One Road, Big Debts

FORUM Staff

Built with a U.S. $200 million loan from the People’s Republic of China (PRC), the bridge that connects the Maldivian capital of Male with its airport has been dubbed the “bridge to prosperity,” and more officially, the China-Maldives Friendship Bridge or the Sinamale Bridge. It looked like a friendly proposition at first. After the bridge’s 2018 opening, a speedboat was no longer required to ferry airport arrivals to the capital, and the development boom it triggered on the nearby island of Hulhumale was warmly received.

Like many of the PRC’s One Belt, One Road (OBOR) infrastructure endeavors, however, it eventually joined a rogues’ gallery of projects saddled by unsustainable debt. A four-year study completed in September 2021 by researchers at the College of William and Mary in Williamsburg, Virginia, shows that 42 low- and middle-income countries have debt on OBOR projects that exceeds 10% of their gross domestic product (GDP), including Brunei, Cambodia, Laos, the Maldives, Myanmar and Papua New Guinea.

AidData, an international development laboratory at the college’s Global Research Institute, said in its report, “Banking on the Belt and Road: Insights from a new global dataset of 13,427 Chinese development projects,” that the PRC supports projects worth a staggering U.S. $843 billion across 165 countries. About U.S. $385 billion of the debt associated with those projects is largely hidden from public scrutiny, the report said.

Chinese Communist Party General Secretary Xi Jinping launched the OBOR scheme in 2013 to promote infrastructure development across Africa, Europe and the Indo-Pacific with Chinese financing. He hoped the projects, which include highways, railroads, power plants and pipelines, would expand the PRC’s exports and access to land and maritime transport facilities, boost its manufacturing, and strengthen its “economic, political, and military influence abroad,” according to the Council on Foreign Relations, an independent think tank. “Yet if the new investments fail to generate sufficient returns, they may also boost debt levels unsustainably and create political frictions with China.”

In the Maldives, which went on a borrowing spree during then-President Abdulla Yameen’s term from 2013-18, officials are now shutting down some OBOR projects due to a lack of viability and worry over mounting debt, according to a January 2022 report by EconomyNext, a financial and political news service. Mohamed Nasheed, speaker of the island nation’s Parliament and leader of the Maldivian Democratic Party, told The Associated Press in 2019 that he estimated his country’s debts to Chinese entities to be as high as U.S. $3 billion, although Chinese officials claim the figure is much lower. The Maldives’ projected GDP for 2022 is about U.S. $5.3 billion, according to the World Bank.

Nasheed began raising alarms about the debt after his party defeated Yameen in 2018. Since Yameen’s ouster, the Maldivian government has established closer ties with India, and Nasheed has led the charge by arguing that the former leader drove the Maldives into a debt trap. The government will be unable to repay Chinese loans unless a review reduces them to their real value, he told EconomyNext.

The Maldives already has stopped some projects at island resorts. “The construction of resorts and ownership of these islands are again in question,” Nasheed told the website. “There are about six to seven islands at different stages of construction by Chinese companies. But the construction work has now stopped for a long time and contractual ownership of these islands remains to be sorted in the courts.”

Hidden Debts, High Costs

With international development finance commitments nearing U.S. $85 billion a year, the PRC now outspends the United States and other major powers by a 2-1 margin, according to AidData. Rather than doling out grants or nonconcessional loans to boost struggling countries, Chinese entities have “used debt rather than aid to establish a dominant position in the international development finance market,” the AidData report states. Since OBOR’s 2013 introduction, the PRC has maintained a 31-1 ratio of loans to grants, according to the report.

The loan terms provided by Chinese state-owned lenders are less favorable than those of multilateral creditors, and the average loan comes with a 4.2% interest rate. The bigger problem for taxpayers in debtor nations, however, is that the nature of the lending is often obscured from public view, making it difficult to assess a struggling government’s true exposure.

That’s because 70% of the PRC’s overseas lending is directed to state-owned companies, state-owned banks, special purpose vehicles, joint ventures and private sector institutions, the AidData report states. The debtor nation often isn’t borrowing the money directly, even though it might be liable if a default occurs.

“These debts, for the most part, do not appear on government balance sheets,” the report states. Most of the lenders, however, “benefit from explicit or implicit forms of host government liability protection, which has blurred the distinction between private and public debt and introduced major public financial management challenges.”

Those challenges are becoming apparent in Laos, which opened a U.S. $6 billion rail link with China in December 2021. The line connects the Laotian capital of Vientiane with the southern Chinese city of Kunming. Laos President Thongloun Sisoulith heralded a “new era of modern infrastructure development” at the rail link’s opening, adding that the “dreams of Lao people have come true,” according to The Manila Times newspaper.

Although the government hopes the railway will turn a profit by 2027, experts fear the Chinese loans that fund it are unsustainable. Jonathan Andrew Lane, an analyst with the Asian Development Bank Institute, wrote in a September 2020 report that there is “limited commercial logic for an expensive railway” connecting the country of 7 million people to Kunming. He suggested the benefits for Laos do not outweigh the risks. “That debt service will put further strain on the limited tax-raising abilities of the government,” Lane wrote.

Nearly half of the country’s U.S. $13.3 billion overall debt is held by Beijing, and the rail link represents even more hidden debt, the AidData report warns. Three Chinese state-owned companies and a Laos enterprise partnered on the project, with Beijing staking 70% of the U.S. $3.54 billion debt for the rail link. There is uncertainty over which country would have to rescue the joint venture in a loan default, the AidData researchers said. If the railway is “insufficiently profitable, anywhere between 0-100% of the total $3.54 billion debt could become a repayment obligation of the government of Laos,” AidData warned.

Despair in Sri Lanka

In Sri Lanka, 2022 wrought shortages of necessities such as milk powder and cooking gas and a mounting debt crisis, which culminated in mid-May when the country, facing bankruptcy, officially defaulted on its foreign debt. For 2022 alone, Sri Lanka’s foreign debt obligations totaled U.S. $7 billion, according to online news magazine The Diplomat. Its total foreign debt exceeds U.S. $51 billion, with U.S. $25 billion due by 2026.

Long lines for food and fuel sparked weeks of protests across Sri Lanka in April 2022 that led to the resignation in July of President Gotabaya Rajapaksa, whom they blamed for crashing the economy.

“There is no solution but for the president to go,” Naveendra Liyaanarachachi, 27, one of the protesters, told The New York Times newspaper in mid-May 2022.

Sri Lankan lawmakers elected Prime Minister Ranil Wickremesinghe as president after Rajapaksa fled the country.

Although the tourism-dependent country’s cash crunch was caused partly by the COVID-19 pandemic, the government’s continual borrowing of money led to a slew of unpayable foreign debts coming due. The economy contracted by 1.5% from July to September 2021, and inflation surged to 12.1% in December 2021, The Diplomat reported.

Sri Lanka’s cash shortage contributed to an economic downspiral, slowing fuel imports. Plunging water levels at hydroelectric dams exacerbated the power and fuel shortages. Sri Lanka’s leaders in January 2022 sought relief from Chinese creditors as the country risked going into default, reported WION, a global news network based in India. “It would be great relief to the country if attention could be paid to restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic,” Rajapaksa told visiting Chinese Foreign Minister Wang Yi in January, WION reported. Yet the PRC offered no relief. “Sri Lanka will surely overcome the temporary difficulties as soon as possible,” a Chinese Foreign Ministry spokesperson said.

Since 2007, Sri Lanka has piled up U.S. $11.8 billion worth of debt through sovereign bonds, which makes up 36.4% of its external debt. Its second-largest creditor is the Asian Development Bank, which loaned Sri Lanka U.S. $4.6 billion, Reuters reported. Its next largest creditors are Japan and the PRC, which both are owed about U.S. $3.5 billion.

Although the PRC is not Sri Lanka’s largest creditor, its projects have been the most controversial. A high-profile example is the Hambantota Port, which opened in November 2010 with Chinese funding and eventually was turned over to Chinese control. In 2017, China Merchants Port Holdings Co. Ltd. acquired a 99-year lease to run the port and take a 70% stake in the project in a joint venture with state-run Sri Lanka Ports Authority when Sri Lanka couldn’t make debt payments.

Corruption, Protests and Scandal

Throughout the Indo-Pacific and the world, scandals continue to follow OBOR projects. The AidData review said 35% of OBOR projects encountered implementation problems, such as “corruption scandals, labor violations, environmental hazards, and public protests.” By comparison, 21% of the Chinese government’s infrastructure portfolio outside OBOR faced similar problems. “Host country policymakers are mothballing high-profile BRI projects because of corruption and overpricing concerns as well as major changes in public sentiment that make it difficult to maintain close relations with China,” the report states, using another acronym for the OBOR scheme.

Perhaps nowhere is this trend more evident than in Malaysia, where a slew of OBOR projects have been stalled by scandal. The East Coast Rail Link, for example, is the signature OBOR project in Malaysia. The 640-kilometer railway is supposed to connect Port Klang on the west coast to Kota Bharu on the east coast. The project was suspended in 2018 over corruption allegations and since has been subjected to multiple renegotiations and realignments, The Diplomat reported in October 2021.

The project was at the center of a scandal that eventually ousted then-Prime Minister Najib Razak from office in May 2018. Najib that year suffered a stunning election loss to 92-year-old Mahathir Mohamad, who had led the country for 22 years before coming out of retirement to challenge Najib.

When Najib’s defeat set in, “it’s possible that no one was more dismayed than officials in Beijing,” Foreign Policy magazine reported in January 2019. That’s because Najib had granted the PRC extraordinary access with myriad projects all over the country. Najib eventually became the focal point of a scandal linked to a state development fund known as 1Malaysia Development Berhad, or 1MDB. His opponent alleged that “some of the Chinese money pouring into Malaysia was being used to refill the fund’s graft-depleted coffers,” Foreign Policy reported.

The Wall Street Journal newspaper in January 2019 provided evidence. Minutes from a series of meetings showed that Malaysian officials suggested to their Chinese counterparts that the PRC should finance infrastructure projects at inflated costs to help settle 1MDB’s debts. “If true, the report puts tangible proof behind widely held suspicions that China exploits corrupt regimes to propel” its OBOR scheme, Foreign Policy reported.

Najib would not weather the scandal. A Malaysian court in December 2021 upheld his conviction and 12-year prison sentence on corruption charges. The court found that Najib had illegally received about U.S. $10 million from SRC International, a former unit of the now-defunct 1MDB.

Ismail Sabri Yaakob took over as prime minister in August 2021 and has vowed to keep the rail link moving. The reputational damage to OBOR, however, had already set in. Agatha Kratz, an associate director at the research and analytics firm Rhodium Group, told the Center for Strategic and International Studies in a March 2021 podcast that the COVID-19 pandemic accentuated a preexisting trend in which the PRC’s projects were being shelved due to concerns about debt sustainability. “It really kick-started this whole narrative of debt-trap diplomacy” for OBOR, she said. “All of a sudden, international media started picking up on those setbacks and you know, the attention on the initiative turned pretty sour.”