Michal Stelmach, an economist at KPMG UK, said Sunak’s attempts to fix the public finances were slowing after he bumped up his support for households last month…reports Asian Lite News
Surging debt interest costs triggered by the leap in inflation forced the British government to borrow more than expected in May at 14 billion pounds ($17.14 billion), according to official data published on Thursday.
Economists polled by Reuters had a median forecast of 12.0 billion pounds for borrowing excluding public sector banks.
Finance minister Rishi Sunak remains under pressure to borrow more after he added 15 billion pounds last month to his support for households hit by the cost-of-living crisis, even as a slowing economy threatens to reduce tax revenues.
He repeated his warning of the hit to the public finances from rising inflation after the data from the Office for National Statistics.
“Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets,” Sunak said.
The government’s interest bill rose by 70% from May last year to 7.6 billion pounds, the biggest ever interest cost for the month of May and the third highest for any month.
Britain’s official budget watchdog has said it expects interest costs in June to reach almost 20 billion pounds due to the accelerating inflation rate.
British inflation-linked government bonds are pegged to the Retail Price Index which hit almost 12% in May.
Borrowing in the April-May period – the first two months of the financial year – was 15% lower than a year earlier at 35.9 billion pounds but was almost 20 billion pounds more than in the April-May period of 2019, before the COVID-19 pandemic hit.
Michal Stelmach, an economist at KPMG UK, said Sunak’s attempts to fix the public finances were slowing after he bumped up his support for households last month.
“Debt reduction this year remains a long shot,” Stelmach said, adding he expected borrowing to overshoot the government’s target by about 20 billion pounds this year on the back of higher spending and weaker economic growth.
Public sector debt would only peak in 2023-24, missing the latest official forecast by two years, Stelmach said.
Thursday’s data showed total public debt, excluding public-sector banks, stood at 2.363 trillion pounds or 95.8% of GDP, up from 95.6% in April.
The Office for National Statistics cut its estimate for borrowing in the 2021/22 financial year, which ended in March, by almost 1.0 billion pounds to 143.7 billion pounds. It also lowered its borrowing estimate for the previous year by almost 8 billion pounds to 309.6 billion pounds.
Countries in the African continent cumulatively owe China a debt of $145 billion, while a sizeable payment of $8 billion needs to be made in the present year…reports Asian Lite News
Last year in September, Sri Lanka’s precariously maintained economy reached the verge of collapse, and the Rajapaksa led government was forced to declare a state of economic emergency in the island nation. Sri Lanka is currently faced with the worst financial crisis it has seen since its independence in 1948.
The South Asian country, since then, attempted to handle the crisis, by way of controlling the supply chain of staple food items, as well as price control to keep inflation in check; however, at this point in time, the island stands at the brink of economic ruin, both on the domestic front as well as on the international platform- unable to control inflation and incapable of repaying public debt.
At the heart of the country’s crisis lies the acute shortage of foreign currency, as well as the massive amounts of foreign debt it has raked up over the years.
When the Rajapaksa government came to power in 2019, they inevitably inherited the pre-existing debt problem that the country was facing under the previous government’s failing regime, only made worse by the Covid-19 pandemic in the following year.
The country’s primary source of revenue dried up, as tourism took an astounding hit following the global Covid-19 crisis and the subsequent travel restrictions; it was only a matter of time before the already indebted country fell.
The government’s inability to effectively deal with the breakdown of the economy — with scarce foreign reserves left to import even food or fuel — has left the population disgruntled, disillusioned by the government, and vulnerable to ruin.
In late January, 2022, when the country was spending the last of its foreign currency to pay off $500 million of sovereign debt, the people were left exposed to domestic economic upheaval as prices of basic commodities continued to soar, with Colombo’s inability to tackle the crisis on the domestic front and protect its citizens.
However, it is of interest to note that while the pandemic proved to be the final nail in the coffin for the island state, Sri Lanka has long been hailed as a “country trapped in debt”, with no viable plan of action in place to ever pay off the huge loans it has amassed over the years.
The executive director at the Institute of Policy Studies of Sri Lanka went on record, noting that the country has seen government after government issuing sovereign bonds, with no realistic concerns of payment of said bonds. Their entire foreign currency reserve has been built on virtually unsustainable borrowing from all across the world.
But this is not the first time that Sri Lanka’s debts have brought the country in hot waters. Back in 2017, Sri Lanka was brought to limelight following the Hambantota Port controversy. The port, which was constructed with Chinese investments and loans north of $1 billion, failed to see much business generated in the 7 years since being opened.
The Sri Lankan government found itself backed into a corner with no realistic possibility of being able to repay the loan to China, eventually reached the controversial decision to give the major ownership of the port to China (a hefty 70 per cent) on a 99-year lease in order to raise the required money for repayment.
The Hambantota Port incident has emerged as a global prime example of what happens when smaller, middle to low-income countries decide to get into bed with the dragon.
While the port was just the beginning, the country’s current financial ruin has cemented the eventual outcome of countries which become debt-ridden to China; if anything, Sri Lanka’s crisis should serve as a very real warning call to all countries dependent on Chinese influx of investment.
Xi Jinping’s bid to gain legitimacy on the global stage and to sculpt China into a world power has been streamlined by the country’s adoption of an intensive soft power policy. As part of this geopolitical strategy, Xi’s pet project introduced in 2013, the Belt and Road Initiative, has amassed 146 countries as signatories up until March, 2022.
As the frontrunner of the soft power policy being employed by the People’s Republic of China, BRI agreements typically result in massive amounts of investments and loans being funnelled into the economies of the signatory states; as China’s interfering presence continues to quietly creep into the country’s affairs under the guise of bringing in resources and business.
While China only makes up 10 per cent of Sri Lanka’s total debt amount, its debt-trap policy is widely recognized by economists and policy experts all across the world. With China’s habit of swooping in and offering loans worth undisclosed amounts to countries that can rarely afford to repay them, its good Samaritan facade cracks as the world grows increasingly suspicious of its intentions.
China’s position as a leading global lender is undeniable, however, the conditions of bilateral loan agreements signed with China are such, that the accompanying non-disclosure agreements ensure the restriction on the rest of the world from finding out the total debt owed China cumulatively, let alone that owed by a single nation.
A study reported that the total Chinese investment in Sri Lanka vis-a-vis infrastructure stood at a whopping $12.1 billion between 2009-2016; however, owing to a lack of clarity regarding what qualifies as a BRI project, there is no official data which can reliably give an estimate of Chinese investment in the country.
Sri Lanka, while mismanaged by its own government, doesn’t even fall into the bracket of nations that are in over their heads with China, in terms of debt. Middle and low-income economies are often left struggling to repay their debts, and inevitably fall victim to interference and influence, unable to resist the pressure from Beijing.
A study in 2020 found that the country had given loans and trade credit to over 150 countries around the globe, totalling an amount of nearly $1.5 trillion.
China’s lending mechanism has often been called out for its tendency to dole out “secret loans”, leading to a hidden-debt problem, where neither the debtors nor international organisations knows exactly how much money is owed to China, and under what terms.
Following the pandemic, more countries have continued to fall for China’s superficially attractive loans and aid. Defaulting on loan repayments could possibly allow China to have control over the borrowing nations’ economic and foreign policies, making it a topic for international concern.
Quick to jump to countries’ aid, China also comes strapped with interest rates that are fourfold as compared to those of the World Bank or IMF.
Termed as “debt-trap diplomacy”, this concept has long been associated with China’s lending practices, where smaller countries fall victim to untenably large loans which they’re unable to repay; resulting in undue political and financial leverage the creditor nation comes to hold over the country.
China’s Belt and Road Initiative alone has raked up $385,000,000,000 in hidden debts from lower-and middle-income countries who are signatories of the project.
More than 40 countries have debt exposure the size of 10 per cent their GDP as a consequence of these hidden debts. Djibouti, Laos, Zambia and Kyrgyzstan’s debts are as high as at least 20 per cent of their annual GDP.
Consequences of China’s duplicitous investments aren’t just limited to the debtors’ economies, as indigenous populations often perceive Chinese backed industries and businesses to be harmful for local interests. Nepal, one of the BRI’s signatories, has been facing large-scale protests against Chinese involvement in the country for years now; subsequently, other South-Asian countries such as Myanmar and Laos have also been vocal about locals being exploited over Chinese interests in the country.
China has also climbed the ladder to become Africa’s largest trading partner, and its no surprise that regions containing more Chinese funded projects are more likely to observe civil protests against these investments.
Countries in the African continent cumulatively owe China a debt of $145 billion, while a sizeable payment of $8 billion needs to be made in the present year.
It’s imperative for low-income nations to proceed with more caution, as Sri Lanka’s case clearly depicts China’s inflexibility to aid a falling ally, as they refused the island’s request to restructure the debt payments to be made to China.
Countries across the African and Asian continents are already entrapped with crushing amounts of debt to the People’s Republic that they cannot hope to repay in the foreseeable future, however, the example of Sri Lanka calls for attention for states to recognize the glaring reality — that the choice to get in deeper with the PRC can only result in the eventual ruin of their economic, and national integrity.
Currently the nation is supposed to have about $500 million in foreign exchange reserves, which is pennies for a country, a report by Rahul Kumar
Sri Lanka began its Sinhala and Tamil New Year celebrations on a sombre note. In his new year message on Thursday, President Gotabaya Rajapaksa said: “The current economic and global crises have become the biggest challenge faced by us Sri Lankans in our recent history. We should overcome this challenge with unity and better understanding”.
The President’s message came two days after the nation announced that it will default on its $51 billion loans. The island nation’s unprecedented catastrophe is its first such crisis and a big ignominy for the government.
Appeal for loans and aid
The country’s new Finance Minister Ali Sabry said that Sri Lanka needs between $3 billion to $4 billion to pull itself out of the economic crisis and has pinned hope on the International Monetary Fund (IMF) for the same. He also said that some of the money will come from governments and other lenders as well.
Newspaper Ceylon Today said: “Sabry, along with newly appointed central bank Governor Nandalal Weerasinghe, is a key member of Rajapaksa’s team for bailout talks with the IMF. The funds are crucial to the success of a debt restructuring process initiated by the island nation this week after suspending some outstanding loan and interest payments.”
Heightened political activity
The misgovernance and the precipitous decline in Sri Lanka’s fortunes have the opposition baying for the powerful Rajapaksa family. Opposition leader Sajith Premadasa plans to move three motions before the parliament. One is to impeach President Rajapaksa who has stubbornly refused to quit despite public pressure. The second is to move a no-confidence motion against the government and the third is to move the parliament to real the 20th amendment that bestows executive powers on the president undermining the parliament and the prime minister.
Rajapaka’s political allies — the Sri Lanka Freedom Party (SLFP) led by Maithripapa Sirisena also plans to make a clean break from the Rajapaksas. Just a few days earlier Sirisena and his party members were holding talks with the president to convince him to quit and hand over the country to an all-party administration.
The road to bankruptcy
Currently the nation is supposed to have about $500 million in foreign exchange reserves, which is pennies for a country. Because of low forex reserves since the middle of last year, the island nation had to steadily reduce imports of food and other essentials. It also had to reduce oil imports, completely stopping these at times. All these measures eventually lead to shutting down of its only oil refinery, long power cuts, queues for fuel and a collapse of its economy.
The country is facing a food shortage partly because of disastrous governance. Last year the president decided to make Sri Lanka the first organic nation in the world and banned the import of chemical fertilisers. This decision brought down its food production considerably, causing a food crisis and resentment among farmers.
China’s huge infrastructure projects were tom-tommed by the Rajapaksas and brought in large amounts of investments but did not support its economy. Experts say the Chinese investment, also called debt diplomacy, in the Mattala Rajapaksa International Airport (MRIA), the Hambantota port and the Colombo Port City only added to the debt burden of Colombo. Experts add that such mega infrastructure investments for such a small nation are not sustainable.
The April 2019 Sunday Easter bombings by the global terror organisations eroded international tourist confidence leading to a loss of tourism earnings. The Covid-19 virus and the subsequent lockdowns across the world added to the woes, wreaking havoc on the nation’s tourism-based economy putting a complete squeeze on its foreign exchange earnings.
Chinese games
With China not responding to Colombo’s appeals of providing it $2.5 billion in financial aid, Sri Lanka has begun talking to the IMF. During Chinese Foreign Minister Wang Yi’s recent visit to Colombo, Sri Lanka had appealed to the communist leadership for restructuring its loans. Despite the bonhomie between China and the Rajapaksa family, Beijing has simply ignored both the appeals–restructuring loans and releasing financial aid–by a fast friend and ally.
To add to the country’s discomfort, China had in fact sent a ship of contaminated organic fertiliser. After Sri Lanka rejected to take delivery of the poor-quality fertiliser, China anchored the ship in Sri Lankan waters for months in a coercive attempt. Eventually, China levied a fine on Sri Lanka and the ship initiated arbitration proceedings in a Singapore tribunal. India had to step in to provide organic fertiliser to Sri Lankan farmers.
Indian support
The then Finance Minister Basil Rakapaksa flew into Delhi to meet with External Affairs Minister S Jaishankar and Finance Minister Nirmala Sitharaman in October 2021. Soon after his visit, India readied a $1.5 billion line of credit package consisting of food, fuel and other essential items, which have bailed out Sri Lanka till now. Sri Lankan cricketers and opposition leader Sajith Premadasa have acknowledged that India stood by the people of Sri Lanka in its time of need.
Just yesterday, New Delhi said that it is thinking of providing another $2 billion in aid.
Next steps
Sri Lanka now has an enormous burden on its hands. It has to pacify its people and instill confidence among them. It has to reduce the lines for fuel, quickly deliver food to people and bring down prices. All of these measures are to ward off starvation and likely humanitarian problems.
At another level, Sri Lanka also has to improve its governance and strengthen its economy. It will have to generate local employment, begin manufacturing goods, support the farmers with fertilisers, bring in tourists, utilise its vast coastline for marine industry and start to export goods and services that it has not yet tapped.
Meanwhile, people continue to protest and camp at the iconic Galle Face seafront.
(The content is being carried under an arrangement with indianarrative.com)
These debts are systematically underreported to the World Bank’s Debtor Reporting System…reports Sanjeev Sharma
Forty-two countries now have levels of public debt exposure to China in excess of 10 per cent of GDP.
AidData, an international development research lab based at William & Mary’s Global Research Institute, today released a trove of new findings about China’s secretive overseas development finance program leveraging insights from a uniquely granular data that captures 13,427 projects across 165 countries worth $843 billion. These projects were financed by more than 300 Chinese government institutions and state-owned entities. This includes a special emphasis on Belt and Road Initiative (BRI).
These debts are systematically underreported to the World Bank’s Debtor Reporting System (DRS) because, in many cases, central government institutions in low-income and middle-income countries are simply not the primary borrowers responsible for repayment, says a research by AidData.
According to Brad Parks, AidData’s Executive Director and a co-author of the report, “these unreported debts are worth approximately $385 billion and the hidden debt problem is getting worse over time”.
He and his co-authors find that average annual underreporting of repayment liabilities to China was $13 billion during the pre-BRI era, but $40 billion during the BRI era. The average government, they estimate, is underreporting its actual and potential repayment obligations to China by an amount that is equivalent to 5.8 per cent of its GDP.
Parks explained that “the challenge of managing these hidden debts is less about governments knowing that they will need to service undisclosed debts to China with known monetary values than it is about governments not knowing the monetary value of debts to China that they may or may not have to service in the future.”
35 per cent of the BRI infrastructure project portfolio has encountered major implementation problems—such as corruption scandals, labor violations, environmental hazards, and public protests—but only 21 per cent of the Chinese government’s infrastructure project portfolio outside of the BRI has encountered similar problems. BRI infrastructure projects are also taking substantially longer to implement than Chinese government-financed infrastructure projects undertaken outside of the BRI, and Beijing has witnessed more project suspensions and cancellations during the BRI era than it did during the pre-BRI era.
“Host country policymakers are mothballing high-profile BRI projects because of corruption and overpricing concerns, as well as major changes in public sentiment that make it difficult to maintain close relations with China. It remains to be seen if ‘buyer’s remorse’ among BRI participant countries will undermine the long-run sustainability of China’s global infrastructure initiative, but clearly Beijing needs to address the concerns of host countries in order to sustain support for the BRI,” said Brooke Russel, an Associate Director at AidData and one of the other co-authors of the report.
“China has quickly established itself as the financier of first resort for many low-income and middle-income countries, but its international lending and grant-giving activities remain shrouded in secrecy,” said Ammar A Malik, a Senior Research Scientist at AidData. Beijing’s reluctance to disclose detailed information about its overseas development finance portfolio has made it difficult for low-income and middle-income countries to objectively weigh the costs and benefits of participating in the BRI.
Malik and his colleagues found that, during the pre-BRI era, China and the U.S. were overseas spending rivals. However, China is now outspending the U.S. and other major powers on a more than 2-to-1 basis. In an average year during the BRI era, China spent $85 billion on their overseas development program as compared to the U.S.’s $37 billion. Banking on the Belt and Road demonstrates that Beijing has used debt rather than aid to establish a dominant position in the international development finance market. Since the BRI was introduced in 2013, China has maintained a 31-to-1 ratio of loans to grants.
The country’s “policy banks”—China Eximbank and China Development Bank—led a major expansion in overseas lending in the run-up to the BRI. However, since 2013, state-owned commercial banks—including Bank of China, the Industrial and Commercial Bank of China, and China Construction Bank—have played an increasingly important role, with their overseas lending activities increasing five-fold during the first five years of BRI implementation. The number of “mega-projects”—financed with loans worth $500 million or more—approved each year also tripled during the BRI era.
The report finds that as China has financed bigger projects and taken on higher levels of credit risk, it has also put in place stronger repayment safeguards. 31 per cent of the country’s overseas lending portfolio benefited from credit insurance, a pledge of collateral, or a third-party repayment guarantee during the early 2000s, but this figure now stands at nearly 60 per cent.
The central bank data on Monday (July 5) revealed that Pakistan’s public debt had increased by Rs 2.89 trillion or 8.23 per cent in 11 months of the fiscal year…reports Asian Lite News
Pakistan’s public debt has increased by over eight per cent in 11 months of the fiscal year ended in June due to increased government borrowing to meet the spending requirements during the COVID-19 pandemic according to government data.
The central bank data on Monday (July 5) revealed that Pakistan’s public debt had increased by Rs 2.89 trillion or 8.23 per cent in 11 months of the fiscal year ended June 30, reported The News International.
The central government’s debt stood at Rs 37.997 trillion at the end of May 2021. The debt amounted to Rs 35.107 trillion in the period ended June 2020.
The debt increased by 10.17 per cent year-on-year in May. It was Rs 34.489 trillion in the period ended May 31, 2020.
Fiscal Responsibility and Debt Limitation (FRDL) Act 2005 defines “Total Public Debt” as debt owed by the government (including federal government and provincial governments) serviced out of consolidated fund and debts owed to the International Monetary Fund.
Rise in public debt is largely driven by the government’s domestic borrowing that has increased 11.95 per cent to Rs 26.065 trillion. Foreign debt was almost flat at Rs 11.931 trillion.
SBP’s data showed that government securities such as the market treasury bills (MTBs), Pakistan Investment Bonds (PIBs), and Ijara Sukuk (Islamic bonds) remained the preferred choice of borrowing within domestic debt. The major portion of borrowing from domestic sources was carried out through medium- to long-term debt instruments.
Imran Khan-led Pakistan government has allocated Rs 900 billion for the federal public sector development programme in fiscal year of 2022, 38 per cent up from last year. There is a need to contain the budget deficit, targeted at Rs 3.420 trillion or 6.3 per cent of GDP this fiscal year, compared with revised estimate of Rs 3.195 trillion or 7 per cent for fiscal year 2021.
Analysts predict the budget deficit to be in the range of 7.0-7.5 per cent in fiscal year 2022, where part of the shortfall would be covered by cut in expenditures, both current and development. The primary deficit is expected to be in the range of 1.0-1.5 per cent.
The Pakistan outlet claims in its official report that increased level of external inflows from multilateral and bilateral development partners is indicative of their confidence in development priorities and policies of the government, including implementation of reforms in the priority areas of fiscal and debt management, energy sector and ease of doing business. (ANI)
Media reports suggest that China has refused to budge on Islamabad’s request to renegotiate the power purchase agreements, reports Asian Lite News
Bankrupt Pakistan’s debt problems seem to be escalating as it is all weather-ally China has declined to restructure USD 3 billion in liabilities.
Islamabad has requested Beijing to forgive debt liabilities owed to China-funded energy projects established under the China-Pakistan Economic Corridor (CPEC).
The debt load, owed largely for the building of independent power producers (IPPs) on take-or-pay power generation contracts, is substantially more than the USD 19 billion in total invested in the plants, Asia Times reported citing reports and industry analysts.
Media reports suggest that China has refused to budge on Islamabad’s request to renegotiate the power purchase agreements, saying that any debt relief would require Chinese banks to amend the terms and conditions under which the credits were extended.
The banks, including China Development Bank and the Export-Import Bank of China, were not prepared to revise any of the clauses of the agreement reached earlier with the government, Beijing said in response to the request to renegotiate terms.
China Pakistan foreign ministers
Pakistan Tehrik-e-Insaf (PTI) Senator and industrialist Nauman Wazir told Asia Times, “First, the tariff determined by National Electric Power Regulatory Authority (NEPRA) at the time of allowing power generation in the private sector was on the very high side.”
“Then, the IPPs submitted erroneous declarations concerning capital, financial assets and operational cost of the company, which became obvious when the balance sheets of the IPPs were made public,” he claimed citing evidence that came to light when an inquiry committee on Pakistan’s power sector revealed its findings last year.
Pakistan has already entered a sovereign debt “danger zone” with total liabilities and debts of USD 294 billion representing 109 per cent as a percentage of GDP as of 30 December 2020.
The Pakistan government reportedly owes about USD 158.9 billion to domestic creditors, of which public sector enterprises owe about USD 15.1 billion. According to The News International, the foreign commercial loans of USD 3.11 billion and USD 1 billion from Chinese deposits helped the government to achieve the net transfer of dollar inflows in the current fiscal year.
With the combination of foreign commercial loans and safe deposits, Pakistan received over USD 4.1 billion that was over 50 per cent out of the total received foreign dollar inflows from creditors.
The news outlet reported that according to official data of the Economic Affairs Division (EAD), during July-February of the fiscal year 2020-21, the Imran Khan government has received USD 7.208 billion total external inflows from multiple financing sources, which are 59 per cent of annual budget estimates of USD 12.233 billion for the entire fiscal year 2020-21.
The News International further reported; disbursement from multilateral and bilateral development partners also maintained a strong trend and is USD 3.098 billion during the period under review against the budgetary allocation of USD 5.811 billion for the fiscal year 2020-21 on concessional terms with longer maturity. These healthy inflows also helped to improve foreign exchange reserves and exchange rate stability.
The Pakistan outlet claims in its official report that increased level of external inflows from multilateral and bilateral development partners is indicative of their confidence in development priorities and policies of the government, including implementation of reforms in the priority areas of fiscal and debt management, energy sector and ease of doing business.
Vaccine and BRI
The Economist Intelligence Unit (EIU), in a report on vaccine diplomacy, said that Pakistan may be getting Chinese Covid vaccine shots in return for its approval of projects linked to China’s Belt and Road Initiative (BRI).
The EIU said that China may also seek to reward Cambodia and Laos with vaccines for their support on territorial disputes in the South China Sea.
EIU said when it comes to donations, which are led by state-owned Sinopharm, the Chinese government has prioritised participants of its Belt and Road Initiative (BRI).
The Chinese authorities have not released complete data as to where vaccines have been sent, probably in an attempt to prevent comparisons among countries. News reports indicate particularly large donations have been pledged to Cambodia (1.7 mn doses) and the Philippines (1 mn). China will also provide loans for recipient countries to purchase vaccines; the Chinese government has pledged to extend a $1bn loan to Latin American and Caribbean countries for this purpose.
Such donations serve several purposes. They aim to create a positive environment for future bilateral economic and political co-operation, facilitate the economic recovery of BRI countries (which are in some cases suppliers of commodities for China), and expand China’s soft power through positive local media coverage, the report said.
The Chinese authorities are able to pursue domestic and overseas vaccination drives in parallel because they face less urgency to vaccinate their own residents; China has consistently kept new daily cases under 200 since April 2020.
China has shipped or plans to export or donate Covid-19 vaccines to a total of around 90 countries as of April 22. The number of countries that China supplies will expand if a Chinese vaccine candidate is approved by the WHO and can therefore become part of the COVAX programme. (ANI/IANS)
Beijing’s lending spree offers growth to developing countries only to leave them saddled with unsustainable debt while increasing their dependency on China, reports Asian Lite News
“Crisis is an opportunity riding the dangerous wind,” goes the old Chinese proverb.
China’s policy to broaden its geopolitical and economic clout comes as a package. Beijing’s Belt and Road Initiative (BRI) provides the country a perfect mix to further this move to gain more significance in world politics. The clout for economic growth risks developing countries to be saddled with unsustainable debt while increasing their dependency on China.
In many vulnerable countries, much of the burdensome debt is owed to a single source: China. According to a study by the International Monetary Fund (IMF), from 2013 to 2016, China’s contribution to the public debt of heavily indebted poor countries nearly doubled from 6.2 percent to 11.6 percent. As of January 2021, according to the IMF, about half of all low-income countries were in debt distress or faced a high risk of entering distress. In light of the high stakes, the terms and conditions of China’s debt contracts have become a matter of global public interest.
A new research analyses 100 such Chinese loan contracts to 24 countries, providing insight into how Beijing uses such agreements to gain leverage. The study, ‘How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments’ calls for attention to seek more transparency in sovereign lending. The study was carried out by researchers from AidData at William & Mary, the Center for Global Development, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics.
China’s broadens its geopolitical and economic clout(IANS)
China’s lending is expanding even more through BRI. Noting a lack of economic feasibility of some BRI projects, many observers suspect that the initiative is partly motivated by China’s desire to stimulate its own economy, obtain strategic assets, and convert its economic access into political and strategic influence in recipient nations.
The study put together by 100 researchers took 36 months to comb through debt information management systems, official registers, and parliamentary websites of 200 borrower countries to compile the dataset of complete loan contracts between Chinese state-owned entities and government borrowers. They also collected a dataset of 142 loan agreements from a group of more than 20 non-Chinese creditors.
The 100 debt contracts in 24 countries around the world has a commitment totalling $36.6 billion, making China the world’s largest official creditor.
All of these contracts were signed between 2000 and 2020. In 84 cases, the lender is the Export-Import Bank of China (China Eximbank) or China Development Bank (CDB).
Many of the contracts contain or refer to borrowers’ promises not to disclose their terms—or, in some cases, even the fact of the contract’s existence.
“Chinese lenders behave a lot like commercial lenders: muscular, commercially savvy lenders who want to be paid on time and with interest,” and the contracts are designed accordingly, said Brad Parks, executive director of AidData, which led the data gathering process.
How China’s loans work
The loan agreements made as part of BRI are written to position China as a “preferred creditor” that could seek repayment first in the event of a problem or default.
This is done through two primary ways: by requiring borrowers to create separate escrow accounts with cash balance requirements that China can seize in case of default. Another clause requires countries to exempt Chinese loans from restructuring efforts with other lenders.
China’s broadens its geopolitical and economic clout(IANS)
These clauses are referred to as “no Paris Club” clauses. Basically referring to the informal group of official creditors that coordinate solutions for debtor countries with payment difficulties.
According to Sebastian Horn, an economist at the Kiel Institute for the World Economy, another key finding of the study is that “Most Chinese loan contracts contain ‘No Paris Club’ clauses, which prohibit countries from restructuring Chinese loans on equal terms and in coordination with other creditors.” This approach to foreign lending effectively gives Beijing sole discretion to decide if, when, and how it will grant debt relief. Christoph Trebesch, also of the Kiel Institute, adds that “China’s practices complicate debt relief efforts in countries that are in financial distress due to the Covid-19 pandemic or other factors.”
Chinese contracts give lenders considerable discretion to cancel loans and/or demand full repayment ahead of schedule. Such terms give lenders an opening to project policy influence over the sovereign borrower, and effectively limit the borrower’s policy space to cancel a Chinese loan or to issue new environmental regulations.
Another point of leverage is that China often includes “cross-default” or “cross-cancellation” provisions that in essence tie various loans to one another. These clauses make it harder for a borrower to walk away from a project and give Chinese institutions bargaining power and policy influence, according to the study.
Deep implications
In such a scenario, the economic benefits of China’s debt-driven projects to recipient nations’ populations are an afterthought. And the lack of transparency in China’s lending obscures its risks to recipient countries, many of which are already vulnerable to or are suffering from financial or fiscal distress. But concealing risks does not eliminate their consequences, and when cash-strapped developing countries fail to pay back the loans for multibillion-dollar projects, it can result in a loss of strategic assets, major hurdles to economic development, and a loss of sovereignty.
For example, unable to repay China for a loan used to build a new port in the city of Hambantota, in 2017 Sri Lanka signed over to China a 99-year lease for its use, potentially as a strategic base for China’s navy.
In Djibouti, public debt has risen to roughly 80 percent of the country’s GDP (and China owns the lion’s share), placing the country at high risk of debt distress. That China’s first and only overseas military base is located in Djibouti is a consequence, not a coincidence.
Elsewhere in Africa, Burundi, Chad, Mozambique, and Zambia are all either in debt distress or at high risk of it, a situation China’s predatory lending practices are exacerbating.
In Argentina, where a $2 billion China Development Bank loan for a railway project had a cross-cancellation clause tied to a $4.7 billion loan from Chinese banks for a hydroelectric dam project. When a new presidential administration came in and tried to cancel the dam project on environmental grounds, the China Development Bank threatened to cancel the railway project loan. Argentina’s government reversed its decision.
Brad Parks, AidData’s Executive Director and a co-author of the report, says that “by shielding their contractual arrangements from public scrutiny, Chinese state-owned banks have made it difficult for other lenders to know if they are positioning themselves at the front of the repayment line.”
Hidden debts to China have also put developing countries—with insufficient foreign currency to repay all of their outstanding obligations to foreign creditors—in an equally challenging position. According to Parks, “non-Chinese creditors are increasingly reluctant to renegotiate repayment terms until they know more about China’s claims.”
The authors of How China Lends warn that restrictions on debt transparency make it difficult for citizens in borrower countries and creditor countries to hold their governments accountable, and call for public debt to be made public.
