Caught in a “strategic debt trap”

At the Munich Security Conference on February 19, Bangladesh Finance
Minister A.K. Abdul Momen posed a question to India?s External Affairs Minister S.
Jaishankar. He asked if the Quadrilateral Security Dialogue (Quad, comprising the US,
India, Japan and Australia) would be able to provide the kind of financial assistance
that China is currently offering. ?China comes forward with a basket of money and
aggressive proposals, affordable proposals, and then you have a problem. What to
do?.? In response without naming China, Jaishankar said, ?We have seen projects
which are commercially unsustainable; airports where aircraft don?t come, harbours
where a ship doesn?t come.? This link was made more clear when Jaishankar said,
?..bad, unsustainable projects don?t end there. Debt becomes equity and that becomes
something else.? Thus, Jaishankar said that it was ?very important? for countries to
make ?informed decisions?.1
What we are witnessing in Sri Lanka is exactly that . In fact Sri Lanka?s financial crisis
is leading to a humanitarian crisis that could ultimately push the country into
bankruptcy. And Chinese ?strategic debt trap diplomacy? is the primary cause of the
country?s financial crisis, which has come to a head after two decades of heavy
Chinese investment.Sri Lanka adopted the Chinese model of infrastructure-led growth
in the early 2000s on the premise that it would generate jobs and usher in prosperity.
No reliable figures are available, but the cumulative value of Chinese infrastructure
investment in Sri Lanka is estimated at over $12 billion between 2006 and 2019.
Colombo has drawn billions in investment under China?s Belt and Road Initiative (BRI).
The program was launched in 2013 to build ports, roads, railways, pipelines and other
infrastructure across Asia.
Sri Lanka?s financial crisis was brought to light when the government declared a
national economic emergency in August last year after a sharp fall in the country?s
currency. Its foreign debt has increased steadily since 2014 (30 percent of GDP),
reaching 41.3 percent of GDP in 2019, and this, in turn, has put a severe load on the
country?s debt service. The country?s foreign reserves are also depleting significantly
faster and stand at a meagre USD 1.6 billion. It also has foreign debt obligations
exceeding USD 7 billion in 2022, including repayment of bonds worth USD 500 million
in January and USD 1 billion in July 2022.2
1
?Countries Saddled With Large Debts?: Jaishankar Takes Dig at China?s ?Debt-Trap Diplomacy?
(thewire.in)
2 Sri Lanka needs to save its economy from China?s debt-trap policy: Global Strat View- The New
Indian Express
Food, milk, medicine and other essential commodities are in short supply as inflation
rate surges past 17%. Power cuts are commonplace and some people have died of
heat stroke while waiting in long lines to buy fuel.The economic woes have resulted in
shortage of medical consumables, which form a substantial part of import in Sri
Lanka?s medical infrastructure. Motorists have had to deal with long queues daily in
order to fill their tanks as the country has been facing a severe fuel shortage. Sri Lanka
has deployed troops at fuel stations as protests have erupted across the island nation
over shortages.
Beyond the Chinese financial debt, Colombo is also caught in a ?strategic trap,? an
extension of a ?debt trap? because China shields Sri Lanka from criticism of its human
rights record at the United Nations and favours an authoritarian, heavily militarised
model of governance over democracy. Today Colombo is paying the price of this trap.
According to Asanga Abeyagoonasekera, a Sri Lankan geopolitical analyst, ?The
quantitative economic projection of debt-trap falls short in capturing the strategic depth
of Chinese projects. The Chinese projects have a long-term strategic design that could
comfortably bring a ?hybrid model? of civil-military activity to the country, a security
concern for Sri Lanka and the entire region.?3
Since the island country is cash-strapped, it is becoming difficult not only for importers
to clear cargo containing essential items, but manufacturers are also unable to acquire
fresh raw materials. Sri Lanka stands as a clear example of what happens to a country
which falls into debt due to public investment projects sponsored by China as part of
its Belt and Road Initiative.
To get BRI loans, the recipient country has to sign a memorandum of understanding
with China. Most of the financing of BRI projects are done through bilateral agreements
between the lending banks and the recipient governments against sovereign
guarantees. The first casualty is transparency, as there is usually opacity around
sovereign guarantees. Loans are also collateralized against local resources, the
borrower pledges to the lender a specific asset as security against the loan. Nearly
two dozen recipient countries of BRI funding are faced with debt distress.
As far a debt trap goes, the position of Pakistan is the most precarious. Pakistan tops
the list of recipient countries of BRI assistance, with projects worth USD 27.3 billion.
Similarly China has snared Pakistan in the BRI debt trap with high-interest rates, stiff
repayment terms, lack of transparency. China is charging higher interest rates for the
Karot Hydropower project in Pakistan, the interest rate is as high as 5.11 per cent.
China Three Gorge South Asia Investment Limited holds 93 per cent ownership stakes
in Karot Hydropower. A typical loan from Chinese institutions under the BRI entails an
interest rate of 4.2 percent and a repayment period of less than 10 years, as against
a loan from any other international consortium which typically carries an interest rate
3
India tries to pry Sri Lanka loose from China?s embrace (cnbc.com)
of 1.1 per cent and a repayment period of 28 years.the burden of hidden and sovereign
debts would be a major cause of concern for Pakistan, with assets of Pakistan tied to
the Chinese economy.
Mirroring the discussions around Pakistan?s Gwadar port and Sri Lanka?s Hambantota,
the issue of a ?debt trap? is also a discussion point for Bangladesh. Dhaka requires
external funding for its ?flagship development programs? financing of which goes
beyond domestic affordability, and the geo-political eminence & commercial
noteworthiness of Bangladesh has made China pay special heed to catch this moneymaking market.
Bangladesh needs to negotiate carefully before inking any financial agreement, focus
more on soft-loan and ensure timely implementation of projects.From 2009 to 2019,
the Dhaka Tribune found that China invested an estimated $9.75 billion in
transportation projects in Bangladesh. While Pakistan is in a difficult position with
respect to its indebtedness to China, Bangladesh has been a cautious borrower.
Nevertheless as the second highest recipient of China?s investment in South Asia after
Pakistan, Bangladesh which imports the highest volume of goods from China should
also be very worried.
Despite its deep pockets China has not yet acceded to a Sri Lankan request for a $2.5
billion credit line or a restructuring of its overall debt. About 22% of Sri Lanka?s debt is
owed to bilateral creditors ? China and Japan (10% each) as well as India (2%). Sri
Lanka has sought IMF bailouts 16 times in the past 56 years, second only to debtridden Pakistan. Meanwhile on top of $2.4 billion India has transferred since January
by way of a currency swap, loan deferment and credit lines, Sri Lanka sought a $1.5
billion credit line from New Delhi to buy essential commodities.India is trying to stabilise
the region.More than a dozen refugees have reached India by boat and Indian media
reported, citing intelligence sources, that an estimated 2,000 more would follow in the
coming days. EAM Jaishankar has voiced his concern over postponement of surgeries
in some of the Sri Lankan hospitals due to shortage of drugs and consumables. New
Delhi has started issuing medical visas for serious patients on priority basis. The
International Monetary Fund (IMF), and other stakeholders should cooperate to help
countries along the Belt and Road facing financial imbalances and high debt. This will
not be easy. Before providing aid, the IMF will require transparency into BRI loan
terms, which are notoriously opaque and can burden countries with high debt. India is
trying to convince Colombo to implement an IMF program which will call for deep
economic reforms. (Courtesy Daily Sikh)