China is falling into its own debt trap as Belt and Road Initiative loans pile up
Updated: 03 October 2022 16:54 STI
beijing [China]Oct 3 (ANI): China is falling into its own debt trap as the country’s banks sharply cut lending to low-income countries under its flagship Belt and Road Initiative (BRI) after economies collapsed of borrowing countries have left the Asian giant with huge accumulated loans, according to a report.
Under the BRI, China has sold more than $1 trillion in loans to nearly 150 developing and least-developed countries at high interest rates, becoming the world’s largest for the first time. official creditor of the world.
But the country is learning hard lessons as borrowing countries face currency crises and cannot repay Chinese debts. Nearly 60% of China’s overseas loans are currently held by countries considered to be in financial difficulty, up from just 5% in 2010.
Countries like Pakistan and Sri Lanka are recent examples of China’s worrying situation. Amid ongoing political instability, Sri Lanka’s economy recently collapsed and Pakistan is also on the brink of economic collapse. The two countries are failing to repay their loans, posing a threat to the Chinese economy, the European Times reported.
Recent flooding in Pakistan has forced Islamabad to turn to the International Monetary Fund for a bailout. Similarly, Bangladesh is also experiencing difficulties in servicing its external debt. Several African countries have also been unable to complete BRI projects and are struggling to repay their loans.
According to the European Times, in the first six months of 2022, BRI investment and financing was only 40% of what it was in the same period of 2019. Sri Lanka does not received no new BIS lending in 2022. BIS lending has slowed sharply. since 2017, mainly because an increasing number of infrastructure projects are facing difficulties and a national campaign against financial risks.
According to a study, to secure these BRI projects, Chinese agencies often pay large sums to politicians and military officials of borrowing countries due to which the terms of these loans are kept secret.
Therefore, international credit rating agencies cannot assess the creditworthiness of borrowing countries. So when the economies of these borrowing countries began to collapse, Chinese agencies funding BRI projects were the first to be taken by surprise, the European Times reported.
It is significant that in 2014 only about 10% of borrowing countries under the BRI were facing a liquidity crisis, by mid-2022 about 70% of them were in default. About 40% of the debt of poor countries is owed to China.
The COVID-19 pandemic, followed by the Russian-Ukrainian conflict, has hurt emerging economies. As countries struggle to service their debts, China is expected to face more problems, according to the report.
Unfortunately for China, its plan to hold as collateral the projects it had invested in also failed. Projects have been abandoned or have no commercial value.
The port of Gwadar in Pakistan is not yet completed. Over the past two years, the Pakistani government has failed to pay its debts for energy projects; the agreements have been breached since 2018. Zambia’s international airport, the port of Hambantota in Sri Lanka and the port city of Colombo are unviable and have no commercial value, European Times reported.
The report further states that in late August 2022, Beijing again parried Colombo’s request for debt restructuring with China, saying “the ball is in Sri Lanka’s court”. It is estimated that in 2022-2023, Sri Lanka owes China about $2 billion in debt repayment.
Still reeling from its economic crisis, the island nation has made several requests for debt restructuring to give it breathing space, but each time has been cold.
For Sri Lanka, it is vital to reach a debt restructuring agreement with China to obtain an IMF bailout. But Beijing has instead asked Colombo to discuss the issue with Chinese banks.
According to the State Bank of Pakistan, the country’s central bank, Pakistan is on the brink of economic collapse and poised to follow Sri Lanka’s lead. With the pressure of debt service, the situation should not change.
The only hope for Pakistan to avoid bankruptcy is to reach an agreement with the IMF for a 6 billion dollar aid package. It is reported that the IMF wants to ban Pakistan from borrowing more from China for projects under the China-Pakistan Economic Corridor before extending aid, European Times reported.
On the other hand, growing anti-Chinese sentiments towards Pakistani nationals is another concern for China for its strategy of land grabbing and job creation for its own people at the expense of the local population.
China has also threatened Pakistan with shutting down its power plants unless payments are made in advance, alleging that payments have not been made for electricity already used.
Additionally, many African countries have expressed concerns about unsustainable BRI loans. Zambia has already canceled its external borrowings, which are essentially Chinese borrowings, to stop aggravating its over-indebtedness. This means that 14 projects under the BRI are withdrawn.
Earlier this month, Zambia received a $1.3 billion financial loan from the IMF, with a grace period of five and a half years and a final maturity of ten years.
Zambia specifically said it would completely cancel 12 planned projects, half of which were to be financed by China EXIM Bank, as well as one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital.
In addition, the government canceled 20 of the outstanding loan amounts, some of which were for new projects and some for ongoing projects. Such write-offs are not unusual for Zambia, but almost 30% of Zambia’s debt comes from Chinese partners compared to non-Chinese private creditors.
According to a study by the Observer Research Foundation, Chinese loans account for more than a quarter of the total external loans of highly indebted African countries. China’s total loan to countries on the African continent is estimated at over $140 billion. Among the main recipient countries of Chinese loans are Angola, Ethiopia, Kenya, Republic of Congo, Zambia and Cameroon.
China’s debt trap policy, BRI, is often criticized and China is said to be used to take over vital facilities in other countries and expand its military presence, the European Times reported.
Meanwhile, according to a Wall Street Journal report, “After nearly a decade of pressuring Chinese banks to be generous with lending, Chinese policymakers are discussing a more conservative program, dubbed Belt. and Road 2.0 in internal discussions, which would more rigorously assess new projects. for funding, those involved said.
“They have also become open to accepting some loan losses and renegotiating debt, which they were previously unwilling to do,” the report added.
“As China is increasingly isolated from the international community, the ‘Belt and Road’ has become increasingly important to Xi Jinping’s strategy. Beijing hopes that the 2.0 version of the ‘Belt and Road’ will become more sustainable,” the report concludes. (ANI)