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
- 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.
- A study by the Centre for Global Development, a Washington-based think tank, analyses one important consequence of BRI: debt.
- 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?
- Sovereign debt is a central government’s debt.
- It is debt issued by the national government in a foreign currency in order to finance the issuing country’s growth and development.
- 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.
- Sovereign debt is also called government debt, public debt, and national debt.
How will BRI trigger this risk?
- 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.
- They find that eight countries could potentially face difficulties in servicing their debt includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan.
- 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
- China’s acquisition of Sri Lanka’s Hambantota port after the Sri Lankan government failed to service its debt is an open fact.
- 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.
- 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.
- The think-tank advocates applying globally-accepted creditor disciplines and standards to the Belt and Road Initiative.
Way Forward: Mitigating Lending Risks
- 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.
- 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.
- China is also recommended to provide technical and legal support to developing countries.
- 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.