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Chinese ‘debt trap’ fuels Sri Lanka, Pakistan crises

Amidst current protests triggered by political skulduggery, the economic mismanagement by the incumbent governments in Sri Lanka and Pakistan is the less-talked, but real, Chinese “Debt Trap.”

The crises are undoubtedly fed by politicians trying to enrich themselves while sticking to power. But they get short term support from Chinese projects financed by the latter’s banking institutions that, when they add up and are not debt-serviced on time, become economic noose around the beneficiary’s neck.

It is the Belt and Road Initiative (BRI) in Sri Lanka where the government collapsed in the face of street protests caused by severe shortages of essential commodities. In Pakistan, it is the much-bigger China Pakistan Economic Corridor (CPEC) is infamously called the “Chinese East India Company”, a symbol of colonization. That voice, muted through media’s suppression, promises to return as Pakistan goes to the polls later this year.
While the CPEC’s working is bound to raise questions, China is about to extend it, or move separately, into the Taliban-ruled Afghanistan. Kabul, unrecognized by the world community and hit by economic sanctions, is desperate for funds and wants the Chinese to come and explore and exploit its huge copper reserves.

The list is growing of those ‘trapped’. Over forty countries have sorely felt the impact of the Chinese “good Samaritans” ready to pull their people out of poverty, but land them into debts that multiply and become difficult to be serviced, leave alone repaid. Among them are Laos, Zambia and Kyrgyzstan.

They include most less-developed economies, but some like Malaysia are intermediary. Despite a significant ethnic Chinese population, Malaysia has partially fought off the Chinese economic influence. Like Malaysia, a less- developed Myanmar also cancelled some Chinese-financed projects.

An interesting commonality is that most of them fight shy of going to Western banking institutions like the World Bank and the International Monetary Fund (IMF) where interests are lower, but terms and conditions are strict and transparent. Changes are sought to legislations and not through political diktats. The IMF has ‘paused’ its talks with Pakistan till a credible government takes office. This no-nonsense approach irks the politicians who prefer to be mollycoddled by the Chinese.

Both Sri Lanka and Pakistan delayed going to the WB and IMF, hoping to get loans from friendly countries. They succeeded, but partially, given the global economic slowdown worsened by the COVID-19 pandemic. The IMF becomes their last resort, when their economies are already wrecked, substantially, by the Chinese “debt trap.”
China, of course, denies any ‘trap’. But several geopolitical experts cite Sri Lanka as an example of China’s “strategic trap diplomacy or “debt-trap diplomacy”. What needs seeing is that most Chinese debts are off-the-book. These are commercial lending and never shown in the government record available for public information.

Politics has played a definite role in Sri Lanka as the Chinese secured the Hambantota port project that lies in the area of the ruling Rajapaksa family. Mahinda Rajapaksa was Sri Lanka’s president when China signed the Hambantota port deal in 2007. Under Maithripala Sirisena, the project was sought to be dropped, but when the Rajapaksa family returned to power, with three ministers from within the family, the project got revived – to the detriment of the Lankan people.

The Chinese lenders also secured the port development and other contracts to their compatriots. The project became controversial and left Sri Lanka grappling with growing debts. When it failed to pay interest and repay the debt, it had no choice but to give the Chinese firm, China Merchants, the Hambantota port on a 99-year lease in return for more loans. This was the impact of a $1 billion-dollar Chinese loan. Over the years, China is said to have given $12 billion to Sri Lanka.
China is the top lender country, according to the AidData research lab at William & Mary, a US university in Virginia. Over an 18-year period, China has granted or loaned money to 13,427 infrastructure projects worth $843 billion across 165 countries. Its estimated under-reported lending amounts to $385 billion. Its average annual lending is about $85 billion while that of the US does not touch $40 billion.
Chinese government companies get the contract for such development projects. Its loans are guaranteed by a cash deposit by recipient countries in bank accounts controlled by China. Simply put, China holds the right to withdraw the required amount from the bank account if the target country fails to pay interest or repay the loan.

Another problem is the rate of interest on Chinese loans. China targets countries that face financial issues inviting downgrading by ratings agencies, making loans from other creditors difficult. China offers loans at commercial rates through its banks and lending institutions at four-six per cent against about one percent from other lenders such as the World Bank.

Further, Chinese loans are to be repaid in a relatively shorter period around 10 years or 15 years against an average of 28-30 years from other lenders. That is, a country taking a loan from China has to pay higher interest and more money in less time.
To service the debt, weak economies take more loans, invariably losing real estate in the form of equity. This is the big picture, where Sri Lanka fits in. Hambantota port of Sri Lanka is an example.

About the Author
Fabien Baussart is the President of CPFA (Center of Political and Foreign Affairs)
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