Debt problems due to Belt and Road

The Center for Global Development has researched the Debt Implications of ‘One Belt, One Road’.

The Center for Global Development has researched the Debt Implications of ‘One Belt, One Road’. In their paper they assess the likelihood of debt problems in 68 countries identified as potential Belt and Road borrowers.

Based on the pipeline of project lending associated with Belt and Road, they conclude that eight countries are at a high risk of debt distress. They identify Djibouti, The Maldives, Laos, Montenegro, Mongolia, Tajikistan, Kyrgyzstan, and Pakistan as the countries of greatest concern.

The authors then examine how China responds to cases of debt distress and find that China has provided debt relief in an ad hoc manner. Some of their examples include;

• In 2011, China reportedly agreed to write off an unknown amount of debt owed by Tajikistan in exchange for some 1,158 square kilometres of disputed territory. At the time, Tajik authorities said they only agreed to provide 5.5 percent of the land that Beijing originally sought.

• In 2011, with Cuba in a desperate economic situation and seeking debt relief, China, its largest single creditor, agreed to restructure between $4-6 billion of the debt. The details of the transaction were not disclosed, but it reportedly included an agreement by China to extend additional trade credits and financing for port rehabilitation. Some recent reports indicate that some of the debt was forgiven.57

• The IMF estimates that China has delivered over 80 percent of what it is expected to provide under HIPC. It was a creditor to 31 of the 36 HIPC countries, and the most recent publicly available information indicates that it provided relief in at least 28 of them, including 100 percent forgiveness for several (e.g., Burundi, Afghanistan, and Guinea).

• With Sri Lanka unwilling to service a $8 billion loan at 6 percent interest that was used to finance the construction of the Hambantota Port, China agreed in July 2017 to a debt-for-equity swap accompanied by a 99-year lease for managing the port.

They note that China has also been willing to extend further credit, so a borrower can avoid default.

The paper concludes with recommendations on how China’s behaviour as a creditor would increase, up to standards that other major sovereigns and multilateral creditors have adopted. They argue China should pursue alignment with other major creditors, because there should be appeal in being a good citizen, and to be more effective as to protect its own interests as a creditor. They recommend;

1. Multilateralizing Belt and Road lending.
The authors note that the creation of the Asian Infrastructure Investment Bank (AIIB) has been positive for international cooperation, and embracing multilateral norms, but it remains small as a share of China’s international financing. Most of the financing so far has been provided by the China Development Bank, Exim Bank, and the Silk Road Fund, which do not adhere to global standards. The first recommendation is for China to work on detailed agreements with the World bank and other Development banks on lending standards.

2. Other Mechanisms for standard-setting in Belt and Road.

a. A post-Paris Club approach to collective creditor action
China has until now declined to become a member, determining that its interests are better served outside the club, and has sufficient leverage in bilateral relationships to protect its interests. The writers posit China could join the Paris Club, or the Paris Club could be redesigned, maybe with the Chinese as architects.

b. Another way could be to implement a China-led G20 sustainable financing agenda.

3. China as a donor
China’s role as an aid donor is expanding rapidly. They graduated from aid assistance from the World Bank in 1999, and in 2016 were one of the largest donors. However, the authors suggest China could direct some the aid in ways that mitigate the risks of commercial lending and promote the development impact of that lending.

a. Finance technical legal support to developing country borrowers, to address asymmetries in financial sophistication between Belt and Road creditors, primarily Chinese, and lenders.

b. Offer debt swap arrangements in support of environmental objectives, where debt is forgiven in exchange for the country's commitment to, for example, preserve a tropical forest.

China has made it very clear that OBOR project must be commercially viable and that the impression that these investments are scalable without sovereign guarantees is a complete misnomer. These debt issues are legacy projects before the Chinese become more stringent about ROI targets etc