. Three years later, its math makes even less sense, more so because the sums and even the numbers of the Chinese and the Pakistanis don’t match. Increasingly, CPEC is looking like a pyramid scheme in which everyone parties as long as the money keeps flowing in; it is when the payback time comes, that reality starts biting.

For Pakistan, and for China, the payback time is coming. What remains to be seen is who picks the tab, China or Pakistan?

This commentary originally appeared in DailyO.