Outline
1. Introduction
2. The Undeniable Benefit: Ending the Physical Crisis
3. The Financial Critique: Dollarization and Circular Debt
- Dollar-Indexed Liabilities and the Rupee Collapse
- "Take-or-Pay" and the Circular Debt Surge
4. The Industrial Shortfall: The "Turnkey" Critique
- The Missing Technology Transfer
- The SEZ Delay and Export Stagnation
5. Implications for Pakistan-China Relations: The Pivot to CPEC 2.0
- Conditionality and Realism
- The Vision of CPEC 2.0
6. Conclusion
The China-Pakistan Economic Corridor (CPEC) is the most transformative infrastructural intervention in Pakistan’s modern history. By rapidly injecting nearly 9,500 megawatts (MW) of generation capacity into a severely crippled national grid, CPEC Phase 1 undeniably averted the total systemic collapse of the power sector in the mid-2010s. However, this great physical achievement is matched by a flawed one. It is fair to say that the same tools that have been used to fast-track these energy projects, guaranteed dollar-indexed liabilities, and "turnkey" operating models have spawned an unsustainable fiscal burden. CPEC managed to reverse acute physical energy scarcity; its rigid contractual framework created a new exponential burden of circular debt for Pakistan, which bypassed the meaningful aspects of local industrial integration. Therefore, in the face of the intricate economic landscape of 2026, the Pakistan-China dynamic needs to move beyond the state-backed debt trap and into practical, pragmatic industrial cooperation through a redesigned CPEC 2.0 that calls for a business-to-business (B2B) approach.
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1- The Undeniable Benefit: Ending the Physical Crisis
One cannot provide an objective critique of the financial impacts of the CPEC without first recognizing the poor macroeconomic starting point from which it arose. Before 2015, Pakistan was engulfed by an unprecedented energy crisis. The national grid was experiencing a daily deficit of approximately 6,000 to 7,000 MW, necessitating the shedding of 12 to 16 hours of load each day. This fuel deficit has crippled the domestic industry and hampered GDP growth.
Moreover, the first phase of the CPEC was an emergency infrastructural triage. The corridor's "Early Harvest" projects succeeded in delivering the “baseload” power to the grid.
| Flagship CPEC Phase 1 Energy Projects | Capacity | Commissioned | Fuel Source |
| Sahiwal Power Project | 1,320 MW | 2017 | Imported Coal |
| Port Qasim Power Project | 1,320 MW | 2018 | Imported Coal |
| China Hub Power Project | 1,320 MW | 2019 | Imported Coal |
| Engro Thar Power Project | 660 MW | 2019 | Indigenous Coal |
The CPEC has helped stabilize the grid through a reliable and uninterrupted power supply. If there had been no such huge injection of Chinese money and technology, Pakistan's industrial output would have been almost certain to be completely wrecked. It provided the state with the space required to sustain its domestic economy. However, as the lights came back on, the steep financial cost of this emergency intervention began to emerge.
2- The Financial Critique: Dollarization and Circular Debt
Although CPEC has been successful in securing an emergency physical presence, its financial structure has turned out to be a macroeconomic landmine. The swift development of these massive plants was facilitated by the Power Policy of 2015, which provided extremely generous, sovereign-backed guarantees to Chinese Independent Power Producers (IPPs), shifting commercial risks entirely to the Pakistani state.
Dollar-Indexed Liabilities and the Rupee Collapse
The worst structural defect in the contracts was that the returns were paid in dollars. The rates of return on equity were guaranteed and strictly linked to the US dollar. The exchange rate at the time of signing these contracts in 2015 was approximately PKR 100. Over the next ten years, financial strain increased exponentially as Pakistan's economy weakened and the Rupee rapidly devalued. Because the government is contractually obligated to pay these IPPs in dollar-equivalent rupees, the cost of generating the same megawatt of electricity doubled and then tripled, simply due to currency devaluation.
"Take-or-Pay" and the Circular Debt Surge
This currency crisis was severely compounded by the rigid "take-or-pay" nature of the contracts. The Pakistani government is legally required to pay "capacity payments" to these IPPs simply to remain available, regardless of whether the national grid actually needs their power.
However, the government was unable to shift such high costs onto the already struggling public, and due to the tremendous losses of the state-owned Distribution Companies (DISCOs), the financial deficit was vast. The power sector circular debt had reached a jaw-dropping Rs 1.889 trillion by February 2026. Notably, the debts were restricted to CPEC power projects and stood at a record Rs 543 billion. The massive backlog of outstanding bills has severely strained the Central Power Purchasing Agency (CPPA-G) and affected plant operators' cash flow.
3- The Industrial Shortfall: The "Turnkey" Critique
In addition to the financial glitches, the energy sector legacy of CPEC is severely challenged on the grounds of not being able to immediately kick-start Pakistan’s domestic industrial base.
The Missing Technology Transfer
Most of the initial power projects of CPEC were implemented as "Turnkey" projects. Chinese state-owned enterprises designed the plants, procured machinery from Chinese manufacturers, and utilized a massive influx of imported Chinese engineers and laborers to build them. Although this model is incredibly effective in terms of speed, it inherently bypasses local integration. Pakistani engineering firms and the domestic labor force were largely sidelined from the high-value technical aspects of these mega-projects, heavily limiting the genuine technology transfer.
The SEZ Delay and Export Stagnation
Most importantly, the energy generation phase is completely decoupled from the industrialization phase. CPEC was originally designed to build power plants and Special Economic Zones (SEZs) simultaneously, so that new factories could produce for export to cover the costs of the project debt. However, the establishment of the SEZs was delayed for years, while the power plants were completed in a hurry. The consequence was a calamitous misaction: Pakistan produced vast quantities of high-cost electricity but had not planned the production of export-oriented factories to use it.
4- Implications for Pakistan-China Relations: The Pivot to CPEC 2.0
The macroeconomic implications of these energy schemes have fundamentally changed the geopolitical landscape of the Islamabad-Beijing bilateral relationship and will be explored in the context of the 75 years of the presence of diplomats from the two countries. The golden age of prerequisite sovereign lending has come to a close. In the current context, this relationship is undergoing a pragmatic and transactional transition.
Conditionality and Realism
While China is Pakistan's ultimate strategic anchor, Beijing is now more cautious. Unpaid amounts owed to Chinese IPPs of Rs 543 billion have turned into a large bilateral talking point as Beijing insists on their debts being settled on time and security for Chinese workers being improved before it dispenses massive new infrastructural loans to Pakistan. Pakistan's recent attempts to restructure these debts indicate that economic facts have come to the fore over diplomatic niceties in the relationship.
The Vision of CPEC 2.0
The corridor must revamp itself and transition to “CPEC 2.0” to build itself up in its second decade of existence. In the next phase, it is all about going beyond sovereign-backed power plants. Rather, the emphasis has been on operationalizing 44 established Special Economic Zones, establishing joint ventures in green technology (BYD's announcement to manufacture electric vehicles in Pakistan by mid-2026), and promoting knowledge transfer. CPEC 2.0 aims to equip Pakistan with the resources to produce and export loans rather than consume them.
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5- Conclusion
The China-Pakistan Economic Corridor’s energy legacy is a significant macroeconomic paradox. History has been written, and it is easy to see that the historic physical achievement of Phase 1 was the provision of the “iron and steel” (capital) that was needed to pull Pakistan's power grid out of a terrible “load shedding” era that was shattering the social fabric of the country. However, physical salvation is very costly. Reliance on guaranteed, dollar-indexed IPP contracts and turnkey operational models transformed an operational deficit into a sprawling circular debt crisis that the state is still fiercely battling to contain.
Ultimately, the survival of CPEC and the broader economic health of Pakistan depend entirely on abandoning the debt-driven, sovereign-guaranteed models of the past. Pakistan and China can convert their historic friendship into a sustainable and prosperous economic partnership if they fully realize the industrial, export-oriented, and technology-based approach of CPEC 2.0.
