Hambantota Port, Sri Lanka

Author: Barclay ballard

Aug 13, 2020

China has a rather mixed reputation when it comes to its overseas investment practices. While its money is generally welcomed by developing countries where funds are scarce, Beijing’s accompanying demands can sometimes cause friction. The case of the Port of Hambantota in Sri Lanka is a lesson for all countries that remain cautious about getting caught in the Chinese debt trap. After the Sri Lankan government could no longer meet payments from the port – which was heavily funded by Chinese investment – it had no choice but to cede it to Beijing for a 99-year lease, as well as 15,000 acres of surrounding land. Earth.

This reputation will now be put to the test as many recipient countries struggle to repay while dealing with the economic turmoil caused by COVID-19. Already, reports are circulating that many countries involved in China’s Belt and Road Initiative (BRI) are in need of debt relief. But it remains to be seen whether Beijing grants such a request.

Tighten your seatbelt
Launched in 2013 as a flagship policy of Chinese President Xi Jinping, the BRI aims to facilitate infrastructure development around the world with investments totaling more than $ 1 billion. Notable successes include the introduction of high-speed railways in Indonesia, strengthening of Greece’s maritime infrastructure, and strengthening

Djibouti’s position as a hub for international trade and logistics. Information gathered by the Center for Economic Policy Research’s policy portal, VoxEU, revealed that the BRI’s transport infrastructure projects increased the GDP of participating economies by up to 3.35%.

Many of China’s BIS loans have gone to developing countries. According to Washington, DC-based consultancy RWR Advisory Group, 15 of the top 20 recipients of BIS loans between 2013 and 2020 had an OECD risk rating of five or higher; four were given the highest possible risk factor of seven. The COVID-19 pandemic could quickly make the financial situation of these countries unsustainable.

“The debt situation of BIS borrowing countries varies,” said Scott Morris, senior researcher at the Center for Global Development.
Finance. “Many entered the current crisis with manageable debt, but some were already facing increasing debt risks. Low-income countries, which have had limited access to trade credit and have relied heavily on borrowing from China, are particularly vulnerable to debt distress. This is particularly [the case] for commodity exporters.

According to the New York Times, Pakistan, Sri Lanka and several African countries are among those who have asked Beijing to postpone, restructure or outright write off debt since the COVID-19 pandemic.

has begun. Debt relief is likely to be granted, but it remains to be seen what form it will take. For many countries currently struggling economically, rescheduling is unlikely to be enough and debt reductions will be necessary. It is not clear whether China is ready to go this far, or whether the government will do so in coordination with an international creditor organization like the IMF.

A bump in the road
The COVID-19 pandemic has spread rapidly and has prompted nations around the world to take unprecedented action, much of which has crippled their respective economies. In the developed world, it is increasingly recognized that this economic damage is likely to hit poorer nations the hardest. In April, G20 countries agreed to freeze repayments on bilateral loans to low-income countries until the end of the year, calling on private creditors to follow suit. Despite agreeing to the deal, China has muddled the waters somewhat by saying it will negotiate with borrowers on a tailor-made bilateral basis.

The COVID-19 pandemic has prompted nations around the world to take unprecedented action, much of which crippled their respective economies

“It appears that China intends to continue negotiations through bilateral channels, which undermines the ability of other creditors to pursue a coordinated approach,” Morris said. “If a large number of borrowing countries request relief simultaneously, it may test the ability of the Chinese government to maintain this bilateral approach. China has no experience as a major creditor in a systemic debt crisis. “
Going forward, an important question for the BIS and other forms of Chinese lending is to what extent the terms will be adjusted to reflect the situation of borrowing countries. Lending concessionality is a key tenet of multilateral lenders like the World Bank, but China has historically favored practices more aligned with those of commercial lenders.

In the eyes of the world, China will need to be cautious about how it reacts to the growing number of requests for debt relief. The BRI has been envisioned as much as a public relations exercise for Beijing as it is an infrastructure support program for the world’s poorest countries, but the problems have been mounting for some time. In 2018, a study conducted by the Center for Global Development already predicted that the BRI could bankrupt eight countries. This forecast may now have to be revised upwards.