Pakistan Is Actually Saying No To Chinese Aid For A Major Dam In PoK
China was supposed to finance a major dam in PoK. But it’s ‘best friend’ Pakistan has suddenly refused Chinese aid. What’s happening between the ‘all-weather allies’?
Pakistan has decided to cancel a US$14 billion infrastructure agreement with China for the construction of Diamer-Bhasha dam in Pakistan-occupied Gilgit-Baltistan under the China-Pakistan Economic Corridor (CPEC) framework saying strict conditions imposed by Beijing for funding the project, which reportedly include proposals to have a Chinese company as the owner, operator and maintenance provider for the project, were “not doable and against our interests”.
Although this was not the first time a country rejected a Chinese offer to finance a mega infrastructure project, it is surprising for the world as the move came from Islamabad - an all-weather ally of Beijing. It was even more surprising as Islamabad has been keen for years to build a cascade of mega dams along the Indus flowing down from the Himalayas, but has struggled to rally its own resources or raise money from international institutions amid opposition from India.
The decision comes at an interesting time when the Pakistan Army, believed to have lost some influence on state institutions after the first-ever democratic transfer of power in the country, has made a come back by orchestrating the ouster of elected Prime Minister Nawaz Sharif a year before the end of his term. The army has always been the main driver of China-Pakistan ties - a patron-client relationship which has manifested in the form of arms sales and unsustainable loans. A decision of this sort was highly unlikely with the army calling the shots.
Additionally, Islamabad would not want to snub Beijing at a time when China is investing billions of dollars in projects through Pakistan. It has accepted Chinese financing with terms favourable to Beijing for a number of projects taken up under CPEC. It has also agreed to lease the strategically-located Gwadar port to Chinese state-owned firm for 40 years and has accepted Chinese ownership of multiple other projects being undertaken with Chinese funding. By some accounts, as many as 15 energy-related projects valuing at $22.4 billion and having 11,110-megawatt generation capacity are part of the CPEC framework.
The timing of this move, therefore, raises multiple questions.
Chinese financing has created debt burdens in a number of Asian and African countries. In Sri Lanka, Beijing has used the burden created by the economically unviable port in Hambantota, developed with Chinese funding, to lease the strategically located deep-water port and and about 15,000 acres of land for 99 years. The port serves only one purpose for China - an outpost in the Indian Ocean.
Economic dependencies created by Chinese loans, which often have an interest rate of 6 to 7 per cent ( for comparison, Japan’s $12 billion loan to India for the Mumbai-Ahmadabad high-speed rail project has an interest rate of 0.1 per cent), leave countries with little space to negotiate a better deal.
India, the United States and Japan, among other countries, have expressed concern over debt burden created by Chinese loans and have agreed to develop alternative financing mechanisms to provide more options for countries in the region. India and the US have also criticised CPEC and China’s Belt and Road Initiative (BRI).
During his visit to India in October, US Secretary of State Rex Tillerson had criticised China’s “financing mechanisms” for creating “enormous levels of debt”.
“Financing is structured in a way that makes it very difficult for them to obtain future financing, and oftentimes has very subtle triggers in the financing that results in financing default and the conversion of debt to equity,” he had said.
Contributing to the debate, US Defence Secretary James Mattis had said during a Congressional hearing that CPEC passes through a disputed territory. He had also opposed BRI, saying a globalised world has “many belts and many roads, and no one nation should put itself into a position of dictating One Belt, One Road”.
The tough stance from the US has triggered reactions from Beijing and Islamabad. The latter seems to have taken to its favourite recourse to blunt criticism - hedging. Pakistan could be using this rejection as a diversionary tactic at a time when it’s relationship with the US has deteriorated significantly owing to its support for Taliban.
President Donald Trump’s South-Asia strategy, which is focused on reversing Taliban gains in Afghanistan and forcing Pakistan to eliminate safe havens in its territory, has pushed Rawalpindi to the back-foot. Tillerson has said Pakistan could lose US privileges if it fails to "to change posture".
Pakistan has for years deflected US criticism over the issue of safe havens for Taliban and other militants active in Afghanistan. It has sacrificed its 'strategic assets' from time to time to please the US. This move could be the latest in a series of decisions Pakistan will make to please the Trump administration. The recent Pakistani effort that led to the release of five American hostages, who were seized in October 2012 by the Haqqani network, should also be seen in this context.
Islamabad has also used similar tactics to blunt criticism from India. Just months ago, it placed Mumbai attack mastermind Hafiz Muhammad Saeed under house arrest while it continues to his aid and abet his organisation to support terror activities.
Although such tactics haven't served it well in India’s case, they have, over the years, helped it evade US pressure successfully.
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