Studies by global research organizations reveal that the Belt of Road Initiative of China, with the help of which Beijing is trying to snare low- and medium- income countries into debt trap, is marked by high interest rates, stiff repayment terms and lack of transparency.
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 this, a loan from an international donor consortium like the Development Assistance Committee of Organization for Economic Co-operation and Development, through which countries like Germany, France or Japan lend, carries an interest rate of 1.1 percent and a repayment period of 28 years. In fact, for BRI projects, interest rates can be even higher. For the Karot Hydropower project in Pakistan, the interest rate is as high as 5.11 percent. China Three Gorge South Asia Investment Limited holds 93 percent ownership stakes in Karot Hydropower.
While the recipient countries of BRI assistance are finding themselves in a difficult position due to the rising debt levels, the position of Pakistan is the most precarious. Pakistan tops the list of recipient countries of BRI assistance, with projects worth $27.3 billion. The flagship BRI project in Pakistan, the China Pakistan Economic Corridor, has landed Islamabad in a precarious position. According to an International Monetary Fund study, the external debt of Pakistan ballooned to $90.12 billion in April 2021, with Islamabad owing China $24.7 billion, or over 27 percent of the debt burden of Pakistan. According to the IMF, the burden of hidden and sovereign debts would be a major cause of concern for Pakistan in the coming days. Assets of Pakistan will be tied to the Chinese economy.
There are 26 CPEC-related projects in Pakistan. These include eight projects related to energy, four related to transportation, one related to communication, three related to education, two pertaining to banking and financial services, one related to reconstruction and rehabilitation, and two projects related to government and civil society.
While the stated objectives of China’s BRI projects are noble, meeting the huge investment needs of the less developed and the developing world in the infrastructure sector, a little scrutiny will reveal the truth. The BRI loans, to get which the recipient country has to sign a memorandum of understanding with China, are mostly extended by State – owned Chinese banks. Most of the financing of BRI projects are done through bilateral agreements between the lending banks and the recipient governments against sovereign guarantees. In many cases, the projects are executed by Chinese firms to whom the loans are routed. The host country gains little.
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 loan. In the case of BRI projects in Angola, this was oil.
U. S. Vice President in the Donald Trump government Mike Pence hit the nail on the head when in 2018 he said that BRI investment choices were centrally driven and the primary objectives were geo-political. “China used debt diplomacy to extend its influence. The terms of the loans are opaque at best and the benefits flow to Beijing,” he said. He feared the Hambantota Port in Sri Lanka could be used as a forward military base for China’s growing blue water navy.
While there is one view that these BRI investments are justified because China
has a large foreign exchange surplus, much of which is held in US treasury bonds and BRI is a way of investing this surplus amount, what leads to the suspicion that the BRI investments are not guided by economic considerations at all and are driven by geo-political objectives is that much of these investments go to economies that are below investment-grade or in some cases not rated at all. Among the recipient countries of BRI investment, there are 17 economies with investment grade of BBB or above, 29 economies are below investment grade and 14 have no ratings at all, according to the OECD Business and Finance Outlook 2018.
Pundits say one should not waste resources by financing non-economic projects as projects that do not pay adequate returns ultimately result in problem loans for lenders, but Beijing does not seem to care. BRI projects are finished with less time overruns, but quality, safety, social equity and the environment are compromised. The cumulative value of such projects
described as “troubled” since 2005 is estimated to be nearly $370 billion. Among these are energy projects worth about $5 billion in Pakistan.
The flip side of BRI is that 23 recipient countries of BRI funding are faced with debt distress. Among them eight countries are of particular concern: Djibouti, the Kyrgyz Republic, Laos, the Maldives, Mongolia, Montenegro, Tajikistan and Pakistan. In the case of Djibouti, in just two years the public external debt rose from 50 percent to 85 percent of GDP, much of this being government – guaranteed public enterprise debt owed to China Exim Bank. Djibouti, incidentally, is the site of China’s only overseas military base.
The most glaring example of this debt diplomacy is the Hambantota Port in Sri Lanka. Interestingly, China financed under BRI the port project which in 2002 India refused to take up, realizing that the port had little commercial prospect. China, however, spent $1.3 billion for the port project, financed by the Ex-Im Bank of China. Not unexpectedly, the expected traffic volume did not materialize. By the end of 2016, the port notched a cumulative loss of $300 million, says a study on BRI projects by Commercial Dispute Resolution Magazine.
Sri Lanka reached an agreement with China Merchants Port Holding Company to run it at lease for 99 years. When it is taken into consideration that Sri Lanka abuts on the sea route between Malacca Straits and Suez Canal, it is clear that placing the Chinese navy in Hambantota, as feared by Mike Pence, would enable Beijing to disrupt the passage of mercantile marines through this route. The total BRI investments in Sri Lanka since 2013 amount to $8.8 billion. Sri Lanka today is a highly indebted country. The debt to GDP ratio of Sri Lanka today is 90 percent, interest payments account for 70 percent of government revenue. Many of the infrastructure loans had been taken under a sovereign guarantee. Colombo’s debt to Chinese policy banks amounts to $8 billion. Following a strong protest from Delhi to Colombo, China had to suspend a project to install hybrid energy plants in three islands of Lanka, close to the coasts of Tamil Nadu in India.
The China Pakistan Economic Corridor (CPEC), the flagship BRI project in Pakistan, too, has been driven by geop0litical interests of China; not any altruistic motive to help Pakistan. The road connects south-west China with the Gwadar Port near Karachi, where it is believed, China wants to develop an escape route from its vulnerability in the South China Sea through which 80 percent of China oil imports and 60 percent of total maritime trade pass. In the event of war, South China may face a blockade. China has already antagonized littoral states in the South China Sea by making illegal claims in their territorial waters and building artificial islands to station the Chinese military.
President of Pakistan Imran Khan’s party Pakistan Tehreek – e -Insaaf, when in opposition, had questioned the terms and conditions of CPEC projects and the lack of transparency around them. According to a study by AidData, a Virginia, USA, based research lab, the $134 million Sachal Wind Farm Project underscores the phenomenon of hidden debt in CPEC projects. The orange line project in Lahore, a joint venture between China Railway
Corporation and China North Industries Corporation and financed by Ex-Im Bank of China, lacks information on rate of interest for the funds and the repayment period for the debt.
Perhaps Pakistan, too, has swallowed the 3,000-km long CPEC that would connect the Xinxiang in China to Gwadar Port in Pakistan with rail, road, pipelines and optical cable network with a geopolitical consideration in mind. CPEC passes through the Gilgit-Baltistan that India claims as its own territory. The presence of Chinese infrastructure in this area will strengthen Pakistan’s hold over disputed area. Islamabad, however, has to pay a big price for this, in terms of the debt trap.
That Pakistan today has no way out but to toe China’s line is evident from the
way Pakistan President Imran Khan in his visit to Beijing during the Winter Olympics endorsed China’s misdemeanours in Xinxiang, Tibet, Taiwan and South China Sea. In December 2021, despite an invitation from the USA, Pakistan opted out, at the behest of China, of the Summit for Democracy convened by American President Joe Biden. Washington did not invite Beijing to the summit.