CPEC 2.0: ambition meets economic reality

As geopolitical considerations increasingly dominated the Pakistan-China partnership, the economic narrative surrounding CPEC lost much of its original momentum. The corridor that once symbolised unprecedented economic cooperation gradually slipped to the back-burner amid security concerns, debt debates and shifting regional priorities.

However, recent exchanges between Islamabad and Beijing suggest a renewed emphasis on economics. Reportedly, under the banner of CPEC 2.0, both countries are reported to be seeking to reinvigorate the relationship through industrial cooperation, agriculture modernisation, information technology and special economic zones. Whether this renewed vision can deliver tangible economic gains remains the central question. It will primarily depend on the mode of Chinese financing and Pakistan’s own economic reforms.

The first phase of the China-Pakistan Economic Corridor delivered substantial infrastructure, but not the economic transformation that was originally envisaged.

Nearly a decade after the launch of CPEC, Pakistan stands at a critical juncture. The country now seeks to move from roads and power plants to productivity, exports and industrial competitiveness.

The first phase of CPEC can reasonably be described as a qualified success. It addressed some of Pakistan’s most pressing infrastructure bottlenecks.

Thousands of megawatts of electricity generation capacity was added but without considering the cost-bearing capacity of the consumers. Today, we have significant power generation capacity, but there are less takers - hence much of capacity is lying idle.

Whereas, major road networks improved connectivity between the country’s northern and southern regions, while the development of Gwadar Port provided Pakistan with a strategically important maritime asset.

Several Special Economic Zones progressed slowly, foreign direct investment outside the CPEC framework remained insignificant and Pakistan’s manufacturing competitiveness did not improve.

More importantly, the economic environment deteriorated. Pakistan entered repeated balance-of-payments crises, sought multiple IMF rescue packages and accumulated significant external debt obligations. Although the popular narrative often exaggerates “Chinese debt traps,” the reality is that Pakistan’s broader debt burden – comprising multilateral, commercial and bilateral liabilities – has severely constrained fiscal space.

This background should explain why CPEC 2.0 needs to be fundamentally different from its predecessor.

China itself appears less inclined today to finance large-scale overseas infrastructure projects through debt-heavy arrangements. There has been a paradigm shift in the Beijing policy.

Across the developing world, Beijing has increasingly shifted toward smaller, commercially viable and revenue-generating projects. The era of massive infrastructure spending under the Belt and Road Initiative has evolved into a more cautious and selective approach.

For Pakistan, this shift may actually be beneficial.

The focus areas identified under CPEC 2.0 – agriculture modernization, information technology, industrial cooperation, mineral development and export-oriented Special Economic Zones – are precisely the sectors capable of generating sustainable economic returns if professionally managed.

Agriculture remains Pakistan’s largest employer but suffers from low productivity, water inefficiencies and weak value-addition. Chinese expertise in agricultural technology, seed development, mechanization and food processing could significantly enhance yields and exports.

Similarly, Pakistan’s rapidly growing IT sector offers opportunities that did not exist when CPEC was launched in 2015. Unlike power plants and highways, IT exports require relatively little capital investment while generating valuable foreign exchange earnings.

Industrial cooperation is perhaps the most critical component. Rising labour costs in China are pushing many low-end manufacturing industries to seek alternative locations. Countries such as Vietnam, Bangladesh and Indonesia have benefited enormously from this transition.

Pakistan hopes that CPEC 2.0 can finally position itself as a destination for Chinese industrial relocation. Yet this ambition faces serious obstacles.

The first challenge is IMF oversight. Pakistan’s economic policies today operate within a framework of fiscal discipline, subsidy rationalization and debt sustainability. Any large borrowing programme, regardless of source, will come under scrutiny. Consequently, CPEC 2.0 cannot rely on the debt-financed model that characterized many early projects.

The second challenge is investor confidence. Chinese companies, like all investors, seek predictability. Persistent concerns regarding policy inconsistency, taxation disputes, currency depreciation, bureaucratic delays and security risks continue to affect investment decisions.

The third challenge involves energy costs. Ironically, one of the unintended consequences of CPEC’s energy projects has been the accumulation of capacity payments that contribute to high electricity tariffs. Pakistan’s industrial sector now struggles with energy costs that often exceed those of regional competitors.

The fourth challenge is governance. Infrastructure can be financed externally, but institutional efficiency cannot.

The success of Special Economic Zones depends on regulatory reforms, streamlined approvals, contract enforcement and an investor-friendly business environment. These remain largely domestic responsibilities.

Perhaps the strongest rationale for CPEC 2.0 lies in geopolitics. At a time when global supply chains are fragmenting and regional connectivity is gaining strategic importance, Pakistan occupies a unique geographical position linking China, Central Asia, the Middle East and the Arabian Sea. If properly integrated with regional trade corridors, logistics networks and industrial hubs, Pakistan could become more than merely a transit route – it could emerge as a production and export platform.

Ultimately, the question is not whether CPEC 2.0 is realistic. It sure is. The more relevant question is whether Pakistan is prepared to undertake the difficult reforms required to make it successful.

CPEC 1.0 demonstrated that infrastructure alone cannot transform an economy. CPEC 2.0 seeks to address that lesson by emphasizing productivity, exports and industrialization. But unlike roads and power plants, these objectives cannot be achieved simply through financing agreements and government announcements.

The future of CPEC will therefore depend less on what China brings to the table and more on what Pakistan does with the opportunities already before it. If structural reforms accompany Chinese cooperation, CPEC 2.0 could become the economic phase that CPEC 1.0 never fully achieved. If not, it risks becoming another ambitious vision constrained by familiar domestic limitations.

Copyright Business Recorder, 2026