Last Updated: Oct 03, 2022, 05:13 PM IST
China is falling into its own debt trap as the country's banks have sharply reduced lending to low-income countries under its flagship Belt and Road initiative (BRI) after the crumbled economies of borrowing countries have left the Asian giant with huge piled up loans, a report has said.
Under the BRI, China dumped over USD 1 trillion as loans to nearly 150
developing and least developed countries at high rates of interest, becoming
the world's largest official creditor for the first time.
But the country is learning hard lessons as the borrowing countries are facing
foreign exchange crises and cannot pay back the Chinese debts. Nearly 60 per
cent of China's overseas loans are currently held by countries considered to be
in financial distress, compared with just 5 per cent in 2010.
Countries like Pakistan and Sri
Lanka are recent examples of China's worrisome situation. Amid the
continued political instability, the economy of Sri Lanka collapsed recently
and Pakistan is also on the brink of an economic collapse. The two countries
are failing to repay their loans, posing a threat to the Chinese economy, the
European Times reported.
The recent floods in Pakistan have forced Islamabad to go to the International
Monetary Fund for a bailout package. Similarly,
Bangladesh is also finding it difficult to service its external debts. Several
African countries have also been unable to complete the BRI projects and are
finding it difficult to repay their loans.
According to the European Times, in the first six months of 2022, BRI
investment and financing was only 40 per cent of what it was in the same period
in 2019. Sri Lanka received no new BRI loan in 2022. Lending through BRI has
slowed sharply since 2017, primarily because a growing number of infrastructure
projects are facing difficulties and a domestic campaign against financial
risks.
According to a study, to secure these BRI projects Chinese
agencies often pay large sums to politicians and military officials in the
borrowing countries because of which the terms of these loans are kept a
secret.
As a result, international credit rating
agencies cannot assess the borrowing countries' creditworthiness. Hence, when
the economies of these borrowing countries started crashing, the Chinese
agencies funding the BRI projects were the first to be taken by surprise,
reported the European Times.
It is significant that while in 2014, only about 10 per cent of the borrowing
countries under BRI were faced with any liquidity crunch, by mid-2022 about 70
per cent of them were defaulters. About 40 per cent of the debt which the poor
countries owe is due to China.
The COVID-19 pandemic, followed by the Russia-Ukraine conflict, has adversely
affected emerging economies. As countries struggle to meet debt obligations,
China is likely to face more problems, the report said.
Unfortunately for China, its design to keep as collateral the projects where it
had invested has also failed. The projects have either been shelved or are of
no commercial value.
Gwadar Port in Pakistan is yet to be completed. For the past two years, the
Pakistan government has not paid their dues for the power projects; agreements
are being violated since 2018. The international airport at Zambia, Hambantota
Port in Sri Lanka and Colombo Port City are not viable and of no commercial
value, reported European Times.
The report further said that in late August 2022, Beijing once again parried
the request from Colombo for the restructuring of its debt to China, saying
"the ball is in Sri Lanka's court." It is estimated that in 2022-23
Sri Lanka owes China about USD 2 billion by way of debt repayment.
Still reeling under its economic crisis, the island nation has made several
requests for restructuring of debt to give it breathing space but has each time
been cold-shouldered.
For Sri Lanka, it is vital to arrive at a debt restructuring arrangement with
China to obtain a bailout from the IMF. But Beijing has asked Colombo to
discuss the issue with Chinese banks instead.
According to the State Bank of Pakistan,
the central bank of the country, Pakistan is on the brink of economic collapse
and poised to go the Sri Lanka way. With the pressure of debt servicing, the
situation is unlikely to change.
The only hope for Pakistan to avoid bankruptcy is to secure a deal with the IMF
for a USD 6 billion assistance package. It is reported that the IMF wants to
ban Pakistan from borrowing more from China for the projects under China
Pakistan Economic Corridor before extending the assistance, reported European
Times.
On the other hand, the rising anti-China feelings on Pakistnationals are
another concern for China for its strategy of land-grabbing and providing
employment to its own people at the cost of the local population.
China has also threatened Pakistan to shut down their power plants unless
payments are made upfront, alleging payments have not been made for already
used power.
Moreover, many African countries have voiced their concerns over the
unsustainable BRI loans. Zambia has already cancelled its foreign loans which
mainly constitute Chinese ones to stop aggravating its debt distress. This
means 14 projects under the BRI are withdrawn.
Earlier, this month Zambia received a USD 1.3 billion financial loans from IMF,
with a grace period of five and a half years and a final maturity of ten years.
Zambia has specifically stated that it will completely cancel 12 planned
projects, half of which were expected to be funded by China EXIM Bank, along
with one by ICBC for a university and another by Jiangxi Corporation for a dual
highway from the capital.
Additionally, the government cancelled 20 of the unpaid loan sums, some of
which were for brand-new projects and others for ongoing ones. Such
cancellations are not unusual for Zambia, but almost 30 per cent of Zambia's
debt comes from Chinese partners compared to non-Chinese private creditors.
According to an Observer Research Foundation study, Chinese loans account for
over one-fourth of the total external loans of African countries with high debt
distress. The total loan of China to countries in the African continent is
estimated to exceed USD 140 billion. Among the major recipient countries of
Chinese loans are Angola, Ethiopia, Kenya, the Republic of Congo, Zambia and
Cameroon.
China's debt trap policy BRI is often criticised which China is alleged to be
used to take control of vital installations in other countries and expand its
military presence, the European Times reported.
Meanwhile, According to a Wall
Street Journal report,
"After nearly a decade of pressing Chinese banks to be generous with
loans, Chinese policymakers are discussing a more conservative program, dubbed
Belt and Road 2.0 in internal discussions, that would more rigorously evaluate
new projects for financing, the people involved said.
"They have also become open to accepting some losses on loans and
renegotiating debt, something they had been previously unwilling to do,"
the report added.
"As China is increasingly isolated from the international community, the
'Belt and Road' has become increasingly important to Xi Jinping's
strategy. Beijing hopes that the 2.0 version of the 'Belt and Road' will become
more sustainable", the report concluded.
No comments:
Post a Comment