Relevance: GS Paper II (International Relations)
Source:
Introduction
China’s Belt and Road Initiative (BRI) which seeks to invest about $8 trillion in infrastructure projects across Asia, Europe and Africa, has come under intense scrutiny, not least due to suspicions over China’s intent behind the ambitious project. A study by the Centre for Global Development, a Washington-based think tank, analyses one important consequence of BRI: debt.
The debt trap
- The BRI will potentially span 68 countries and could have implications for each of these countries’ public debt.
- It is found that eight countries could potentially face difficulties in servicing their debt because of the Belt and Road Initiative. These include Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan.
- These countries are either low GDP or are distressed by their internal problems like terrorism or communal clashes or are underdeveloped. These are the countries which need international help and funds but that help shouldn’t be coming from China as it’s more of a TRAP.
- China has a pattern of funding infrastructure projects in poorer countries in exchange for better relations and regional access, a trend hence called debt-trap diplomacy.
- The loans can have exorbitant interest rates or natural resources are used as collateral that China can control if a country defaults on its payments.
- One example is China’s acquisition of Sri Lanka’s Hambantota port after the Sri Lankan government failed to service its debt.
- The same pattern can be seen in Djibouti. The loans to Djibouti amount to at least US$1.1 billion, which is more than Djibouti could ever dream of repaying. It is about to cede control of another key port to Beijing.
- The Maldives, a small economy heavily reliant on tourism, is one of the most at-risk countries of any involved with the BRI to the distress of debt.
Creditor China not bound by rules
- Unlike most of the world’s other major creditors, China is not bound to a set of rules on how it addresses debtor repayment problems.
- Currently, China is only an ad hoc participant of the Paris Club, a collection of creditor nations which follow a set of rules in dealing with debtor nations.
Dealing with the Chinese debt trap
- It is recommended that globally-accepted creditor disciplines and standards be applied to the Belt and Road Initiative.
- Further, it is recommended that the World Bank and other multilateral banks increase their participation in the Belt and Road Initiative and work with the Chinese government to set the lending standards for the BRI projects.
- Another recommendation is to establish a new creditor’s group which would maintain the core principles of the Paris Club but with China playing a more meaningful role.
- To mitigate lending risks, China is also recommended to provide technical and legal support to developing countries.
- Finally, the think tank proposes that China should offer debt swap arrangements in support of environmental goals where borrowing country debt is forgiven in exchange for a commitment to an environmental objective, for instance, forest preservation.
