China has embarked on very rapid and massive overseas lending since 2013 when it launched its high-profile Belt and Road Initiative (BRI). It has emerged as a major lender and provided hundreds of billions in loans and credit to developing countries across all continents. Most of China’s overseas lending has been directed at the energy, transport, and other infrastructure sectors under the BRI framework.
Beijing’s BRI was launched against the backdrop of rapid growth in public and corporate debt across the world. Public debt in emerging market economies continues to rise, reaching its highest level for the past four decades and thereby increasing fiscal risk and vulnerability.
Labelling the BRI as “a debt trap” is both factually wrong and exaggerated. In fact, even before the launch of the BRI, some countries that joined the BRI were already facing rising debt levels.
On 31 March 2021, the Aid Data Lab at the William & Mary Global Research Institute released a report that examined 13,427 BRI-related projects worth US$843 billion across 165 countries between 2000 and 2017. The report revealed that over 40 countries have debt exposure to Beijing in excess of 10% of GDP, and 35% of the projects have encountered problems such as corruption scandals, labour violations, environmental hazards and public protests. China has been accused of so-called “debt trap diplomacy” through its BRI. The critics argue that there is a significant risk that developing countries may not be able to repay their debts related to participating in the BRI. Given their debt obligation to China, these countries must align their foreign policy with Beijing by taking a pro-China stance.
‘Debt trap’ a misnomer
Labelling the BRI as “a debt trap” is both factually wrong and exaggerated. In fact, even before the launch of the BRI, some countries that joined the BRI were already facing rising debt levels. Many developing countries have debt problems, but their debt problems have accumulated over a long period of time, and although their debt increased when the Chinese projects were implemented, these debts account for a relatively small proportion of the countries’ total debt, compared to their debt borrowed from multilateral financial institutions and commercial creditors.
Among the BRI countries, none of their domestic economic and debt crises have so far been caused by China; instead, they have been caused by internal fiscal mismanagement or external shocks, such as the global Covid-19 pandemic and the Ukraine war. Many low-income developing countries that receive BRI financing lack a comprehensive and robust fiscal framework. For example, while there was much hype about China plunging Sri Lanka into a “debt trap”, China has in fact provided loans that account for less than 10% of Sri Lanka’s total external debt. Sri Lanka’s economic, political and social crises are rooted in the rampant corruption of its political elites, the government’s poor economic management and the impacts of the global pandemic.
China expects the BRI loans to be fully repaid, since it did not force the developing countries to borrow from China, and it has no legal obligation to offer debt relief or a “haircut”.
BRI is not an aid programme or a charitable initiative. China views the BRI infrastructure projects as commercial endeavours with loans based on a market interest rate (or slightly lower). Even countries with low levels of debt must carefully weigh the pros and cons of BRI investments. Projects should conform to national development priorities. The BRI countries have full right to either borrow Chinese loans or refuse to accept them.
China expects the BRI loans to be fully repaid, since it did not force the developing countries to borrow from China, and it has no legal obligation to offer debt relief or a “haircut”. Regarding countries struggling with domestic economic crises and debt repayment, China has accepted a rollover of payments and even offered some interest rate relief but not a true haircut. The G20 Debt Relief Initiative and the Common Framework have initiated China’s participation in multilateral debt coordination.
Possible to generate a virtuous circle of growth
It is important to bear in mind that it is not a sin for developing countries to engage in growth-oriented infrastructure borrowing. A distinction must be made between whether debt can be used as an investment to remove growth bottlenecks or to support spending and consumption. Many low-income developing countries lack infrastructure development funds and can only borrow externally.
The BRI investments focus on infrastructure construction. The increase in the debt of borrowing countries in the short and medium term is conducive to their sustainable development in the long run, since these projects lay the foundations for promoting investment and boosting trade and economic growth. After the infrastructure is built, the economy will develop faster, create jobs, raise income levels, and earn foreign exchange through exports. A virtuous circle could be embedded.
As a World Bank report in 2019 shows, the BRI transport corridor will help in two important ways: shortening transport times and increasing trade and investment. It is estimated that travel times could be reduced by up to 12% in countries along the transport corridor routes and by an average of 3% in the rest of the world, indicating that non-BRI countries and regions will also benefit.
Looking back on the Chinese development experience over the past four decades, the biggest bottleneck China has faced in its development is infrastructure underdevelopment. Without infrastructure, there is no way to promote trade or develop an agricultural, manufacturing, or service economy. From China’s own experience, in order to develop, countries must first overcome infrastructure bottlenecks, which a Chinese saying encapsulates as “to get rich, build roads first”.
Hundreds of railways, roads, seaports, energy plants, telecommunications and other infrastructure projects built under the BRI framework have been welcomed by the recipient countries. For example, since a Chinese firm took over the operation and management of the Piraeus port terminal in Greece in 2016, this firm has invested in upgrading the port and related facilities. The port of Piraeus has now been transformed into one of the fastest growing and busiest container terminals in the Mediterranean Sea.
Mounting debt still an issue
Having said that, China is indeed a major creditor of many BRI countries, such as Pakistan, Laos, Angola, Kenya, Ethiopia and Myanmar. These countries’ economies have been hit hard by the pandemic, which further escalated their domestic economic and fiscal crises. According to the recent debt sustainability analysis by the World Bank and International Monetary Fund, one-third of low-income developing countries participating in the Initiative face a high risk of debt distress. Nearly two-thirds of emerging market economies that have embraced the Initiative face rising debt vulnerabilities, which calls for critical scrutiny of countries whose debt exceeds the indicative threshold of 50% of GDP or whose total financing needs exceed 15% of GDP.
... China should address the issue of transparency and lending management.
BRI projects can significantly improve connectivity, boost trade, investment, economic growth and improve the living conditions of the recipient countries on a sustainable basis, but only if China collaborates with the BRI countries by allowing the participating economies to fully account for the potential costs of debt-financed infrastructure.
Nevertheless, reliable information on the financing terms and conditions for BRI infrastructure projects is currently scarce. In order to effectively address the issue of debt sustainability in relation to BRI infrastructure projects, China should address the issue of transparency and lending management. The lack of transparency surrounding the terms and scale of financing for the BRI poses serious risks to borrowing and creditor countries, and to the eventual success of the Initiative. Debt transparency is essential for borrowers and creditors to make informed decisions, ensure the efficient use of available financing and safeguard debt sustainability, as well as citizens' ability to hold governments accountable.
Greater transparency and debt sustainability analysis
To promote sustainable BRI development, China should adhere to the guidance of the Belt and Road Debt Sustainability Analysis Framework (hereinafter referred to as the Analytical Framework) on overseas lending. The debt situation in borrowing countries and their prospects of repaying the debt incurred through BRI projects should be examined in detail, and transparency and debt sustainability analysis should be applied in relation to the BRI debt. The Analytical Framework was adopted after the second BRI summit in 2019. The Analytical Framework is based on the Debt Sustainability Framework (DSF) of the International Monetary Fund and the World Bank, taking into account the national conditions and development practices of the BRI countries. The Analytical Framework is the BRI version of the DSF.
... private sector participation in BRI financing through public-private partnerships can promote high-quality infrastructure development and enhance project financing transparency.
China and 26 other countries have also jointly formulated the Guiding Principles for Financing the Belt and Road Projects, which clearly define the need to build a transparent, friendly, non-discriminatory, and predictable financing environment, emphasise sustainable economic and social development, and take into account debt sustainability when mobilising funds. In addition, private sector participation in BRI financing through public-private partnerships can promote high-quality infrastructure development and enhance project financing transparency.
The Paris Club is the most important association of public sector creditors, and it is the main international platform for official bilateral debt restructuring. Given its emergence as the largest official public creditor to developing countries, China cannot stay on the outside in the long term. The Paris Club also needs to absorb emerging creditors such as China. At the same time, the Paris Club needs to make necessary reforms. For example, it should consider the impact that productive investments can have on long-term GDP growth.
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