Harsh V Pant & Aditya Gowdara Shivamurthy
The crises in Sri Lanka and Pakistan are raising questions about the relevance and the costs of their reliance on the alternative financial system provided by China’s Belt and Road Initiative
On March 6, China became the last major bilateral creditor to provide financing and restructuring assurances to Sri Lanka. Following this, the International Monetary Fund (IMF) has agreed to make a final decision on Colombo’s $2.9 billion bailout package. Sri Lanka’s consistent back-and-forth negotiations with the IMF and China indicate a broader development in South Asia.
In 2022, two other South Asian nations and participants of the Belt and Road Initiative (BRI) — Pakistan and Bangladesh — sought financial assistance from the IMF. These developments in the subcontinent indicate that developing countries are furthering their economic interests and stability by approaching the IMF and the West, even as they try not to antagonise China.
China’s geopolitical ambitions and the search for status in the emerging multipolar world have exacerbated its tensions with the Bretton Woods system. Its revisionist ambitions seek to rival and substitute “Western-dominated institutions” Western institutions like the IMF. The 2008 financial crisis, and the launch of the BRI in 2013, saw a massive expansion of strategically important investments from Chinese institutions and banks.
Elite capture, financial incentives and corruption, fewer conditions for assistance, and swift disbursement had made China an attractive alternative for the developing world. By 2021, China’s lending was worth $1.5 trillion – making it the largest creditor in the world, even surpassing other multilateral organisations.
Contemporary Financial Scenarios
Yet, recent economic hardships in the region underscore the high risks affiliated with Chinese debts. Today, Sri Lanka owes over $7 billion to China, which is nearly 20 per cent of its total external debts — making China the largest bilateral donor. Over time, Beijing has only contributed to this debt-trapping. As signs of depleting forex grew clear in 2017, Beijing stepped in with new assistance loans to reinforce Sri Lanka’s forex reserves. It was also in Beijing’s interests to deter Sri Lanka from approaching the IMF, considering that economic reforms, debt haircuts and loan restructuring would impact its own economic interests.
As the crisis deepened in 2022, and Sri Lanka’s differences with China intensified, Beijing stayed indifferent to Sri Lanka’s requests for $4 billion in assistance and loan restructuring. It further expressed its displeasure over Sri Lanka suspending its debt services and approaching the IMF for a bailout package of $2.9 billion. Urging broader economic reforms, the IMF demanded Sri Lanka seek debt restructuring guarantees from its major bilateral lenders.
China’s reluctance to restructure debt compelled the island nation to miss its IMF deadlines twice. Finally, with India and Japan promising debt restructuring to Sri Lanka, China stepped up its half-hearted support. China Exim Bank agreed to restructure its loans worth $4.1 billion, while other lenders like China Development Bank, have not offered any assurances yet.
The crisis in Pakistan is no different either. Pakistan already owes over $30 billion to China, which is 30 per cent of its overall external debt. China continues to be Pakistan’s biggest creditor and has invested nearly $62 billion in the China-Pakistan Economic Corridor. China’s assistance has failed to generate revenues, reforms or even attract more foreign direct investments (FDIs). Having borrowed significantly from China, Pakistan is now desperately reaching out to IMF for assistance.
The talks with IMF for a bailout package worth $1.1 billion have, however, resolved the stalemate. Pakistan has increased its taxes to fulfil IMF demands, yet it has failed to restructure its debt and renegotiate with China. Rather, China is continuing to assist Pakistan with new loans. In November 2022, China offered assistance worth $8.75 billion, which included a commercial loan, currency swap, and loan rollovers. In the last two months, China has further offered assistance and loan rollover worth $2 billion, in turn compounding Pakistan’s long-term debt problem.
Meanwhile, Bangladesh has had its IMF stabilisation package worth $4.7 billion approved this year. Dhaka’s outreach to the IMF was a precautionary move, as the external debt remains vital to its growth, and it had continued to witness depleting forex reserves, energy shortages, and falling domestic production and exports. Bangladesh has an external debt accumulation of $72 billion – out of which it owes $5 billion to China, which is nearly 7 per cent of its total external debt. Although the debt owed to China is relatively small, Beijing has been investing in the country’s energy sector, physical infrastructure, railways, and connectivity projects, calling for a more cautious approach.
Beijing’s white elephant projects, commercial lending, exploitation of corruption, opaque negotiations, and hesitancy to restructure debt have played a significant role in the economic crisis of these countries. Offering fresh loans to address the debt problems has only exacerbated the structural vulnerabilities and economic instability in these South Asian countries. Realising the broader implications of Chinese lending – the West and India are persisting in trying to convince South Asian countries to implement much-needed economic reforms and engage with the IMF. The US has asked Pakistan to shun its over-reliance on Chinese debt, and India, along with the Paris Club countries, has assured Sri Lanka of debt restructuring.
That said, smaller South Asian countries will continue maintaining good ties with both China and the West. A friendly Beijing will offer more autonomy for Sri Lanka, Pakistan, and Bangladesh to balance India and its partners in the region, and vice versa. China also holds significant economic leverage, which is crucial for the region to embark on its economic recovery and to also avail the IMF bailout packages.
In contrast to the popular narrative where IMF’s programs, conditions and prescriptions are often dubbed as tactics of “Western colonialism” – today, the IMF has been attempting to stabilise the economy of smaller and developing countries. Beijing’s assistance, on the other hand, has been supplemented with narrow geopolitical interests and economic conditions. While status and geopolitical ambitions motivated Beijing to challenge the Bretton Woods system, the reality in the post-pandemic world is much more complicated. The crises in Sri Lanka and Pakistan are raising questions about the relevance and the costs of reliance on this alternative system. China’s alternative is not the panacea anymore as it had seemed once.
The article was first published in Observer Research Foundation as South Asian nations get back to reality on March 17, 2023.
Read more by the authors: Indo-Pacific & the New Normal: Embracing for the Challenges