For a pesky, little four-letter word, it must infuriate President Xi Jinping. Everywhere he goes it seems to echo in his ears. Corporate debt. Local government debt. Consumer debt. And now Belt and Road debt.
In the latest cautionary tale, the International Monetary Fund Managing Director Christine Lagarde warned of the potential risks for partners involved in Xi’s grand global vision.
Speaking in Beijing on Thursday after attending the Boao Forum, Asia’s equivalent of Davos, on Hainan Island in southern China, she talked about the “challenges” ahead.
“The Belt and Road Initiative can provide much-needed infrastructure financing to partner countries,” Lagarde told a conference organized by the IMF and the People’s Bank of China, the country’s de facto central bank.
“However, these ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payment challenges,” she added.
At the heart of the Belt and Road Initiative are the ‘New Silk Road’ superhighways, connecting China with 68 countries and 4.4 billion people across Asia, Africa, the Middle East and Europe in a labyrinth of multi-trillion-dollar infrastructure projects.
‘New Silk Road’
Launched in a fanfare of state-media publicity by Xi in 2013, this colossal program has become an extension of Beijing’s global ambitions and the centerpiece of its economic foreign policy.
Yet because of its monumental scope, there are “sovereign debt risks” lurking in the background of the planned “US$8 trillion network of transportation, energy, and telecommunications infrastructure” projects, the Center for Global Development has highlighted.
In a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the Washington-based think tank underlined the problems when it pointed out that 23 countries could be prone to “debt distress.” Of the group, Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan were rated in the “high risk” category.
“Belt and Road provides something that countries desperately want – financing for infrastructure,” John Hurley, a visiting fellow at the Center for Global Development and co-author of the study along with Scott Morris and Gailyn Portelance, said in a statement. “But when it comes to this type of lending, there can be too much of a good thing.”
Significantly, Lagarde touched on these concerns when highlighting the broader issues. But she also made it clear that Beijing was fully “aware” of the potential potholes dotted around such a massive undertaking as the Belt and Road Initiative.
Still, there have been high-profile horror stories associated with China’s “New Silk Road.” Pakistan was flagged up by the Center for Global Development, with the report claiming it was “by far the largest country at high risk.”
Financing for infrastructure and energy projects there was estimated at about $50 billion.These include Gwadar Port, which is one of several major developments in the region that make up the China-Pakistan Economic Corridor.
“In countries where public debt is already high, careful management of financing terms is critical,” Lagarde told the Beijing conference. “This will protect both China and partner governments from entering into agreements that will cause financial difficulties in the future.
“Fortunately, we know that China’s leadership is aware of these potential risks — as well as the proven strategies that can help address the challenges,” she added.
Transparency in “decision-making,” linked to digital and high-tech solutions, will also smooth the process. This, in turn, will protect China and Belt and Road governments from agreeing to loans which could prove economically explosive.
“An overarching framework between the various agencies involved in the Belt and Road Initiative would help provide clarity to all stakeholders,” Lagarde said. “For projects that have already been approved, dispute resolution systems can prevent small problems from turning into major complications.
“In Kenya, for example, the government recently launched an e-procurement system that made the review process more efficient and accessible,” she continued. “Innovations like these can also help foster an open process and level playing field for project selection, which is essential for strong private sector participation.”
Innovative ideas will certainly be crucial in managing the ‘New Silk Road’ program because of its amazing scale and depth. It could also help Xi and his global partners from falling into the age-old debt trap.