UN warns China’s OBOR could drag South Asia into Financial crisis
Indian Defence News-US warns China for One Belt One Road Project, which could let Asia into debt trap.
NEW DELHI: The United Nation has raised a concern by red flagging the China’s ambitious project OBOR which will be built through PoK connecting other Asian countries as a special economic corridor because this could have an implication of long-term financial debt on Asian countries.
A recently concluded UN Economic and Social Commission for Asia and the Pacific Study (UNESCAP) has warned of financial risks in countries in south and central Asia where China’s announced investment value under OBOR is high compared to the relative size of the economy of the recipient country.
Earlier China made deals and Uzbekistan for $15 billlion in 2013, $37 billion with Kazakistan in 2014 and Pakistan nfor $46 billion in April 2015, each represents over a fifth of GDP level in Kazakhstan and Pakistan, according to the UN study.
China’s commitment to Pakistan has now reached $ 62 billion. Similarly, the $24 billion China-Bangladesh agreement in October 2016 is equivalent to almost 20% of Bangladesh’s GDP.
“External account indicators for some of these economies are relatively weak. In Kazakhstan, the current account deficit amounted to about 6% of GDP in 2016, while external debt stood at over 80% of GDP in 2015. In Pakistan, foreign external reserves are rather small at about 4 months of imports in early 2017”.
“Relatively easy access to large foreign loans for infrastructure projects, even if most of them tend to be on a concessional basis, can lead to risks through a slight deterioration in trade balance, undermining macroeconomic and balance of payments stability in small economies with underdeveloped financial markets and less effective debt management,” the study said regarding the nature of the Chinese loans.
It is no secret that Sri Lanka has run into a huge debt trap by welcoming Chinese funded projects. Sri Lankan debt exceeds $60 billion, more than 10 percent of that is owed to the Chinese. To resolve its debt crisis, the Sri Lankan government agreed to convert its debt into equity. This may lead to Chinese ownership of the projects finally.
The financing for BRI or OBOR related infrastructure projects will require large scale capital investments. An estimate by the Chinese government suggests total investment by China would amount to about $4 trillion. The McKinsey Global Institute (2016) and the Asian Development Bank (2017) estimated that infrastructure development needs in Asia are about $1.6 to $1.7 trillion per year on average in the years to 2030, according to UNESCAP study.
“Simply channelling exorbitant amounts of money into other countries is not going to be enough for realising the New Silk Route. The implementation of the initiative calls for something more — understanding and adapting to the internal processes of BRI participants…Like a chain, the Belt and Road is as strong as its weakest link and public perceptions toward China can become an existential issue for Beijing’s ambitious initiative,” said Daniel Balazs, a graduate from China’s Tongji University, Shanghai, while writing a piece for Australia-based East Asia Forum.