China recently published a report titled `Belt and Road Infrastructure Development Index (BRIDI) 2020’ jointly brought out by the China International Contractors Association, the country’s organization of overseas industrial contractors and the China Export & Credit Insurance Corporation (SINOSURE). The report analyses the BRI’s momentum and scope of work in 71 countries from various perspectives including impact on environment, demands, costs and local sentiments.
Ironically, the report also included India as one of the BRI countries placing it at the 11th position in the overall rankings. The Report reveals that COVID-19 posed one of the biggest challenges to BRI in 2020 and BRIDI fell to its lowest mark in a decade faced with worsening conditions for trade and investment & rising global risks and vulnerabilities. Even the Chinese Ministry of Commerce, in the first half of 2020 acknowledged a fall of 13.8% on its year on year turnover. The paper further highlighted debt distress, risk of insolvency and sovereign debt defaults as major challenges to the project based on SINOSURE’s sovereign ratings. The ratings have estimated that nearly half of the BRI countries were at intermediate levels of sovereign solvency and about one-sixth of the countries on the higher side. From the paradigm of development too, it may be noted that 93% of BRI countries suffered a decline over the past one year due to COVID-19. In this scenario, future BRI projects are most likely to focus on renewable energy and communication infrastructure.
There are apprehensions that in the garb of data security, countries may resort to a digital curtain & create a digital divide between operating players. This is particularly so in the communications market where China believes trade protectionism has led to countries enforcing a ban in the services of Huawei. It is viewed that such measures could potentially hinder technological exchanges between the economies; postpone the development of global communication strategies and cause hurdles in the realization of the objectives of BRI. In a probable post pandemic era this global digital divide might even fester parallel digital universes impacting the international order in myriad ways.
Undoubtedly, the risk of sovereign insolvency is more apparent on the less affluent countries such as Afghanistan, East Timor, Kyrgyzstan, Laos and Sri Lanka. Other nations in a similar situation like Lebanon, Mozambique, Yemen, Sao Tome and Principe have already defaulted on their debt and are facing immense pressure over their pending infrastructure projects. Incidentally, the pandemic has reoriented global efforts towards dampening short term energy demands and increasing costs of new/ renewable energy infrastructure. In this context, the BRIDI report warns that reordering of national fiscal priorities in most BRI countries will temporarily squeeze spending on infrastructure, making such projects potential targets of geopolitics and anti globalization sentiments. This could eventually hamper the flow of capital, technologies and personnel - elements critical to the success of BRI.
Further, in September 2020, China held its first video conference of BRI countries in an attempt to provide fresh impetus to its ailing projects. Some of the projects facing disruptions including the US$ 60 Bn CPEC which runs through Pakistan and parts of Pakistan occupied Kashmir as alleged and protested by India, were taken note of. Countries such as Malaysia, Bangladesh, Indonesia, Pakistan, Cambodia and Sri Lanka slammed China over delays in implementation of their infrastructure projects and voiced concerns over the economic implications. As is known, the power projects in Myanmar and Bangladesh, bridge project in Bangladesh, silk city and `five-island’ project in Kuwait, the Thailand high speed train project are initiatives clouded with uncertainty. Moreover, some key projects such as Cambodia’s Sihanoukville Special Economic Zone, Indonesia’s Jakarta-Bandung high speed rail are unfinished and reeling under cost escalations. In Cambodia, things have worsened to an extent that operations of an SEZ almost came to a standstill and a power plant to be built by a Chinese construction company could not commence work due to differences in terms and conditions.
In many African countries too, BRI projects remain affected as countries gather their minimal resources towards fighting the spread of the virus. In Nigeria, a US $1.5 Bn rail project is currently encountering inordinate delay and many Chinese funded projects in Zambia, Zimbabwe, Algeria and Egypt are on hold as countries battle an existential crisis. Some projects which were faced with delays even before the pandemic have only had their issues compounded. In this scenario of economic uncertainty, many countries have started reconsidering the viability of these BRI projects. The pandemic has also affected all nations including China which has its own set of financial challenges. One cannot rule out the probability of diversion of funds and resources from BRI to tackling more immediate concerns of the Chinese economy. Against the backdrop of the pandemic, there have been announcements of delays, halt in operations and even renegotiations. Many of these countries after taking loans worth billions of dollars from China are demanding a freeze on loan repayment and some are even pursuing cancellation of loans. In response, President Xi has allegedly promised to write off all the interest free loans to the African nations and reportedly asked Chinese financial institutions to conduct consultations with these countries for commercial loan arrangements. According to the China Africa Research Initiative of Johns Hopkins University, School of Advanced International Studies, the overall Chinese lending to Africa stood at about US$ 152 Million for commitments made during the years 2000 – 2018. With COVID 19, however, the Chinese banks particularly, the China Exim Bank and China Development Bank, the two major banks financing most of the BRI projects, have begun to exercise utmost caution and operate with increased prudence.
Interestingly, the Work from Home culture that boomed significantly with the spread of the virus has had a huge impact on the infrastructure projects as world over, digital connectivity has taken precedence over physical contact. Further, even before the virus outbreak, in some countries, the BRI objectives were seen to be in conflict with the development goals of the host countries as the Chinese investors showed little regard for the long term plans & aspirations of these nations. In many BRI projects, small and poor countries were left reeling under the burden of heavy debt & seizure of valuable assets. The tales of Khorgos Gateway in Kazakhstan, the `highway to nowhere’ in Montenegro and the Kyrgyzstan free trade zone reflect the painful economic fallout these debt traps have had in their host countries. Further, with the pandemic, the ability of such countries to acquire more debt seems compromised and China’s willingness to assume the burden seems rather untested.
In fact, in early 2020, when the world was waking up to the scale of the pandemic, China had already begun its assessment of categorizing projects as `not affected’, `temporary impact’ & `re-start’. It is imperative to understand that any investment in infrastructure would pay off only when it increases the productivity of the host economy. Contrastingly, many of the BRI projects were debt financed and barely useful in repaying the amount invested. In this scenario, investment in ports, roads, rails, energy, water and other infrastructural projects were seen as the fundamentals of a `debt trap’. Since these infrastructure projects were largely funded by a foreign government, in the case of China, the repayment of the loan also had to be done in foreign exchange. This clause burdens the beneficiaries especially the poor & small countries so much that in most occasions they do not have the requisite foreign exchange to repay the debt. The accumulated financial woes ultimately lead to a failed infrastructure project which not only impacts the host country financially but also adversely alters its image in the global order.
While it is often mentioned that China’s banking system may absorb a substantial portion of these defaulted loans, no one actually knows how healthy China’s state owned banks are in reality. Also a credit crunch in China will significantly affect the ability to issue new loans for these costly BRI projects. It is quite possible that the Chinese tactic of quickly granting loans to economically unviable projects to trap poor countries in a cycle of debt, may gradually change.
Interestingly, even prior to the pandemic, about twenty-three BRI countries were identified as being in debt distress. With the pandemic assuming grave proportions, the economic strain for these countries emerging from the efforts to deal with the virus and rescue the economy from a downward spiral would be immense. There is no doubt that countries like Cambodia, Kyrgyzstan, Sri Lanka, Pakistan, Djibouti, Montenegro will in definite terms require debt relief. The amount at stake is so huge that even China may not be able to afford to waiving off payments for multiple countries. According to the Kiel Institute for the World Economy, China has provided 50% more to developing countries than it has officially reported. In that case, the `hidden debts’ could reflect a dangerous trend as they distort the international surveillance of China’s lending practices. The institute’s analysis further mentioned that China has granted loans amounting to US$ 520 Billion to ever 150 countries for BRI related projects. The country now accounts for one quarter of the total lending through banks to emerging economies and is the largest official creditor in the world, overtaking both the World Bank and the IMF.
So, against this backdrop, the COVID-19 pandemic with its origins allegedly in China has ultimately turned out to be a catastrophic event in the execution of BRI projects, making it economically unviable and enhancing the burden of debts on other countries. China may find itself entangled in a web of its own creation. Its strategy, originally meant to be a predatory move targeting poor countries has now taken the form of a massive economic and political debacle that it simply cannot escape from.
By Mpekuzi
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