Sri Lanka’s current bitter debt crisis was the topic of discussion at the annual spring meeting of global financial leaders in Washington under the auspices of the World Bank and IMF last month (April 2022).
Sri Lanka is ridden with a debilitating debt crisis, that has resulted in an acute shortage of foreign currency, which means that the country cannot pay for much-needed staple food and fuel, leading to severe scarcity and sky-rocketing prices.
The island nation, on 12 April, announced a pre-emptive default of all its foreign debt, totalling USD 51 billion, as an emergency measure. The crisis is a fallout of the large debt owed by the nation to China, which has, so far, announced emergency humanitarian assistance to Sri Lanka, but not committed to any debt rescheduling.
Sri Lanka’s debt crisis is much to do with China’s Belt and Roads Initiative (BRI) projects like Hambantota Port and Colombo Port City, under which Chinese financers lent large amounts of money with rigorous terms of repayment. In 2021-22, Sri Lanka’s debt repayment to Beijing amounted to USD 2 billion, and China’s unsatiating interest in foreign assets led to the lease of Hambantota Port to China for 99 years.
Another notable case in China’s insidious debt-trap diplomacy is Pakistan. Pakistan, that features in World Bank’s list of 10 largest borrowers, is heavily indebted to China. China is unscrupulously using its debt-trap diplomacy to seize huge assets in Pakistan. Under the BRI, the China-Pakistan Economic Corridor project aims to connect Gwadar Port in Baluchistan to the Xinjiang province in China.
Countries like Maldives, Madagascar and Tajikstan are also reeling under the Chinese debt trap. This is a huge warning sign to most unsuspecting developing countries that have been recipients of huge loans from China under the BRI.
A recent report by Virginia-based research lab, AidData, showed that China’s BRI has compounded the debt burden of countries, already hit by the Covid pandemic, multifold, with hidden loans worth $385bn.
Hidden debt is that debt which is not reported to the World Bank. Chinese debts are systematically underreported to the World Bank’s Debtor Reporting System (DRS) by lending to private firms rather than government institutions. AidData tracked over 13,000 projects worth $843bn across 165 countries, including $385bn in what it reports as “hidden” debt.
The latest study shows lower- and middle-income countries are burdened with staggering hidden debts worth $385 bn. According to the report, debt exposure of 44 countries has exceeded 10 per cent of their GDP. Djibouti, Laos, Zambia and Kyrgyzstan have debts to China equivalent to at least 20% of their annual GDP.
Since 1952, the World Bank’s DRS has captured loans issued to government borrowers, and private borrowers with government repayment guarantees. However, DRS only tracks the obligations of public sector in which the government holds a 50 per cent or more share.
According to the report, DRS has tracked $310bn worth of debt to lower- and middle-income countries from China with explicit government liability protection from host nations. AidData has tracked an additional $366bn worth of loans not recorded by DRS.
Much of the debt owed to China relates to large infrastructure projects like roads, railways and ports, and also to the mining and energy industry. China also customarily lends at higher rates of interest than western governments. At around 4%, these loans are close to commercial market rates and about four times that of a typical loan from the World Bank or an individual country such as France or Germany.
The required repayment period for a Chinese loan is also generally shorter – less than 10 years, compared to around 28 years for other lenders’ concessional loans to developing countries.
Chinese state-owned lenders also typically require borrowers to maintain a minimum cash balance in an offshore account to which the lender has access.
If a borrower fails to repay its debt, China can simply debit funds from this account without having to collect on bad debt through a judicial process.
China is determinedly and efficaciously seeking to usurp the bastions of the West, in order to assert its prime objective of becoming the nonpareil power in the world. In fact, China has been aggressively using military, economic and diplomatic might to spread its tentacles across the globe.
China’s BRI is one of the largest infrastructure and investment projects in history, covering more than 68 countries, including 65% of the world’s population and 40% of the global gross domestic product as of 2017.
In fact, China has taken its onslaught to the very neighbourhood of the US, what with it engineering lucrative deals in South America. Reuters reported, on 5 April, that US senators expressed consternation, during a senate foreign relations subcommittee hearing, that China has made serious inroads into the region that was seen as traditionally aligned with the US.
Beijing’s trade with the South American region has soared by over USD 300 billion from 2002 to 2020, with USD 160 billion directly invested during that time. Twenty of the 31 Latin American countries have signed on to be part of the BRI, China has financed infrastructure projects in another five nations, and several countries have been persuaded to drop diplomatic relations with Taiwan, an independent island nation that China views as part of its sovereign territory.
China’s snare of economic partnership and promise of infrastructure and economic growth has seen gullible nations fall prey to its sparkling and humongous reserves of financial resources. Cash-strapped nations fail to realise this is only a vicious debt trap and, before too late, will have the large dragon seize vital assets within their borders. It’s a case of promise of prosperity and hope turning to a nightmare and despair, as in the case of Sri Lanka.
Sri Lanka is a wake-up call to beleaguered nations to be wary of China’s aggressive debt-trap diplomacy. For, redoubtable China’s prime objective is to change the status quo of the world to its advantage, and to, in fact, rule it, at no matter what cost to other nations.
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