OBOR Initiative

Who is at risk from China’s Belt and Road Initiative debt trap?


Mains Paper 2: IR | India and its neighborhood- relations.

From UPSC perspective, the following things are important:

Prelims level: OBOR, Paris Club

Mains level:  Concerns raised by Belt and Road Initiative of China


Uncertainty over China’s grace

  1. China’s Belt and Road Initiative (BRI) which seeks to invest about $8 trillion in infrastructure projects across Asia, Europe and Africa has come under intense scrutiny.
  2. A study by the Centre for Global Development, a Washington-based think tank, analyses one important consequence of BRI: debt.
  3. The study finds that it is unlikely that the BRI is likely to raise the risk of a sovereign debt default among relatively small and poor countries.

What is Sovereign Debt?

  1. Sovereign debt is a central government’s debt.
  2. It is debt issued by the national government in a foreign currency in order to finance the issuing country’s growth and development.
  3. The stability of the issuing government can be provided by the country’s sovereign credit ratings which help investors weigh risks when assessing sovereign debt investments.
  4. Sovereign debt is also called government debt, public debt, and national debt.

How will BRI trigger this risk?

  1. To understand this effect, the study first uses sovereign credit risk ratings and World Bank debt sustainability analysis to identify 23 of the 68 countries currently at risk of debt distress.
  2. They find that eight countries could potentially face difficulties in servicing their debt includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan.
  3. Pakistan, which through the CPEC, serves as the centrepiece of the BRI and is by far the largest country exposed, with China reportedly financing about 80% of its estimated $62 billion debt.

Adhering to global discipline

  1. China’s acquisition of Sri Lanka’s Hambantota port after the Sri Lankan government failed to service its debt is an open fact.
  2. Unlike most of the world’s other major creditors, China is not bound to a set of rules on how it addresses debtor repayment problems.
  3. Currently, China is only an ad hoc participant of the Paris Club, a collection of creditor nations which follow a set of rules in dealing with debtor nations.
  4. The think-tank advocates applying globally-accepted creditor disciplines and standards to the Belt and Road Initiative.

Way Forward: Mitigating Lending Risks

  1. The World Bank and other multilateral banks should increase their participation in the BRI and work with the Chinese government to set the lending standards.
  2. Another recommendation is to establish a new creditor’s group which would maintain the core principles of the Paris Club but with China playing a more meaningful role.
  3. China is also recommended to provide technical and legal support to developing countries.
  4. China should offer debt swap arrangements in support of environmental goals where borrowing country debt is forgiven in exchange for a commitment to an environmental objective, for instance, forest preservation.
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