The People’s Republic of China (PRC) has been pushing poor countries to the brink of economic ruin through its well-thought-out ‘debt trap’ and its unforgiving nature when it comes to the recovery of loans.
As per an exclusive report by Associated Press (AP), countries such as Kenya, Laos, Zambia, Pakistan, and Mongolia are now faced with the tough choice to keep schools running and provide electricity to the public or pay back their debt to China.
These nations have depleted a large chunk of their foreign currency reserves in loan repayment and are now left with only a few months worth of resources. Associated Press found that the above-mentioned countries owe more than 50% of their foreign loans to one nation, China.
More than 1/3rd of the revenue in these countries is channelised to pay off the debt, which these nations borrowed to build power plants, mines, and ports. So far, Zambia and Srilanka have defaulted on loan repayment.
The economic situation in Pakistan and Kenya has been grim as well, with millions being laid off or their payments withheld to pay foreign loans. Associated Press pointed out the case study of Zambia, an African nation that borrowed money from China to fund its infrastructure projects.
While it received an initial economic boost, the Zambian government had to soon cut corners to be able to pay off foreign debt. It decreased spending on social services, healthcare, and subsidies to farmers. The Chinese government ‘insisted on confidentiality’ and maintained secrecy around the terms and conditions of the loan.
As such, non-Chinese lenders and big government leaders did not come to Zambia’s rescue when it defaulted on payments in November 2020. It later came to light that the African nation owed $6.6 billion to Chinese banks.
“Inflation in Zambia has since soared 50%, unemployment has hit a 17-year high and the nation’s currency, the kwacha, has lost 30% of its value in just seven months. A United Nations estimate of Zambians not getting enough food has nearly tripled so far this year, to 3.5 million,” the report by Associated Press noted.
An AP analysis found that countries heavily indebted to China are draining foreign currency reserves used to pay interest on loans, leaving some with just months before that money is gone. Mongolia has eight months left. Pakistan and Ethiopia about two. https://t.co/2eaZwQsWmc
— The Associated Press (@AP) May 18, 2023
It pointed out that foreign cash reserves have dropped more than 50% in countries such as Pakistan and the Republic of Congo, which had borrowed money from China. Without external aid, Pakistan is likely to default in the next 2 months.
A similar fate awaits Ethiopia and Mongolia. The condition of these poor nations has also been exacerbated by corruption, governmental mismanagement, the Russia-Ukraine war, an increase in interest rates by US Federal Reserve, and so on.
Meanwhile, China has refuted the allegations and claimed to help developing nations ‘overcome difficulties.’ Its Foreign Ministry has said that it offers extended loan maturities and emergency loans to such ‘poor nations.’
China also claimed to have waived off interest payments during the Covid-19 pandemic. Some experts have also suggested that it is ‘undoing’ its debt trap diplomacy wherein it would seize loan strategic assets (such as ports and mines) for default on loan repayment.
Aid Data finds $385 billion of ‘hidden’ Chinese debt in 88 countries
The Executive Director of Research Lab AidData, Brad Parks, who worked in close coordination with the Associated Press, has been investigating Chinese financing patterns since 2011. At that time, the Chinese government was eyeing to secure supplies of minerals, form strategic alliances abroad, and hoard US dollars.
China began lending money to poor nations as part of its ‘Belt and Road Initiative (BRI)’. The countries, which fell into the Chinese debt trap, were eager to build roads, ports, power plants, infrastructure and expand mineral mining operations.
When these poor nations were heavily burdened by Chinese government loans, the Communist nation shrewdly set up shell companies to lend them money instead of handing it out directly. Such a cunning practice was witnessed in the case of Zambia and Indonesia, where these loans were never recorded in govt books.
“When these projects go bad, what was advertised as a private debt becomes a public debt…There are projects all over the globe like this,” Brad Parks stated. In 2021, he discovered $385 billion of ‘underreported’ and ‘hidden’ Chinese debt in 88 nations.
China set up secret escrow accounts
Brad Parks also found that most Chinese-funded projects were located in regions that were favored by powerful politicians of the respective countries, even if it made little economic sense. The projects were also frequently sanctioned around the time of the elections.
Aid Data studied Chinese loan details and found a clause that mandated borrowing nations to deposit US dollars in ‘secret escrow accounts (third party contractual arrangement)’. That way, China could still recover its money even if the countries defaulted on interest payments.
With the looming confidentiality around the loan clauses, China has been successful in jumping the line for payment while keeping other lenders oblivious.
“The other creditors are saying, ‘We’re not going to offer anything if China is, in effect, at the head of the repayment line…It leads to paralysis. Everyone is sizing each other up and saying, ‘Am I going to be a chump here?'” Brad Parks told Associated Press.
The introduction of ‘swap’ loans
In its bid to keep lending a hidden affair, China’s central bank has been financing billions of dollars in loans through foreign currency exchanges (popularly known as swaps).
Foreign currency exchanges help nations easily borrow US dollars to check temporary shortages in foreign currency reserves and maintain liquidity. But China has been using these swaps as loans and charging more than normal interest rates.
In that way, they do not reflect in the government’s books as loans owed by another country. Reportedly, Mongolia ($1.8 billion), Pakistan ($3.6 billion), and Laos ($300 million) have borrowed money in such swaps for years.
“The swaps can help stave off default by replenishing currency reserves, but they pile more loans on top of old ones and can make a collapse much worse, akin to what happened in the runup to the 2009 financial crisis when U.S. banks kept offering ever-bigger mortgages to homeowners who couldn’t afford the first one,” The Associated Press noted.
“Somehow they’ve managed to do all of this out of public view…So unless people understand how China lends, how its lending practices work, we’re never going to solve these crises,” Parks concluded.
China exerting pressure on a reluctant Nepal to join the Belt and Road Initiative
China has been trying to get the support of Nepal for its ambitious Belt and Road Initiative (BRI). Still, the Himalayan country is reluctant to join as it also seeks support from the US and India which oppose Chinese policies, a Kathmandu-based online magazine Epardafas reported.
The Epardafas report claims that Nepal has not yet agreed to enter into BRI but there are still questions that the projects offered by China are really beneficial.
The inauguration of Pokhara Regional International Airport in August last year is an example of the pressure that China is trying to exert on Nepal.
During that time, the Acting Chinese Ambassador to Nepal Wang Xin said that the airport was under the BRI plan. However, in reality, the airport was actually built with investments from the Nepal government and the loan investment of a Chinese Export-Import Bank, according to the Epardafas report.
China and its strategic interest in neighbouring Bangladesh
Earlier, four state-owned Chinese companies had expressed interest in building a ‘Smart City’ and a metro rail network in Chittagong. China is known to push developing countries into debt by lending money for building infrastructure projects with marginal or no economic returns.
While Bangladesh is relatively safe for now, things may spiral out of control if the Sheikh Hasina government fails to keep inflation and the associated unrest in check. It will then be an uphill task for India to support both Bangladesh and Sri Lanka at the same time.
