23 November 2020, NIICE Commentary 6486
Fahmida Alam
The Asian dragon’s grand strategy to connect Asia, Africa, and Europe through the Belt and Road Initiative (BRI) comes with some burdensome context for the developing nations. China’s increasing loans to help developing nations have become a growing concern for the dominant actors in the international community. China has become one of the major funding sources for developing countries. According to a study conducted by Brookings Institution (2018), China’s development finance increased significantly after the global financial crisis in 2008, reaching a peak of USD 50 billion in 2009, and since averaging around USD 40 billion per year. However, all these findings are luring the developing countries into an unsustainable debt trap. Countries that are unable to pay the loans now have to settle down in concessional arrangements which works in Beijing’s favor.
China has benefited from the multidimensional vulnerabilities of many developing states by offering low-interest rates for long periods as a development loan under the BRI project. A recent report indicates that around 23 countries are at a great risk of debt distress where eight of them are at a critical concern under the measure of debt sustainability. The term ‘Debt Trap Diplomacy’ refers to the notion that when a state issues an extravagant amount of loan to extract financial or political concessions when a state can’t repay. The emerging countries get lured into the debt trap for the sake of development. The generous amount of loans is given to developing countries who seek such levels of investment, as it is considered necessary for the economic growth and prosperity of many low-income countries. Being saddled with heavy amounts of loans result in the weakening of sovereign power and loss of strategic assets of developing countries.
As a part of the BRI, Djibouti, and Sri Lanka both play a vital role as they can be used to influence and control maritime geopolitics. The Hambantota project is often used as a remarkable example to explain the ‘Debt-Trap Diplomacy’ of China. In the middle of 2017, the Sri Lankan government had to hand over the Hambantota port for a 99-year lease to a Chinese company. China invested USD 1.5 billion in the construction of Hambantota port during the term of President Rajapaksa. The port construction began in 2008 with a USD 307 million loan from the Export-Import Bank of China to build the first phase of the Hambantota Port project at 6.3 percent interest, which is a very high-interest rate by all standards. However, Sri Lankan Port Authority (SLPA) assumed that the new port will help to cater to the growing needs of trade and commerce and lift-off pressure from the Colombo port, but it didn’t happen in reality. The heavy amount of loss led to a downturn in the growth of GDP. Being unable to pay, Sri Lanka had to give up control over the Hambantota port. The SLPA authority retains only 15 percent of the share of the Hambantota International Port Group (HIPG). The 99-year lease has created so many controversies in the international media and community about whether Sri Lanka is falling into a “debt trap” to China or not.
Similarly, African nations are turning into a casualty of debt trap distress. The region is exceptionally delicate and has a history of foreign aid not working due to corruption. There is a possibility of Djibouti falling into the ‘debt trap’ pit, bringing about loss of resources and a decline in economic development. Many scholars have predicted that Djibouti might face the same consequences as Sri Lanka. Over the years, Chinese loans have extended the public debt of Djibouti to 91 percent of GDP, which was 50 percent in 2017. However, the Djibouti government has denied such allegations and stated that they own the majority of shares in each project. In the meantime, the debt of Djibouti is rounded at 77 percent of its annual GDP. Although the officials have repeatedly denied the debt distress and stay firm on repaying China, the 8 percent GDP growth curve projects a different scenario. If this continues, then Djibouti will be the next domino to fall under China’s influence since Chinese firms own most shares in different projects. On various occasions, China has been called out as an ‘aggressor’ and African states as the ‘victims’ in western narratives. Western states and media have always expressed their grave concern about the BRI-related projects as a tool to initiate debt-trap diplomacy. Mike Pompeo, the US State Secretary, has given a warning to the African and Latin American countries to be aware of the ‘debt-trap scheme’ of China.
There isn’t any kind of protocol or any multilateral framework set by the IMF or World Bank while giving out money to the borrowers. However, if a country falls into the debt trap, then Beijing opts for concessions or any other arrangement, e.g., port lease, development contracts, and others, thereby increasing its overall influence in the country. Many countries already have some due loans to the IMF and World Bank and further lending from China pushes them towards a multidimensional complex. China’s extensive lending can hamper the balance between the states in terms of finance and bring a worldwide debt crisis.
