The China Pakistan Economic Corridor: Accelerating recovery from Covid-19

by Dr. Sebastien Goulard

Pakistan is now suffering from the Covid-19 crisis. As of July 3, 2020, the country had nearly 220,000 Covid-19 confirmed cases and the death toll exceeded 4,550 deaths. The World Health Organization (WHO) expressed concern about the development of Covid-19 in Pakistan due to the fragility of the health system.

Contrary to a WHO suggestion, Pakistan has decided not to implement a second lockdown. Despite an initial lockdown being in place from April 1 to May 9  Covid-19 started to spread in the country in June. For Prime Minister Imran Khan, a second lockdown would have disastrous economic and social consequences, and he thus declared: “We must also realize that Pakistan is a poor country and that we had no choice but to reopen the country“. The chosen option of the government is based upon ‘hotspot selective’ lockdowns which are limited to the major Covid-19 clusters so as not to immobilize the country.

A hard-hit economy

In early June, the government forecast GDP growth of 2.3% for the fiscal year 2020-2021. A few days earlier, the more pessimistic World Bank forecasted a contraction of 0.2%. However, given the evolving health situation in the country as well as abroad, growth prospects may be further revised in the months ahead.

In an additional blow, the agricultural sector, which employs nearly 35 million workers, has been very badly affected by plagues of locusts which have threatened crops since June 2019. Pakistan is therefore seeking solutions to secure employment, prevent its population from falling into poverty and to secure national stability.

Pakistan Government Response

To cope with this economic slowdown the Government, headed by Prime Minister Imran Khan, has chosen to complete the privatization process of nationalised companies (such as Pakistan Steel Mills), and to continue to carry out reforms with an emphasis upon the objectives defined by the International Monetary Fund.

In April 2020, at the start of the pandemic, Prime Minister Khan announced a major construction sector recovery plan that followed another USD $ 6.7 billion Covid-19 relief package adopted in late March 2020. Pakistan has chosen to reduce taxes on companies so as not to threaten business activity even though there is a possible risk in increasing the public deficit,

Pakistan is also relying on foreign investors, especially from China, to help the national economy recover. The current crisis reaffirmed the priority given to the completion of the China Pakistan Economic Corridor (CPEC), in order to support the economy of Pakistan.

CPEC and the Covid-19 crisis

In mid-June, Pakistani authorities rejected comments that the CPEC had been experiencing some slowdown and claimed that the program had entered phase 2. Moreover, Abdul Hafeez Shaikh, Adviser to the Prime Minister on Finance and Revenue, after meeting with Yao Jing, the Chinese Ambassador to Pakistan, stated that his country would soon adopt several institutional reforms to facilitate the completion of the CPEC. Several projects have already started or will start soon.

The Diamer-Bhasha dam

In May 2020, the Pakistani government gave agreement for the creation of a joint venture between the Frontier Works Organization (FTO), a company owned by the Pakistani army and China Power for the construction of a dam.

This project is not new since it was first mentioned in 1980, but due to its high cost,  construction of this dam has been delayed for a long time. It was not until 2004 that the first feasibility report was published.

The newly established joint venture should accelerate construction, although it will still need about 8 years to be completed. The dam will be gigantic; at 272 meter-high, it is much higher than China’s Three Gorges Dam (185 meters). Its electricity production capacity is expected to reach 4,500 megawatts, which is significant for a country facing electricity supply issues.

The dam project also raises questions regarding relations with India because it will be built in the state of Gilgit-Baltistan, a region claimed by India; and this could therefore make conflict settlement of tensions in Kashmir more difficult.

Peshawar to Karachi Rail Line Modernisation Project

In early June, the Peshawar-Karachi railway track modernisation project was finally approved. With a total length of more than 1,800 km, the new line will become a major axis for development, and train speeds will be increased from 110 to 160 km/h.

This line project will be divided into several sections:

• The first one of 527 km will link Peshawar to Lahore and construction is to  start in January 2020  for at least 4 years.
• The second segment regards the line between Lahore and Hyderabad, and must be completed by the end of 2026.
• Finally, the last 740 km segment will link the Rawalpindi-Peshawar line to the Hyderabad-Multan railway.

The line modernisation is part of a bigger rail project to link Kashgar in the Chinese region of Xinjiang to the new port of Gwadar in Pakistan. This is a major project with an estimated cost of USD $ 7.2 billion.

Gwadar International Airport,  Phase 2 Construction

In south-west Pakistan, the construction of Gwadar International airport is progressing. In May 2020, the second phase of this project was launched.

The airport, which is expected to be operational by 2023, will become Pakistan’s second largest airport after Karachi, and will replace the existing smaller airport. Funded by a USD $230 million grant from China, this is a major CPEC project, and its success will largely depend on Gwadar’s ability to attract foreign companies to its special economic zone.

After completing the feasibility studies and initial work, construction of the runway and terminals is expected to begin shortly. Infrastructure for residents including schools and hospitals are also planned.

Funding Concerns?

CPEC development is regularly criticized for its very high cost, which according to some estimates will reach more than USD $60 billion. However, China and Pakistan seem ready to renegotiate the terms of their partnership, since it is obviously not in Beijing’s interest for Pakistan to experience an economic crisis.

The corridor, in addition to strengthening relations with the Chinese neighbor, will give Pakistan the opportunity to industrialize more quickly. Special economic zones like those of Dhabeji in Sindh and Allama Iqbal in Punjab will host Chinese and foreign companies. The relocation of certain industries from China to Pakistan is already evident. For Islamabad, one of the objectives of the CPEC is to ease import substitution with industrialisation, this would greatly improve Pakistan’s balance of payments and create several hundred thousand new jobs.

Towards an innovative economy?

The Covid-19 crisis in Pakistan may also accelerate the transition to a more innovative economy. Against the backdrop of the global Covid-19 pandemic several Pakistani economists are encouraging national authorities to further support the new technology sector. E-health, e-education and e-commerce are expected to grow rapidly. The high-tech sector is experiencing strong growth, and is drawing interest from digital giants such as China’s Alibaba which in 2018 acquired the Pakistani platform Daraz.

In Pakistan, the CPEC initiative is not limited to the creation of large infrastructure projects and the development of the digital silk road will also create new opportunities.