Economic
growth or debt trap
Dr Shabir Choudhry 13 September
2018
Of course, China will not accept that
its Belt and Road Initiative is encountering problems. The BRI projects are
supposed to bring development and economic growth by building highways,
railways, pipelines, power plants and ports etc.
However,
the fact that Beijing has launched a publicity drive to highlight potential
benefits of the Belt and Road Initiative indicates there are problems. The BRI
was unveiled in 2013, and there has been massive well-articulated publicity to
‘sell’ this mega initiative.
The
question is why a new style of publicity is required to defend the Chinese loan
giving strategy under the BRI. Even one can see frustration and anger in
language of some Chinese diplomats when they defend the BRI programmes.
It must be
pointed out that China is building six massive economic corridors under BRI
programme; and CPEC is just one of them. One can add that the CPEC is extremely
important component of the BRI.
It is interesting that Deputy Chief of
the Chinese Embassy in Islamabad, Lijian Zhao, addressed a press briefing and
also replied to reports related to the Chinese loan as a ‘debt trap’ for
developing and poor countries. The Chinese diplomat said some “fake economists”
are spreading this “totally baseless propaganda”.
Those who criticise the CPEC or the BRI
projects, are reputable economists of various countries, which include top
economists of the World Bank and the International Monetary Fund, and other
financial institutions. But to the angry Chinese diplomate, they are ‘fake
economists’. Lijian Zhao said if someone tells you that ‘CPEC is a debt trap,
remember to call them fake economists”. 1
The
objective of this propaganda campaign is to promote China as an important and
friendly global power, which has ability, and will to finance viable
infrastructure projects in different developing countries. Purpose of these
projects is to promote economic growth for the betterment of the local people.
In other words, message is that China should be seen as an economic partner,
rather than a strategic power.
Neo Colonialism does not
need gunboats - debt trap a new form
of imperialism
93 years old, Mohamad Mahathir is back in office once again.
His mandate includes to get Malaysia out of ‘suffocating debt’.
Malaysia has huge debt of $250 billion, some of which
is owed to Chinese companies. Mahathir Mohamad, during his visit to China
unambiguously said in the Great Hall in Beijing, where senior Chinese officials
were also present:
“We do not want a situation
where there is a new version of colonialism happening because poor countries
are unable to compete with rich countries.” 2
Those who still think that China is
giving out billions of dollars to build infrastructure to help poor and
developing countries need to see what America is saying on this issue.
Brian
Hook, who is a Senior Policy Advisor to the American Secretary of State and
Director of Policy Planning, said:
"The belt and road is for the moment China's way
of doing things. It is a made in China, made for China initiative." 3
Mr Hook expects China to observe international high
standards, and promote transparency and rule of law; and only finance
economically sustainable projects. Mr Hook explicitly said:
"We encourage China to promote an uphold
internationally accepted best practices and infrastructure development and
financing and to adopt an open and inclusive approach to its belt and road
initiative, especially these overseas infrastructure projects." 4
Prime
Minister of Sri Lanka, Mahinda Rajapaksa thought of resolving Sri Lanka’s
economic problems; and approached China for help in 1910. China happily obliged
Sri Lanka by providing a loan of $ 1.5 billion to build a port in
underdeveloped fishing village of Hambantota.
Also,
China provided $200 million for a second international airport. In the
following year, another $810 millions were provided for the second phase of the
port project.
The
money was coming in without too much effort. Like leaders of Pakistan, Sri
Lankan leaders also hoped that once these projects are functional, the country
would be able to pay back loans. They borrowed $272 millions for a railway
project, and more than $ billion for Colombo Port City project.
Contrary
to expectations or financial forecasts the projects did not do well, and were
not able to economically sustain themselves. Within five years the loans
swelled to $8 billion with interest rate of
6%. The country had an external debt of $48.3 billion at the end of 2017.
Outcome
of this bad investment was that by December 2017, Sri Lanka had to handover the
Hambantota port to China Merchants Port Holdings Company for $1.12 billion.
In order to provide justification for
loss of country’s sovereignty, Mahinda Samarasinghe said:
"We had to take a decision to get
out of this debt trap."
However,
critics of the Sri Lankan Government say, the government compromised the country’s sovereignty. This port episode
occurred merely two months after the former president of Maldives ‘warned
that its debts to Beijing could force the country to cede territory to China as
early as next year’.
It must be noted that Sri Lanka is
extremely essential to China’s strategic, defence and commercial designs
because of the country’s location. New Delhi, on the other hand, is perturbed
on this ‘debt-for-equity deal’ because of security and strategic concerns.
Control of the port of Hambantota can be significant for China to advance their
agenda under the guise of the BRI.
Furthermore, the airport they built with the Chinese
money, Mattala Rajapaksa International Airport, is
virtually not used and is called "the world's emptiest international
airport". The airport has only four regular flights arriving and departing
from there, which does not even cover the maintenance costs of the airport.
The Sri Lankan government wants to sell
the airport. New Delhi is apprehensive that Beijing might takeover this airport
too; and it can become Chinese air force base. In view of that danger, India
has also expressed interest in purchasing the airport.
Even though Sri Lanka has huge debt
crises, 81.6% of its gross domestic product, perhaps third highest ratio among
emerging economies, China has proposed two new joint construction projects to
Sri Lanka. One is $3 billion oil refinery and the second is $125 million cement
factory.
Despite the previous bitter experience,
the Sri Lankan government is seriously considering these projects. While
justifying its intentions, a senior Sri Lankan official said:
"There is no country or institution with
ready cash other than China." 5
This
approach sums up the predicament the emerging economies face. No government or international
financial institution has money readily available to provide to developing
countries.
Lim Guan Eng, new Finance
Minister of Malaysia, while talking about of ‘debt trap’, gave example of Sri
Lanka, and asserted:
“We don’t want a situation like Sri Lanka where they
couldn’t pay and the Chinese ended up taking over the project.” 6
As expected, and in
order to protect its policy of investment, China is making serious and
consistent efforts to justify what they are doing in name of economic growth,
and building infrastructure. Despite Chinese assurances, many people around the
globe perceive the Chinese agenda being imperialist in nature. Critics believe
that infrastructure is built to lay down ‘foundations of a new form of
imperialism’.
M
Waqas Jan, who is a Research Associate and Program Coordinator for
the China Study and Information Centre at the Strategic Vision Institute,
Islamabad, writes:
Particularly with
respect to the BRI, these perceptions of Chinese Imperialism are rooted in what
numerous analysts have termed as China’s ‘Debt Trap Diplomacy.’ Citing the
cases of the Hambantota Port in Sri Lanka, the Bar-Boljare highway in
Montenegro and the China Pakistan Economic Corridor (CPEC) in Pakistan, a
growing number of critics have pointed out that these projects, while being
funded through highly attractive and concessional loans from China, are leading
to unsustainable levels of debt for these countries. 7
M Waqas Jan thinks these mounting debts in the guise of BRI funding, will reduce
these countries to ‘being mere client states, with their sovereignty firmly
in the grasp of Chinese creditors’.
The issue of debt trap has been brought
to international spotlight by blunt and courageous remarks of Malaysia’s new
elected leader Mahathir Mohammad, who has recently cancelled the $20 billion
East Coast Rail Link project, and two natural gas pipelines worth $2.3 billion.
The new government is also considering fate of other projects
which may not be economically sustainable.
While speaking in a press conference in China, Prime
Minister Mahathir unequivocally said, we did not
wish to face a situation ‘where there was a new version of colonialism based
on unequal relations’. 8
No matter what the new government of
Imran Khan pretends, there are deep worries in corridors of power in Pakistan.
On one hand, they want economic growth; and on the other hand, they are
seriously concerned about mounting debts and Pakistan’s ability to pay.
Imran Khan wants greater transparency
and accountability, but at the same time, he can’t afford to annoy China. He
will have to ensure that Pakistan continue to grow economically, however, the
CPEC must not result in Pakistan losing parts of its sovereignty.
Mohamad Mahathir, while talking to the New York Times,
about the Chinese strategy of lending money to the poor countries, very boldly
said:
“They know that when they lend big sums of money to a
poor country, in the end they may have to take the project for themselves.”
He further said:
“China knows very well that it had to deal with unequal
treaties in the past imposed upon China by Western powers. So, China should be
sympathetic toward us. They know we cannot afford this.” 9
What debt stress
countries do
Pakistan
is not alone, there are other countries sleep - walking in to quagmire of
Chinese debt trap. Out of those countries that are hosting various projects
financed by the Chinese mega BRI adventure, 23 countries were identified at
risk of debt distress by Center for Global Development in their study in March
2018. Out of these 23 countries, eight were assessed to be highly vulnerable. 10
It is sad that Pakistan
is among these eight countries which are perceived as ‘highly vulnerable’. Out
of these eight, Pakistan, Kyrgyzstan, Mongolia, Laos and Tajikistan share
borders with China, that means they can become easy targets when it comes to
recovering debts.
Two small countries, Maldives and Djibouti are also among
highly vulnerable countries; and their strategic location is very significant
to China. A Chinese foothold in these small, but strategically important
countries will surely upset some countries who have big interests in the Indian
Ocean.
Out of
major vulnerable countries, Pakistan is the ‘most overtly in debt to
China’. No doubt Pakistan urgently needs foreign investment, but question is at
what cost. Pakistan’s huge trade deficit, which creates balance of payment
problems. Additionally, uncertain and unhealthy relations with some Western
countries makes debt servicing extremely difficult.
Furthermore, as influence and power
of China grows; and developing countries become more and more dependent on the
Chinese funds, military, economic and technical support, there are clear signs
that these countries are gradually losing sovereignty, and are becoming ‘client
states’.
Take example of Sri Lanka, as
pointed out earlier, the Chinese financed Port and airport were built at Hambantota
on the southeast coast proved to be a commercial disaster. It forced the debt
stressed country to give China 85 percent stakes to settle $1.12 billion debt. These projects
are not attracting much business, but regular Chinese Submarines give a lot of
tension and discomfort to Indian defence and strategic experts.
Many well - wishers, friendly leaders and
countries have expressed their concern about mounting debts of Pakistan which
can destabilise Pakistan, and give rise to extremism and violence. Among them
are some American Senators who have ‘asserted that Islamabad is
at risk of debt distress due to rising current-account
deficit and external debt obligations caused by the China Pakistan Economic Corridor’. 11
China doesn’t want Pakistan
to collapse economically or surrender to strict conditions of the IMF, which
will ultimately hurt the CPEC projects. Beijing has provided additional $5
billion loan that Islamabad can keep its economic boat buoyant. This loan,
unlike some other loans, is spread over 25 years and is at 2.9 percent
interest.
Situation of Pakistani economy can be seen from this fact that
officials of National Highway Authority
(NHA) and Ministry of Communications said, ‘their cheques worth Rs25 billion
have bounced as the Finance Ministry has not released funds of the fourth
quarter of the last fiscal year’. 12
The Sun, popular English daily, in its
special report published on 17 August 2018, on One Belt One Road said:
‘CHINA
is "colonising" smaller countries by lending them
massive amounts of money they can never repay, it's been
claimed’. 13
The report
asserts that China is providing ‘massive loans it holds over small states
worldwide to snatch assets and increase its military footprint… Countries around the
world owe huge sums to President Xi Jinping's China. Developing countries from Pakistan to Djibouti, the
Maldives to Fiji, all owe huge amounts to China. Already there are examples of
defaulters being pressured into surrendering control of assets or allowing
military bases on their land.
Some critics are
calling it "debt-trap diplomacy" or "debt colonialism" -
offering enticing loans to countries unable to repay, and then demanding
concessions when they default. 14
Also, they were seriously concerned about
Chinese behaviour as a money lender, which doesn’t comply with international
standards adopted by other lenders. Some critics call it a ‘debt trap
diplomacy’, which enables Beijing to impose unfair trade and financial deals on
financially impoverished countries.
Because of their economic conditions they find it difficult to resist power and
influence of Beijing in economic and foreign policy matters.
China provided $1.4 billion to Djibouti
for construction of infrastructure, and this was equivalent to 75 percent of
Djibouti's GDP. In assessment of IMF economic experts, Djibouti’s public
external debt over the past two years has increased from 50 to 85 percentage,
which is highest among the low-income countries.
With the increase of Djibouti’s
dependence, there are serious concerns that China may take over control of
Doraleh Container Terminal, which will further consolidate China's influence in
this strategically important region.
It must be pointed out that Djibouti is
always regarded as a main ally of America in that region, which has provided
military bases to America. Washington is extremely concerned about Doraleh Container Terminal falling into Beijing’s hands;
and it is possible that America will endeavour to stop this happening.
American concerns
about China’s military and strategic designs get boost when Chinese activities
are monitored in South China Sea, and in the Pacific. There is hardly any doubt
that China is using man made islands for military purposes, as on islands in South China Sea, airstrips
and military batteries have been spotted.
Also, it must be noted that China upgraded the largest wharf in the South Pacific, which is
capable of accommodating aircraft carriers. Vanuatu
owes £191million to China, and in April 2018, China expressed its desire
to establish a military base in Vanuatu.
Apart from that, Tonga
is also in ‘debt trap’, and finds it difficult to make payments for the big
loans. Prime Minister of Tonga, Akilisi Pohiva said, he fears that China
may seize assets from his country.
Other debt stress
countries in the region include Papua New Guinea, which owes
roughly £498million. Fiji owes £496million, and Samoa owes
£181million.
In a letter to the
American Defense Secretary James N. Mattis, The Senators said:
"In China's String of Pearls
strategy for the Indo-Pacific, Gwadar and Hambantota are important footholds
that if converted into naval bases will enable the PLA Navy to maintain a
permanent presence in the Indian Ocean." 15
Pakistani response
Pakistan also has serious economic,
ideological, religious and structural problems. However, unlike other nations,
Pakistani response to these problems is bewildering. One may think they are
unable to visualise the dangers facing their country. Others may think they
overvalue importance of their status and strategic location. They think they
are invincible. Also, they erroneously think that world powers are desperate to
ensure that Pakistan must survive as a nation state.
Some critics, however, think that
Pakistani elite is determined to go ahead with their agenda, no matter the
price. In view of these critics, to pursue the agenda which they advanced with
considerable success for decades is suicidal in 2018.
When confronted with questions
about Pakistan’s mounting debts, and about the fate of other countries who
heavily borrowed from China, Pakistanis say we are not Sri Lanka or Malaysia.
We are a nuclear state with world’s sixth largest army.
They forget the Soviet Russia was
larger and stronger than Pakistan with thousands of nukes, and missiles, yet
the country disintegrated because of economic meltdown.
If it can happen to the USSR and
other countries, then why it can’t happen to Pakistan. I don’t accept this
logic that Pakistan was established in name of religion, and on 27th
Ramadan, therefore, the country has become invincible. Pakistan’s friends,
well-wishers and other countries in the region are seriously concerned that
Pakistan can become a victim of China’s debt trap policy, and Pakistan may have
to give control of Gwadar and may be other areas to China.
It must be pointed out that
instability in Pakistan can endanger peace and stability of South Asia, and
does not suit national interests of neighbouring countries because chaos and
instability can spill over to other countries.
Some reports suggest that Imran Khan
has never been a fan of the CPEC projects; and he made that crystal clear
during his siege of Islamabad. As a result of his actions, visit of the Chinese
leader and inauguration of the CPEC was delayed.
Imran Khan was on record requested
expatriate Pakistani and Azad Kashmiri people not to send money to Pakistan
through bank, as he did not want the government to be strengthened. Also, he
requested people not to pay taxes or pay utility bills, and urged them civil
disobedience. Now in power, same Imran Khan is begging people to send money
through banks; and send extra $1000 each that he can build a dam.
Some analysts also suggest that he is
under pressure from the establishment, which gave him the top post, to continue
with the CPEC projects. However, alarm bells rang in different centres of power
when famous British paper, Financial Times, published a report on 10 September
2018, with the title ‘Pakistan rethinks its role in China's Belt and Road
plan’.
The report of the Financial Times quoted above, reveals that Pakistani Ministers and government Advisers assert that
the new government will review BRI investments and renegotiate a trade
agreement, which unfairly benefit Chinese companies.
Pakistani member of Cabinet responsible
for commerce, textiles, industry and investment, Mr Abdul Razak Dawood said, "The
previous government did a bad job negotiating with China on CPEC - they didn't
do their homework correctly and didn't negotiate correctly so they gave away a
lot." 16
As a result of this the new government
plans to carry out an appraisal of all the CPEC projects, and ‘renegotiate
agreements reached under China's Belt and Road Initiative’. This means
Pakistan’s new government may join ‘a growing list of countries questioning
the terms of their involvement in Beijing's showpiece infrastructure investment
plan’.
Pakistan's new government has
established a committee consisting of 9 members to evaluate the CPEC projects.
Officials of the concerned Ministry claim that:
"Chinese companies received tax
breaks, many breaks and have an undue advantage in Pakistan; this is one of the
things we're looking at because it's not fair that Pakistan companies should be
disadvantaged." 17
Meanwhile, Foreign Minister
of China, Wang Yi, told the reporters that the
"CPEC has not inflicted a debt
burden on Pakistan. When these projects get completed and enter into operation,
they will unleash huge economic benefits." 18
I am not surprised on this statement;
and others should also not be amazed. China has to say all this to woo intended
targets. If they say their funded infrastructure projects become ‘debt traps’,
which country will put their neck on the chopping board?
Despite fast changing situation and efforts
to stabilise Pakistani economy, I can’t visualise Pakistan coming out of this
debt trap that soon, or cancel the CPEC; at best, the new government can put
some projects on hold or extend terms of the loans until the economic mess is
sorted out.
In a group
discussion on India and Pakistan relations in London, a few years ago, one
Indian economist said, India wants to have a stable Pakistan, which is at peace
with its neighbours. He said unstable and volatile Pakistan can be dangerous to
integrity of Pakistan and to the region of South Asia.
However,
later on during interactive dialogue, he said, because of the nuclear weapons
there cannot be a war between India and Pakistan. We want peace, and only with
peace in the region both countries can progress and alleviate poverty. If
Pakistan does not abandon their past policies of exporting extremism and
terrorism, then we will have to work on a strategy to weaken Pakistan
economically.
The above
statement can be better understood by reading the following comments of a Pakistani
commentator on social media, who writes with a pseudonym Gernailsaab. He
writes:
‘Of course, the CPEC is a game changer
– just see how the CPEC will benefit China economically, strategically and
militarily. On top of these benefits, China will get 90 billion in return for
their investment in Pakistan.’
He further
said, ‘Indians are clever, they indirectly helped China to ‘trap Pakistan in
this mountain of debt’. They used ‘reverse psychology, knowing opposing the
CPEC will ensure Pakistan will go ahead with the mega project without too much
consideration’.
He
concluded by saying that a time will come when Pakistan will soon replace
Somalia with number one spot at the bottom of the world ranking.
India has
some serious concerns about the CPEC. One is about the issues related to Gilgit
Baltistan. India claims that because this territory is part of the former
Princely State of Jammu and Kashmir, therefore, this is a disputed region; and
belongs to India.
Also, India
feels presence of China in Gilgit Baltistan and in Gwadar will endanger
security and strategic and economic interests of India.
It is
possible that Indian opposition to the CPEC could be because of these or some
other reasons. However, it is also possible that they opposed the CPEC knowing
full well that Indian opposition will certify that this mega project is
essential – a game changer for Pakistan; and the Pakistani policy makers will
surely go ahead with it.
China is worried about growing extremism and militancy in East
Turkistan; and Beijing thinks roots of this trouble is in Pakistan and in
Afghanistan, from where these people get inspiration and military and financial
support.
The Pakistan army Chief, General Qamar Javed Bajwa assured visiting
Foreign Minister of China, Mr Wang Yi, that the Pakistan army will ‘guarantee’
security of the CPEC projects. He also assured his respected guest, that
Pakistan will fulfil Pakistan’s ‘commitment to firmly fight the East
Turkistan Islamic Movement as part of its counterterrorism effort.’
According to state run Xinhua news Agency, in reply, the Chinese Foreign
Minister asserted that the ‘Pakistani Military is the protector of the China
– Pakistan friendship, and the bilateral military relations are an important
part of the all-weather strategic cooperative partnership between the two
countries and a symbol of their high political mutual trust.’ 19
Does this mean, this time the Pakistan army is ready to fight China’s
war inside Pakistan and in Afghanistan? It will be disastrous if this happens.
However, it is important to see what impact that will have on Pakistan, and
various religious and militant groups in Pakistan?
China has funded mega sea port projects across the
Indian Ocean in countries that are economically weak. This strategy is known as
the string of pearls. Many military and strategic experts have apprehension
that there is a possibility that these ports could become bases of Chinese
warships and submarines.
Malaysia’s Deputy Defense Minister, Liew Chin Tong,
said:
“You look at a map, and you can see the
places where China is plotting ports and investments, from Myanmar to Pakistan
to Sri Lanka, on toward Djibouti. What’s crucial to all that? Our little
Malaysia, and the Malacca Strait.”
On plight
of the Malaysian economy, Fuziah Salleh, a law maker of the Malaysia’s new
governing coalition, said:
“We welcome foreign
investment and development, but we question the huge price that we will have to
pay. Who is the real beneficiary of all this financing? The Malaysians, or the
Chinese?” Fuziah Salleh further said:
“I am worried that our sovereignty has been sold.” 20
I have briefly explained what happened to some other
countries which borrowed money from China. As explained above, Pakistan is
among eight countries which have borrowed money, and are having serious
difficulties in balance of payments. No matter what people like me or others
say, Pakistani elite don’t care. They will always go ahead with wrong policies,
and then accuse others for their failures and predicament.
I know they will not stop or reconsider their policies
on the CPEC. Anyone, who caution them, or give them advice which contradicts
their wisdom, they waste no time to call him/her anti Pakistan or an agent of
someone. I am seriously concerned what may happen because of the CPEC to
Pakistan, and areas of my motherland under their control, namely Gilgit
Baltistan and Pakistani Administered Kashmir, and the region.
Anything that happens in Pakistan negatively affects us
as well. They built a dam called Neelam Jhelum Dam, and diverted River Neelam
near Muzaffarabad. I was among those who opposed it when the project was on
papers. I was called anti Pakistan and a traitor, even by citizens of Jammu and
Kashmir who are more loyal to Pakistan than their forcibly divided motherland.
Now the project is completed which will 100% benefit
Pakistan, and we will suffer in many ways. The River Neelam is dry. People of
the area have already started crying out because of enormous problems like lack
of water, environment and other troubles. Their crime was to remain quiet when
they could have done something to stop it.
Irony is, every household of so called Azad Kashmir was
forced to pay 20 rupees per month for the construction of the dam for more than
a decade. This amount was included in their monthly electricity bill. It is
possible that they may continue to milk poor people of Azad Kashmir, as mental
slaves of Pakistan are programmed only to speak against injustice perpetrated
by India.
People of Pakistan did not allow any Pakistani
government to build a dam called Kala Bagh, because of their concerns in KPK
and Sindh, even though they were not asked to pay for the dam. Initial work on
this dam was started in early 1950s; and they have already spent huge amount of
tax payers’ money on different feasibility, technical and other reports.
In Azad Kashmir, Pakistan has built many dams; in some
cases, they silenced people by force. They are building dozens of small and big
dams in Azad Kashmir; and people will suffer as a result of construction of
these dams.
Soon time will come that ordinary people of Pakistan,
Gilgit Baltistan and so called Azad Kashmir will cry because of the Chinese
economic and cultural invasion. Anyway, I end this long article with a quote
from the Pentagon report released recently, and let people draw their own
conclusions on the CPEC and BRI.
“The ‘Belt and Road Initiative’ (BRI) is intended to
develop strong economic ties with other countries, shape their interests to
align with China’s and deter confrontation or criticism of China’s
approach to sensitive issues. Countries participating in BRI could develop
economic dependence on Chinese capital, which China could leverage to achieve
its interests.” 21
References:
4. Ibid
7.
Five years on, the BRI is still being perceived as a
debt trap Daily Times,
September 3rd 2018.
8.
Ibid
10. http://www.eurasiareview.com/01092018-rethinking-belt-and-road-debt-analysis/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+eurasiareview%2FVsnE+%28Eurasia+Review%29
12. The News, 11
September 2018
13. The Sun, 17 August
2018
14. Ibid
17. Ibid
18. Ibid
19. https://www.thehindu.com/news/international/china-denies-cpec-backing-as-debt-trap-for-pakistan/article24909376.ece
