Post-Covid, one of the major issues that global forums consisting of nation-states are debating is the problem of debt plaguing many low-income countries. Both the forums housing advanced & large economies, the G7 & G20, are constantly finding it difficult to arrive at some consensus surrounding high levels of debt. Particularly important is the role of China, whose debt diplomacy hinges on a vulture surrounding a low-income nation’s prized geostrategic assets. Chinese for a decade have been pushing infrastructure building by low-income countries as a magic bullet to solve their plateauing economy and a path to garner foreign investments & private capital into nations. These mega infrastructure projects were executed end-to-end with borrowings from Chinese financial institutions and majorly were physically executed by Chinese companies. China hence both lent loans at high-interest rates and established a market for excessive construction inputs like cement, steel, and iron in foreign nations. This propelled the Chinese economy as the Belt & Road Initiative captured the eye-balls of sovereigns in these low-income countries as an easy way to be a fast-growing economic powerhouse.
Although the Chinese idea of big-ticket infrastructure projects solving numerous structural bottlenecks in the economy was tempting, it completely over-estimated the use-case for such infra projects and repaying capacity generated by these in low-income nation-states. Thus started the construction of many white-elephant projects across the globe in the BRI scheme. We in India have a fairly rough idea of the difficulties surrounding mega infrastructure projects and the time required for them to be completed and generate any returns. Low-income nations like Sri Lanka very well underestimated these difficulties, and even all-weather friends of China, the Pakistanis, couldn’t fathom the unviability of the unwieldy large infra elephants. The final nail in the coffin for the recipient nations of Chinese debt was Covid and the slowdown of free-flowing Chinese capital. The Chinese economy itself contracted and the insurmountable debt grew into a rude shock as the Chinese resisted any negotiation to either partially waive or renegotiate debt burdens.
The ravaged low-income economies again suffered due to the Russian invasion of Ukraine and the following war, as energy prices spiralled. The Paris Club, formed by advanced economies & lending nations, has consciously agreed to find sustainable solutions to the debt problems or else risk several countries around the globe being bankrupt. This will in turn propel instabilities and clashes erupting across the globe. The world in general, and developed nations, especially the US, have little energy left to put off fires. A synchronised spiralling debt leading to unstable economies unable to provide basic amenities to their people will eventually create harakiri in the global system. The obstacle in front of the Paris Club has again been China, which decided not to renegotiate debt through its loans till Multilateral Financial institutions like World Bank & IMF do not intervene. Though their intervention will solely be to foot interests arising out of Chinese loans. The US has been categorical in denying any burden on its shoulders in servicing unsustainable debt arising from illogical Chinese loans. This makes many low-income countries anxious and at a crossroads.
Amidst this uncertainty, one must follow a prudent path laid down by Multilateral Financial Institutions and heed the advice of advanced economies. Low-income nations must necessarily wean themselves away from Chinese loans by forging financial partnerships with advanced democratic nations. At the end of the day, although Multilateral Financial Institutions have several lacunae, they are still tested as a better way of building resilient economies than Chinese state-sponsored irrational loan methods. These low-income nations also have political systems that defy any checks and balances which is one of the major remedies that Multilateral Financial Institutions demand for fixing economies. In general, this path is better suited and low-income nations have to make a choice amidst dwindling foreign reserves and white-elephant infrastructure projects not bottling out any animal spirits in their domestic economies. Other nations who haven’t yet attached themselves to this Chinese bandwagon must be very careful not to. Their short-term political gains by flowing Chinese capital causes eventual loss of sovereignty and heavy indebtedness.
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