The Belt And Road Initiative

The Belt And Road Initiative

When the Belt and Road Forum was held on May 14-15, 2017 in Beijing, four Least Developed Countries, namely Cambodia, Ethiopia, Laos and Myanmar, sent their highest level of delegation as their support to the Belt and Road Initiative envisioned by China. Afghanistan, Bangladesh and Nepal had ministerial level of representation in the forum. Other least developed countries that have signed up for the include Djibouti, Tanzania, Timor-Leste and Yemen.

Eleven out of 47 least developed countries have become a part of the China-led initiative. China’s belt road provides considerable opportunities for least developed countries to build and improve their infrastructure and connectivity, and ultimately enhance their economy through their active participation in global trade.

Some of the notable projects currently planned under the beat road framework that are of significance to the least developed include Bangladesh, China, India and Myanmar Economic Corridor; an industrial park in Cambodia; a high-speed Southern China – Laos railway line; Addis Ababa – Djibouti railway line; and a deep-sea port and an industrial park in Myanmar.

China has advanced the Public Private Partnership model for the execution of projects, but, the public coffers of the least developed are inadequate to invest in the proposed large scale projects, and also the private sectors in most of the least developed do not have the capacity to invest and carry out such projects.

This leaves the partner countries to take loans through Chinese banks and China-led multilateral financing institutions such as Asian Infrastructure and Investment Bank, New Development Bank under the BRICS, China Development Bank and Exim Bank of China. Needless to mention, the loans received are to be paid back in a definite period of time.

If the belt road projects result in higher trade volume, there will be a win-win situation. Otherwise, it will add financial burden to the least developed pushing them into external debt crisis. It is also to be taken into account that the least developed economies are typically prone to various risks such as foreign exchange risk, risk of recession and risk of commodity price volatility; and are plagued by structural and institutional inefficiencies including lack of per-existing infrastructure, corruption and red tape.

Several China-led projects under belt road are going through financial problems in some way or another; developing countries such as Sri Lanka. The country’s cabinet has recently approved a deal to sell 70% of its Hambantota port for $1.2 billion to state-owned China Merchants Port Holdings in order to pay off its $8 billion debt to China.

The port has been a commercial failure since it could not generate revenue even to pay staff salaries. It is feared that Cambodia, one of the least developed and a close ally of China, could also meet the Sri Lankan fate. In Cambodia, China is investing in an industrial park which will have over 100 companies. However, if, by any chance, such investments do not yield commercially, then Cambodia will have extreme difficulty in paying off its $3.9 billion bilateral debt with China.

Similarly, a high speed railway connecting Southern China to Laos would be the most expensive infrastructure project in Laos requiring $6 billion, which would be jointly financed by the government of Laos and concessionary loan from China keeping mineral wealth of Laos as collateral. Laos, with already 317% debt to export ratio and 11% debt service ratio as of 2015 according to International Debt Statistics, has high chance of falling into a trap of external debt crisis.

Among the least developed signing the belt road, Afghanistan, Djibouti and Laos are in high risk of debt distress according to the International Monetary Fund, as of 2017. The financial model of the belt road, which encourages the partner nations to access loans to fund its infrastructural project, has chances of landing these vulnerable countries into further debt crises.

Least developed should also consider their geopolitical complexities while accepting project proposals. Nepal, for example, is situated between two Asian giants China and India. Diplomatic relationship between the two has soured due to the recent Doklam standoff and the refusal by India to be a part of the belt road. It is now a challenge for Nepal to show diplomatic acumen while designing and implementing any belt road projects, not harming its relationship with any of the two neighbors. Likewise, China is building a deep sea port in Kyaukpyu town of Myanmar and also seeking similar approval from Bangladesh, giving it vital access to the Indian Ocean.

This will bring some challenging responses from India and the United States who cannot accept the Chinese hegemony over the region. Similarly, ASEAN least developed Cambodia and Laos have also been dragged into the territorial disputes over South China Sea. In the midst of possible escalation of tensions, it is likely that the interests of the vulnerable least developed will be disregarded while war among the big guns continues, and these powerless countries may simply be pawns among the mighty.

Even when countries are provided with cheap, concessional and unconditional loans as proposed, low income countries will have low bargaining power and little say over the construction modalities of the projects under the belt road. It is very likely that Chinese construction companies will be preferred without competitive bidding preventing the possibility of any skill transfer to the host countries.

Least developed may be bound to agree to unfavorable operational conditions in terms of labor, environment and material sourcing standards. Skeptics also argue that with loans taken from China being used to pay Chinese contractors and Chinese laborers, infrastructures are being built simply to extract raw materials and mineral resources from Asia and Africa to ultimately transfer it to China.