Conversation with Dr. Anne-Marie Schleich about the Sino-Indian conflict: „CPEC has increased Pakistan’s fiscal instability“

Conversation with Dr. Anne-Marie Schleich about the Sino-Indian conflict: „CPEC has increased Pakistan’s fiscal instability“

Global Review had the pleasure to have a conversation with Dr. Anne-Marie Schleich about the Sino-Indian conflict, Pakistan, Bhutan and the CPEC.

Dr. Anne-Marie Schleich was a German diplomat from 1979 until 2016. Most recently, she was the German Ambassador to New Zealand and seven Pacific Island States from 2012 to 2016. She was the German Consul- General in Melbourne, Australia from 2008 to 2012 and has also served in Singapore, Bangkok, Islamabad and London. From 1998 to 2001 she was the Deputy Head of the Asia Pacific, Africa and Latin America Department, Foreign Affairs Directorate, Office of the German Chancellor, Berlin. In 2001 she was appointed Head of the Department for International Environmental Policies at the German Foreign Office.

Global Review: The Indo-Chinese relations have become much tenser after the latest border conflict China makes India responsible for a new assertiveness, infrastructure building in this region in order to fix new borders, the Trump-Modi meeting, the new Indian Hindu nationalism which by the Jammu/ Kashmir abrogation law also influences the Line of Control, etc. India on the other side claims that there is a new Chinese assertiveness, that it is the first time that China claims that the Galway valley is part of China and also points to other aggressive actions of China like in the South China Sea which was the model for Chinese encroachment step by step. Chinese and Indian hawks on both sides are proposing military action and voice alarmist warnings. As frontrunners the Tibetan exile community in India, which sees Mao Zedong´s five-finger strategy at work. “When Tibet was occupied, Mao Zedong and other Chinese leaders said, ‘Tibet is the palm which we must occupy, then we will go after the five fingers’. The first finger is Ladakh. The other four are Nepal, Bhutan, Sikkim and Arunachal Pradesh? Which interpretation do you prefer and what is your analysis of the Sino-Indian conflict?

Dr. Anne-Marie Schleich: My dictum: China and India remain deeply distrustful of each other’s strategic regional and geopolitical intentions. Increased militarisation along long-disputed border areas and heightened nationalism on both sides will make future border clashes likely.

I want to go back to the 2020 China-India Border Conflict in Ladakh: From May onwards, Indian and Chinese troops clashed violently in the Indian-administered Eastern Ladakh region with casualties on both sides. One trigger seems to have been India’s construction of a strategically important bridge in the Galwan Valley.  Another cause could have been the controversial revocation of the special status of Jammu and Kashmir in August 2019 by the Indian government. In any case, Chinese troops made an incursion into Indian-claimed territory along the Line of Control zone. Each country accused the other of border transgressions and rationalised their actions. The situation was somehow deescalated, and Chinese and Indian army commanders met under the bilateral consultation mechanism for border issues which had been established during the Modi-Xi summit in India in October 2019.

Both India and China have since then further increased their military presences along the China-Indian border areas, making such incidents more likely and prone to new escalations.

Let’s look back at another military conflict along the Chinese border, namely the 2017 India-China standoff at the Bhutan-China border in Doklam. In June 2017, a ten-week-long standoff between China and India started along the 470 km long Bhutan-China border. The Doklam Plateau, which borders the Chinese administered “Tibet Autonomous Region” (TAR) and the tiny, independent Kingdom of Bhutan, has been claimed by both Bhutan and China for a very long time. For centuries, Bhutan has administered the area from its capital Thimphu. As a reminder: Tibet and Bhutan are marked by centuries of religious affiliations as well as conflicts between Bhutanese and Tibetan rival groups. The Bhutan government has been wary of China’s strategic intentions and the Doklam incident didn’t help. Both India and Bhutan have not joined China’s Belt and Road Initiative (BRI), unlike other South Asian countries such as Nepal. Since 1984, China and Bhutan have held 24 rounds of border talks. China has insisted that the area has historically been an integral part of Tibet.

Coming back to June 2017: India, Bhutan’s political and strategic ally sent troops into the Doklam area to stop China’s construction of a road there. It had a strategic reason to intervene as full control of the Doklam Plateau would give China a vantage point over the Indian Siliguri Corridor nearby, also known as the Chicken’s Neck. This small strip of land is a strategically extremely important corridor as it connects the eight north-eastern Indian states, among them Arunachal Pradesh, with the rest of India.After two months standoff, both India and China withdrew their soldiers to their previous positions. However, both countries have since massively increased their military presence in this area.

Bhutan is increasingly feeling the squeeze of the strained China-India relations as another China–Bhutan diplomatic flare up happened just a few months ago. When Bhutan applied in mid 2020 for a grant from the Global Environment Facility (GEF) for its 750 sq. km Saktong Wildlife Sanctuary in the Pasamlung valley in the eastern part of Bhutan, China opposed the funding of the project and claimed for the first time the area to be disputed border territory. The area had never been in question during the over thirty year long China-Bhutan border talks.  

India continues to be deeply worried about China’s BRI activities in its backyard, South Asia. It remains concerned about a more assertive China and its increased role in the region. India, therefore, has tried to reinforce or strengthen economic ties with its immediate South Asian neighbours. It also aims to have greater geopolitical flexibility by re-connecting with its Quad partners Japan, the US and Australia.

Unresolved border questions between China, India, and Bhutan are likely to flare up again, especially with increased militarisation along the border and heightened nationalism on both sides. Beijing and New Delhi need to achieve a more durable modus vivendi on their borders to avoid further clashes.

Global Review: Which role does the China-Pakistan-Economic Corridor (CPEC) play in the Sino-Indian conflict and which role does the CPEC play in the framework of China´s New Silkroad?

Dr. Anne-Marie Schleich: The Sino-Indian border conflict only plays a minor part in this enormous economic venture between China and Pakistan but we still see a juxtaposition of China-Pakistan interests on one side and India on the other. CPEC, which officially started in 2015, is China’s flagship for its grand New Silk Road initiative. It is a gigantic and daring technical and financial undertaking by the Chinese government and Chinese companies with about 58 projects worth about US$62 billion. These include eight projects to develop Pakistan’s Gwadar port, city and airport in Baluchistan, 21 new coal, hydro, and solar power plants as well as the development of power transmission lines, highways, railways, and fibreoptic cables.

China sees an economically prosperous and stable Pakistan as politically advantageous and wants to create a geostrategic connectivity corridor from its resource-rich Muslim Xinjiang province to Pakistan’s Gwadar city and port. Gwadar is strategically important because of its closeness to the Strait of Hormuz, the cross junction of vital international sea shipping routes. For China, the construction and administration of coal-fired power plants within CPEC pose good alternative business opportunities abroad for its state-owned enterprises. It is convenient at a time when coal-fired power in China is going to be scaled down with President Xi Jinping’s stronger focus on a sustainable power supply.

Pakistan wanted Chinese technological know-how and money to upgrade Pakistan’s fledgling or non -existent industrial infrastructure and to revive its economy. Pakistan’s perennial power shortages and transmission losses have been major challenges for Pakistani governments. Only this Sunday, Pakistan was hit by the latest nationwide power blackout. CPEC power plants were intended to provide a fast remedy. At Pakistan’s request, China’s investments were predominantly in coal-powered plants. The Sharif government’s decision to switch from oil to coal was problematic. 70 percent of all the CPEC power plant projects are coal-based. Coal usage is projected to rise from five million tonnes in 2015 to 15 million tonnes in 2020, and imports will also rise as domestic coal reserves are insufficient. With this, Pakistan’s commitment to reduce greenhouse gases under the Paris Agreement will be difficult to achieve. Likewise, the focus on coal contrasts with China’s newly proclaimed domestic sustainability policy, yet China continues to be involved in coal power plants in its neighbourhood.

Pakistani Prime Minister Imran Khan pledged “to complete CPEC at any cost” when he launched “CPEC Phase 2.0” in July 2020. He also increased the military’s role in the CPEC governance  and appointed retired Army General Asim Bajwa as chairman of the newly created CPEC Authority in 2019. Bajwa was tasked to push ahead with stalled CPEC projects. Even though Pakistan managed the COVID-19 pandemic comparatively well, its economy suffered. In spite of Pakistan’s problematic fiscal situation, new contracts worth $11 billion were signed in 2020 for the construction of two hydropower plants and the Mainline1 railway. In July, the controversial CPEC Authority Bill was introduced, granting the military comprehensive powers and reducing the role of civilian government.

Information on the progress of CPEC projects remains vague. Some projects have been subdivided into different stages, and some have been shelved or are still without financial closure. Observers guess that a quarter of the projects have been completed, among them nine power projects worth $7.9 billion. Nine other projects, worth $ 9.5 billion, are under construction. The Gwadar projects are advancing, and the Lahore Metro line and part of the Peshawar-Karachi Motorway have been completed.

As for India: It is most unhappy about CPEC. Some projects were increasingly built in or pass through Pakistan’s “Azad Jammu and Kashmir” region (AJK) which is claimed by India. Among them were an industrial zone and a motorway connecting AJK to Pakistan’s main motorway. But the Kohala Hydropower Project on the Jhelum river in the AJK region is most controversial. It  was among the newest CPEC projects for which contracts were signed in mid 2020. At least since 2019, India has repeatedly and strongly protested against CPEC and called on both China and Pakistan to suspend activities in the AJK region.

There are three major problems I would want to highlight:

The main problem is Pakistan’s fiscal situation. For a long time, the country has faced a vicious cycle of high debt liabilities. Its total debt and liabilities surged to 106 percent of GDP in 2020. Domestic debt has risen by 35 percent to about $135 billion. Pakistan’s foreign reserves have fallen to a low of $13 billion. Its GDP contracted by 2.8 percent in 2019/20. In 2019, the International Monetary Fund (IMF) approved a $6 billion loan but demanded “decisive fiscal consolidation to reduce public debt.” CPEC has increased the dilemma. In March 2020, Khan asked China for a moratorium on its loans to mitigate the economic impact of the COVID-19 pandemic. China announced on 7 June 2020 a suspension until December 2020 of debt repayment for 77 developing countries, including Pakistan, under the G20 Debt Service Suspension Initiative. It is estimated that Pakistan owes China between $22 and 30 billion, constituting the largest portion of its external debt owed to one country. With a lack of fiscal reform, a dangerous debt spiral is looming.

Most CPEC power plants are based on the Chinese BOOT (“build, own, operate, transfer”) model. Chinese ownership will be transferred to the government of Pakistan after 30 years of operation. This has raised transparency and accountability questions. Following recent electricity price hikes, a government committee reviewed the role of Independent Power Producers (IPP). It recently found serious “malpractices” by IPPs, like inflated operating costs and high annual profits. Pressure is mounting on PM Khan by the newly founded opposition “Pakistan Democratic Movement” to ensure a greater viability.

CPEC projects are increasingly unpopular among the Baluchistan population and separatists. Benefits of the Gwadar projects don’t seem to have trickled down to the local population of this historically underdeveloped province. The projects, as well as Chinese engineers and Chinese co-owned institutions such as the Karachi Stock Exchange, have become targets of Baluchistan militants. The Pakistani army has launched major security operations but seems to have been rather heavy-handed in its approach. Alleged extrajudicial arrests by the military have resulted in a loss of confidence in the government.

Five years after its start, CPEC has increased Pakistan’s fiscal instability, has given rise to questions over the efficacy of some power projects and led to opposition requests for more transparency and accountability.

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