Is BRI road to a ‘debt trap’? The numbers say no

By Feng Da Hsuan and Liang Haiming Source:Global Times Published: 2018/11/21 22:48:40

Illustration: Luo Xuan/GT



 

The issue of whether China is pursuing "debt diplomacy" through the Belt and Road initiative (BRI) has sparked international debate.

For example, according to Ibrahim Mohamed Solih, newly elected president of the Maldives, an island nation in the Indian Ocean, the answer is yes.

In his inauguration speech on Saturday, he claimed that China's investment in the Maldives significantly increased the country's debt, and he claimed that the state treasury had been "ransacked" by China. He concluded by saying that the Maldives is facing a debt crisis.

Other nations such as Malaysia and Sri Lanka, as well as a number of African countries, have also raised issues regarding China's pursuit of "debt diplomacy" through the BRI. As academics, the proliferation of discourse about this issue attracted our interest.

It is our firm belief that the debt problem of a nation should and must be a mathematical one. International and trustworthy financial statistics must have the final word. Public debate should be based entirely on such figures.

To this end, and to achieve fairness, the statistics we use in this article are not from China.

Let us discuss the Maldives' debt problem. How big is the debt? No figures were given by Solih, so we'll use publicly released numbers from the US Central Intelligence Agency (CIA) and the IMF.

According to the CIA, in 2017, the Maldives' national debt was equivalent to 68.1 percent of its GDP. Globally, it ranked 53rd, which was lower than India (70.2 percent) and Sri Lanka (79.4 percent.) In 2017, the Maldives' GDP was $4.505 billion, while its foreign debt as of December 31, 2016, stood at $848.8 million. 

The IMF figures are lower than the CIA's. The IMF statistics show that the Maldives' national debt was equivalent to 34.7 percent of its GDP. By 2021, the number is forecast to rise to 51.2 percent.

There is a significant difference between national and foreign debt. For a nation to raise funds means that the central government will issue treasury bonds. Since the Maldives' national debt accounts for 68.1 percent of GDP according to the CIA, this means that the government is raising funds for administrative expenses, medical expenses, education expenses and other public expenditures.

In this regard, the national debt-GDP relationship only reflects the scale of government bond issues. This has nothing to do with China.

According to the definition of the IMF and the World Bank (WB), external debt is strictly the liability of residents of a country for contractual repayment to non-resi dents.

A country's external debt is primarily utilized to raise funds for investment to promote economic growth or to compensate for fiscal deficits.

Therefore, if the Maldivian president believes that his country has a Chinese debt dilemma, one should encourage him to release the latest figures. For example, of the $848.8 million of the Maldives' foreign debt, what is China's percentage? Furthermore, how much has Chinese debt boosted the growth of the Maldives' GDP and how many jobs did it add?

Second, as mentioned from the start, since China's "debt diplomacy" is being questioned, let's also explore Malaysia's debt problem to provide a comprehensive understanding of the underlying issues. Malaysia's Prime Minister Mahathir Mohamad and Finance Minister Lim Guan Eng recently pointed out that as of the end of 2017, Malaysia's government debt accounted for 80.3 percent of its GDP - much higher than the 50.9 percent level disclosed by the former prime minister Najib Razak. The two accused China of being the main cause of Malaysia's high debt.

Interestingly, Najib recently issued a statement saying that the new government's figures are incorrect and don't provide details of the current debt amount. According to Najib, this information would disrupt the financial markets and put credit rating agencies on alert. Indeed, the information would affect the confidence of foreign investors regarding Malaysia.

It's normal in many countries for political power to change hands, but financial statistics released before and after such changes should not show such large gaps.

What this shows is that either the current or former government is releasing debt figures for political and not economic reasons. For the sake of global confidence in Malaysia, this needs clarification. The current Malaysian government should reveal the percentage of foreign debt due to China out of its entire debt. If China isn't the largest creditor, who is?

The debt problems of BRI countries are not necessarily related to BRI projects. Before the BRI began, many of the countries and regions involved already had high debt levels, and China has not been the largest creditor of these nations.

The debts arose mainly from long-term borrowing from other countries and/or international financial organizations. We believe that having an appropriate level of external debt can help a country's economic development. In today's competitive environment, a country that can attract and retain large amounts of low-cost funding will gain a competitive edge. Such a situation reflects financial prowess, not weakness.

Take China as an example. There is no question that because of China's rapid economic growth, it has become the world's second-largest economy. On the one hand, it has benefited from the policy of reform and opening-up that has remained steadfast for 40 years. On the other hand, it has also benefited from the continuous influx of foreign resources.

We also believe that if BRI economies alter their policies and stop accepting low-cost and sustainable foreign investment, they will have troubled economic futures. Many BRI nations and regions have received loans from European nations, the US, Japan and even India. Why are such loans seen in a favorable light while those from China are "debt traps"?

Ultimately, when the debate is based on internationally accepted figures, it's clear the claims of Chinese "debt diplomacy" are not based on the actual numbers - they are political claims. If it was just a case of numbers, there would surely be a solution. It is less certain that an easy solution, or one at all, can be found for a political problem. 

Feng Da Hsuan is chief adviser of the China Silk Road iValley Research Institute and former vice president for research at the University of Texas at Dallas. Liang Haiming is chairman and chief economist of the China Silk Road iValley Research Institute. bizopinion@globaltimes.com.cn



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