Nadi, Fiji — China’s Belt and Road Initiative (BRI) and debt sustainability are often spoken about in the West as an increasing cause for concern. Examples often include BRI projects in South Asia such as Sri Lanka’s Hambantota Port, which China Merchants Port Holdings took over in 2017 after signing a 99-year lease agreement, and Pakistan’s China-Pakistan Economic Corridor (CPEC), which has been said to be contributing to the country’s current debt woes. How real are these worries and are they justified?
At a seminar organized at the 52nd annual meeting of the Asian Development Bank this week entitled “Is Debt Sustainability a Cause for Concern?”, Ishrat Husain, Pakistan’s federal minister and advisor to the Prime Minister on institutional reforms and austerity, expects that the country's level of debt service will likely breach 40% of government revenue this year from 37% previously as a result of the 33% depreciation of Pakistan's currency.
The country’s total external debt has also ballooned and now accounts for 33% of the total from 24% in the past few years. “We are quite worried about it,” he admits. Breaking down the external creditors, Hussain explained that 72% of the total external liabilities are public or publicly guaranteed debt of which 33% are owed to multilateral institutions, with banks and bonds accounting for 14% and the rest to bilateral creditors.
He added that China, which some have suggested has contributed to the country’s current debt problems, only accounted for 11.5% of the total external debt and liabilities. Husain explained further that when CPEC was announced by Chinese President Xi Jinping in 2015, the total package was US$45 billion over 15 years. “If you look at Pakistan’s annual investment programme, both public and private, it is about US$50 billion. If you take US$4 billion of the CPEC, it is just a small fraction of Pakistan’s overall annual investment programme. People should look at facts.”
CPEC consisted of three packages, he pointed out. “US$35 billion was earmarked for power projects. Pakistan faced serious energy shortages from 2010 to 2015 which brought down our exports reducing the country’s growth rate.” With its existing policy on independent power producers, China came in under this same policy without any extra concession, Husain says. “It was foreign direct investment, and the commercial loans came in via the Chinese companies from China Export-Import Bank and China Development Bank, which was paid out from the tariff.” There was no loan obligation on the part of the Pakistan government.
The second package was a US$6 billion loan to the government with a 2% concessional interest rate over 20 years with a five-year grace period. China also provided grants for the third package of CPEC to build an international airport, improve water supply and roads. “Out of the total foreign debt of US$100 billion, only US$11 billion is owed to China. All the propaganda against CPEC and BRI is really not based on facts,” Husein says.
ADB President Takehiko Nakao commented that China’s BRI is understandable given the history of trading in that area including in Central Asia. Creating connectivity is also beneficial. “What is important is that projects have to make economic sense, achieving a certain return, with project integrity, based on a good bidding system and caring for the social and environmental impact,” says Nakao.
China’s lending to the smaller countries is likely to have a more serious impact. Nakao shared that he has discussed with the Chinese authorities how big lenders such as multilateral agencies and commercial creditors approach lending. “We have a system of analyzing the debt situation of a country. There also are OECD guidelines on export credits. In the case of official development assistance (ODA) loans, they have to be untied.”
China still considers itself a developing country and see these types of activity as a form of South-South cooperation, he pointed out. “But it is more like a big economy supporting less developed countries. Therefore China should abide by international standards. Even China is having difficulty about the data such as the amount of lending to state-owned enterprises and private enterprises,” says Nakao. He also underscored that debt sustainability is not just an issue for the borrower but also the lender. “If you are unable to get the money back it is also a problem for them [lender].” He believes that China is now realizing this is an issue.
Good governance and transparency around the borrowing arrangement is so important especially for infrastructure projects, adds Sonja Gibbs, managing director, global policy initiatives at the Institute of International Finance (IIF). “Having a framework or guideline can really help. Key is the implementation. But also what’s important is reconciling the way in which China does business with what you might see as standard operating procedures elsewhere. Keeping a multilateral approach is also one reason why the Paris Club continues to encourage China to become an official member rather than an observer.”
Gibbs shares that lending to low-income developing countries has become far more complex with the share of concessional loans declining to 28% from 35% in 2017. Meanwhile, she noted that lending by China to these countries now accounts for 20% from almost being non-existent in 2007.