Pakistani and Chinese workers at the site of a Belt and Road project in northern Pakistan. Photo: AFP

The China-led Belt and Road Initiative (BRI) is putting strain on Pakistan’s public finances and currency, some are saying, casting a shadow over Xi Jinping’s signature connectivity plan.

Jonathan Rogers writes in The Asset on potential hiccups for the grand infrastructure scheme.

“[Pakistan’s] current account worsened substantially last year on the back of a sharp increase in imports due to trade activity related to the Belt Road initiative.

“This in turn has put pressure on the Pakistan rupee, which was the worst performer in the Asian currency complex last year and which has experienced downside revaluation pressure since December, with two sharp legs down met with a depletion of the central bank’s foreign exchange reserves.

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“Pakistan had signed up to Belt Road-related projects to the tune of US$60 billion, including plans to build power plants and a railway linking Western China with the Pakistani Indian Ocean port of Gwadar. But political dial back prompted the Pakistani government to withdraw from a joint venture with China to develop the Diamer-Bhasha dam in Kashmir last November.

“That pullback apparently came as the Pakistan authorities baulked at the use of Chinese companies and labour that was stipulated under the terms of the Belt Road agreement. Above and beyond the politics, the economics would strain Pakistan’s balance of payments given that the bulk of the work would appear on the import side of the country’s trade balance with China.”

Pakistan is not the only BRI country that has pulled back from Chinese-led projects. Nepal reportedly scrapped a US$2.5 billion deal to build a hydroelectric dam with the Chinese state company China Gezhouba Group. A new administration abandoned the plan last November, saying the deal was signed without an open tender process, which is required by law.

“Full transparency – through competing public tenders – of the adequacy, suitability and quality of the Chinese equipment being used,” The South China Morning Post reported last November, “could soon become a serious problem.”

In Pakistan, security and local politics also loom over potential projects. China reportedly pulled the plug on US$1 billion worth of road projects late last year, a decision made amid local political infighting.

Pulling money from projects is “China’s way of conveying a diplomatic yet strong message to the Pakistanis: We will pay, but only on our terms,” the European Foundation for South Asian Studies, an Amsterdam-based think tank, was quoted by CNBC as writing. The decision was “a temporary punitive step to affirm control,” according to the think tank.

“Pakistani ministries charged with carrying out the projects have incurred delays because of infighting … Concerns that the project bypasses Pakistan’s poorer regions and will mainly benefit the financially-strong province of Punjab has made politicians argue,” the group said.

Security risks are also lurking below the surface. China has reportedly been discreetly holding talks with separatist groups in hopes of protecting infrastructure projects.

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