Chinese's BRI: A Threat to the Nations' Sovereignty

What is the way forward?

So far, BRI is being seen as a one-sided initiative of the Chinese government. But the way BRI is getting unfolded, it has become clear that unless it is not brought to a multilateral forum, it will be difficult for China to take it forward. With emerging scenario, it's now clear that though, BRI has been a one-sided initiative, however it can't move forward unless multilateral approach is adopted. How the conflict between these two ends would be resolved is the major problem of BRI. Involvement of international financial institutions like World Bank, Asian Development Bank etc. has started as their affiliation with this work is being sought. The World Bank has made studies about this project. The World Bank believes that it is already deeply connected to the BRI countries and it is also a partner in some BRI projects, and these projects are worth nearly $80 billion. But expressing concerns about this, the World Bank has also pointed towards the challenges and dangers arising out of BRI. In the last five years, BRI projects have been struggling with numerous problems. In terms of numbers, 14 percent projects involving 32 percent cost of present BRI projects are running through difficulties. The lack of local stability, unilateral decision-making process, lack of local industrialisation and labor force participation as well as escalation of cost, problem of land acquisition, etc. are the major problems being faced by these projects. The World Bank has recently started studying the proposed benefits of the BRI project and the policy and regulatory solutions for the problems being faced there. Similarly, the Asian Infrastructure Investment Bank is studying about better regulation and management of BRI projects. We have to understand that there are many apprehensions of the World Bank about BRI. This has been discussed in detail in many reports of the World Bank, but there are scant efforts by International Financial Institutions to take BRI project in their hands. China's paradox can be a snag in the solution to this problem. The time has come to come clear whether China will come out of its 'China Alone' policy and make extensive efforts to advance BRI through global platforms. If it doesn't happen China will create obstacles in its own plan.

Eight countries at Risk of Debt Trap

There are 23 BRI countries which were subject to debt distress according to international standard measures of debt sustainability. However, out of these 23 countries 15 countries were considered to be less vulnerable to debt distress. Eight countries are identified to be subject to debt distress due to future BRI related financing. Maldives, for instance, had debt to GDP ratio of 73.1 percent in 2015, which increased to 83.1 percent in 2016 and by 2018 the forecast was it would increase to 109 percent. Similarly other countries are also subject to similar kind of situation.

Though Debt-GDP ratio shows the vulnerability of these countries due to unsustainable debt burden, a qualitative analysis of debt situation of these countries give us a more clear and horrifying picture about the same. In this context bilateral relationship of these countries with China can be a useful guide for the future vulnerability of debt.

Djibouti

Recent IMF assessment about the Djibouti's borrowing program reveals that in just 2 years between 2015 and 2017, Djibouti public debt has increased from 50 to 85 percent of GDP. This is unprecedented for any low income country. This makes Djibouti vulnerable as most of this debt consists of government, guaranteed public enterprise and is owed to China government owned China Exim Bank. China has provided total funding of $1.4 billion for Djiboutis major investment projects, which is equivalent to 75 percent of Djibouti's GDP. In future, new projects which are in pipeline, are two airports, a port at Ghoubet, an oil terminal and a toll road. Some of these loans are at high commercial rate. Though, IMF has been issuing cautionary statements about Djibouti's vulnerability due to projects, not earning sufficient revenue, Djibouti continues to borrow both at lower than market rates and at high commercial rates. All this makes Djibouti subject to high unsustainable debt.

The Maldives

Promotion of national tourism, upgradation of urban infrastructure and adoption to climate change in accordance with National Sustainable Development Strategy are some of the stated objectives of an unprecedented public investment program in Maldives. Three most prominent investment projects include upgradation of international airport costing around $830 million, a new population centre and a bridge near airport, costing around $400 million and relocation of the major port (of which no cost estimate in available). In all these projects China is heavily involved. Though, China's Exim Bank has announced financing of airport project at concessional rates and repayment terms, IMF and world bank have put Maldives at a high risk of debt distress due to its vulnerability to exogenous shocks.

Lao People's Democratic Republic (“Laos”) Though Lao's GDP has been growing at an average growth of 8 percent, it continue to remain among poorest countries in South East Asia. It plans to build China Laos  railways. IMF has been raising doubts since 2013, about the ability of Laos to service its debt, if it moves ahead with this railway project, which involves a total cost of $6 billion, which is nearly half of Lao's GDP. Although, Ministry of Finance of Laos is maintaining that Laos's government will not give guarantee for the majority of financing from China (China Exim Bank), however, the government will definitely be under considerable stress to cover any losses. Secrecy is being maintained about the financial terms for many elements of the project, but the fact remains that Laotian government itself has signed loan agreements with China Exim Bank, which means all sovereign guarantee for same.

Montenegro

According to World Bank's estimates Montenegro's public debt may increase to 83 percent of GDP in 2018, if there are no fiscal adjustments. Reason for huge piling up of their public debt is building of infrastructure project, namely, a motor way linking the port of Bar with Serbia. This would integrate Montenegrin transport network with those of other Balkan countries. For this a loan to the extant of 85 percent of the project cost would be provided by China Exim Bank under an agreement reached in 2014. Total cost of the project is $ 1.1 billion which is 25 percent of Montenegro's GDP. In this SB process, whereas first phase of project may complete smoothly, however, as per IMF's, estimates troubles would start in second and third phase, as non-concessional loan provided by China could lead to debt default.

Mongolia

Case is made that Mongolia's future economic development depends upon the large infrastructure investments, which are likely to raise productivity and facilitate exports. However, these projects cannot be funded by internal resources. Mongolia needs concessional loan. China Exim Bank offered financing of $1 billion at a concessional rate in 2017, for hydropower project and a highway project from the airport to the capital. But as per the information available, power project is stalled and money is being transferred to other project. It is apprehended that Mongolia may soon default in the repayment of loan, despite its concessional financing by China.  

Tajikistan

Tajikistan is the first leg of the land based projects of BRI. Tajikistan is one of the poorest countries in Asia and has been assessed as being at high risk of debt distress by IMF and World Bank. Tajikistan plans to increase its external debt both at concessional rates and at non-concessional rates, to pay for infrastructure investment in power and transportation sectors. Some of these elements support BRI. Further there is a gas pipeline going through Tajikistan, which is financed by China and there would be pressure on Tajikistan to bear some of its cost. Tajikistan has also issued $500 million in Eurobonds to pay for a new hydro power project. China accounts for nearly 80 percent of increase in external debt of Tajikistan between 2007 and 2016.

Kyrgyz Republic (Kyrgyzstan)

Like Tajikistan, Kyrgyzstan is also a relatively poor country. Many new BRI related infrastructure projects are being constructed there, with external debt by March 2017, its sovereign debt reached 65 percent of GDP and 90 percent of this debt was external debt. Largest single creditor to Kyrgyzstan is China's Exim bank with a total loan of more than $1.5 billion, which is 40 percent of country's total external debt. The projects are a chain of hydro power plants, a China-Kyrgyzstan-Uzbekistan railway, additional highway construction and completion of Central Asia-China pipeline. With increase in public investment of the kind mentioned above, its currency has depreciated significantly and although Kyrgyzstan is considered to be at moderate risk of debt distress, Kyrgyzstan remain vulnerable to shocks.

Pakistan

China-Pakistan Economic Corridor (CPEC) is at the center stage of BRI. Total value of CPEC projects is estimated at $62 billion, of which $33 billion is in energy projects. China is financing nearly 80 percent of this amount. The debt distress has compelled Pakistan them to cancel many of the projects including three major road projects. The major reason of Pakistan's risk of debt distress is high interest rates being charged by China. Reports indicate that whereas China Exim Bank is charging nearly 2-2.5 percent concessional rate in other countries, Pakistan's loans are being charged at 5 percent. According to IMF, Pakistan's public debt ratio to GDP may go above 70 percent because of these adverse shocks. Pakistan is already under huge debt stress and has so far approached IMF several times and also has requested six debt treatments from the Paris Club. Now huge borrowing on account of CPEC may push Pakistan to request Paris Club seventh time in near future.

China's Response to Debt Distress in BRI Countries

It is surprising that whereas countries have been facing debt distress of similar kind, the response of Chinese government to the problem has been differential, ad-hoc and on case to case basis. So far, it has generally refrained from participating in multilateral approaches to debt relief, although it does take part in debt relief discussion at international financial institutions and engage itself informally with IMF staff for individual countries. Other major official creditors do participate in multilateral mechanisms with regard to sovereign defaults. China is not even a member of Paris Club and therefore has no obligation to act in solidarity with Paris Club members. It does not even inform the Paris Club about the management of its credit activities.

There has been almost absence of the data of actual amount of debt in different BRI countries and this is total lack of multilateral or other framework to define China's approach to debt sustainability problems. Therefore, analysts have to base their analysis only on the anecdotal evidence of actions taken by China about the same, which is mostly ad hoc, and based on case to case approach.

Following are few examples of how China has acted in the situation arising out of debt distress of BRI countries.

1. In 2011 Tajikistan was asked to give away 1158 square kilometers of so called disputed territory in exchange of writing off an unknown amount of debt owed by Tajikistan. However, Tajikistan authorities said that it agreed to provide only 5.5 percent of the land sought by China.

2. In 2011 when Cuba sought debt relief due to desperate economic situtation, China being its single largest creditor agreed to restructure US$ 4 to 6 billion. However, details of the transations remained secret, though it was reported that China also agreed to extend additional trade credit and financing for port renovation. Recent reports also indicate that some of the debt was forgiven.

3. According to IMF estimates, China has provided 80 percent of what it was expected to provide under HIPC, that is heavily indebted poor countries. China has been a creditor of 31 out of 36 HIPC countries. China has so far provided relief to atleast 28 HIPC countries and 100 percent forgiveness to Burundi, Afghanistan and Guinea

4. In case of Sri Lanka it was a different treatment altogether. China which financed construction of the Humbantota Port to the tune of US$ 8 billion, forced Sri Lanka for a debt for equity swap accompanied by 99-years lease for managing the port.