China’s Ambassador to Sri Lanka, Qi Zhenhong, announced on March 21 that his country is considering a $1 billion loan and a $1.5 billion line of credit for Colombo to purchase goods from China. There is, however, growing resistance in Sri Lanka against further borrowing from China after the island nation had to hand over control of the port of Hambantota in 2017 because it failed to meet its repayment commitments.
The ongoing multi-billion dollar Colombo Port City project is also funded by China. Beijing’s debt trap diplomacy, which critics say is a ploy to grab strategic assets by granting loans on terms that end up being impossible for countries to repay, is proving to be a major geopolitical challenge.
China is now the world’s biggest lender, according to AidData, a research lab at the College of William and Mary, a major public research university in Virginia, US. It offers more money to the developing world than traditional lenders, including the World Bank, International Monetary Fund and member countries of the Organization for Economic Co-operation and Development (OECD) combined.
The funding generally goes to projects under President Xi Jinping’s flagship project, the Belt and Road Initiative (BRI), and is largely concentrated in the Indo-Pacific region. Unlike the development finance offered by traditional lenders, these are like ordinary commercial loans. They often come with non-disclosure clauses under which the borrowing country must keep the terms and sometimes even the existence of the loans secret. It violates the basic principle that public debt must be transparent so that borrowing governments can be held accountable by taxpayers. According to the latest figures from AidData, Chinese loans to the developing world amount to around $843 billion, while hidden debt is $385 billion.
Since most loans are given to countries with weak economies and unlikely to obtain loans from reputable lending institutions, China is often able to impose favorable terms and rates. high interest. And the hidden nature of these loans makes them untraceable and immune to scrutiny. Often only Chinese companies are allowed to work on projects funded by these loans and most work, excluding casual labor, is done by Chinese citizens.
For example, in the two major projects in Sri Lanka – the port of Hambantota and the port city of Colombo – the loan agreement specified that the China Harbor Engineering Company would be the construction contractor. The failure to support the local economy and the preference for Chinese workers has led to widespread protests in several countries, including Beijing’s “always friend”, Pakistan.
The Pakistani coastal town of Gwadar, where China is building a port and allied infrastructure as part of the China-Pakistan Economic Corridor, witnessed multiple protests last year as the Chinese began monopolizing fishing rights in the area and imposed humiliating security checks on local populations. .
Chinese lenders offer loans at higher interest rates, close to commercial rates. For example, the rate for the Hambantota project was almost 6.5%, about three to four times the rate offered by the IMF and the World Bank for similar projects. The repayment schedules are just as rigorous. Chinese loans often have a repayment window of less than 10 years, while traditional lenders offer up to 30 years.
About 40 low- and middle-income countries now owe more than 10% of their annual economic output to Chinese lenders. In the case of Djibouti, Laos, Zambia and Kyrgyzstan, the corresponding figure is above 20%. As indebtedness increases, this gives China the opportunity to take over projects and turn them into strategic assets. Most Chinese money is invested in infrastructure projects like roads, railways, ports, mines and energy resources.
Like Hambantota and Gwadar ports, there are many other big projects like Entebbe airport in Uganda, Mombasa port in Kenya, military base in Djibouti and railway projects in Laos and Nepal which are financed by Chinese debt. In the days to come, when the Indo-Pacific is the world’s preeminent theater of great power politics, debt diplomacy could give China unrivaled leverage in the region and could turn into a strategic nightmare for the world. ‘India.