China’s Debt Diplomacy Takes A Credit Hit

SRI LANKA AND Pakistan might count as among the ‘dangerous and chaotic places’ that President Xi Jinping last November advised Belt and Road (BRI) investors to avoid. Both are strategically important waystations along the BRI that are under severe financial stress and in political turmoil.

As friends of China, both would be looking east for assistance, aid that Beijing is being slow to provide. It has not yet reissued a promised $4 billion of loans to replace those Pakistan paid off in late March. Nor has it responded to Sri Lanka’s request for $2.5 billion in credit support.

China has become the largest government creditor over the past decade. Its state-owned policy banks often best the International Monetary Fund (IMF) and the World Bank in annual lending to developing countries.

The scale of that lending and the lack of transparency as to its terms have drawn criticism for exacerbating debt problems in poorer countries and accusations of ‘debt-trap diplomacy’.

Sri Lanka and Pakistan’s optimism that Beijing will come through for them is running into a new realism in Beijing. This is already evident in China’s circumspect approach to debt relief in Africa.

At last November’s high-level BRI symposium, Xi urged a cautious approach to lending along the Belt and Road. For the past couple of years, it has been apparent to top leadership that China’s banks have taken on too much debt in countries with uncertain repayment prospects.

A slowing economy at home and the persistence of domestic financial stability concerns have only made these worries more acute.

Securing approval for new credit lines is becoming harder even for policy banks as authorities emphasise the need for improved risk management and controls.

Sri Lanka has already turned to IMF in Washington for help with preparing an economic recovery programme as a basis for restructuring its debt and emergency financial assistance. Pakistan’s new leaders also plan to work with the IMF to stabilise the country’s economy.

Sri Lanka, in particular, will have as weak a negotiating hand with the IMF as it has had with Beijing.

China’s concern will be that Sri Lanka will have to accede to IMF demands, including who should occupy key government positions. That could mean a government less well disposed to China than some of its predecessors.

Similarly, the ousting of Imran Khan as Pakistan’s prime minister may cost Beijing a friendly if not necessarily firm ally in a country that provides an essential connection between the BRI’s two halves.

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Filed under China-Pakistan, Economy

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