Confirming the early conclusions reached by the Belt and Road Institute in Sweden (BRIX), a new study conducted by a renowned American research center showed that the wide-spread allegations that China is setting up “debt traps” for developing nations through financing Belt and Road infrastructure projects have no basis in reality. On the contrary, China’s debt relief efforts are the most extensive in the world. Especially in the current period of the economic disasters caused by the COVID-19 Pandemic, China is leading the way in alleviating the debt burden of the most affected nations, especially in Africa. (see separate article).
On June 18, a report, “Debt Relief with Chinese Characteristics” was released by Johns Hopkins School of Advanced International Studies (SAIS) which sought to peel away the onion layers on that question of accusations of China’s “debt trap.” SAIS researchers Kevin Acker, Deborah Brautigam and Yufan Huang reported that after examining over Chinese 1,000 loans to African nations, analysis “suggest[s] that agreements have been easier to reach with Chinese lenders than with private creditors,”.
Since 2000, the state of China is estimated to have loaned over $150 billion to Africa (this is exclusive of “private,” not state-owned lenders, which have loaned much more), of which $3.4 billion has actually been “cancelled.” Over that 20-year period, China has also “restructured and refinanced” $15 billion in debt. Most crucially, the researchers report — in harsh contrast to the “debt trap” hype—China had never seized any assets. “We found no ‘asset seizures’ and despite contract clauses requiring arbitration, no evidence of the use of courts to enforce payments, or application of penalty interest rates.
“As the continent’s largest single creditor,” Bloomberg writes in its review of the report, “China is seen as key to the success of the Group of 20 leading economies’ plan to freeze about $11 billion in debt payments from poor countries this year,” noting that the G20 has stalled, approving “less than a quarter of 73 eligible countries with a debt waiver.”
One important conclusion the study writers draw is the difference in mentality of the Western lenders and the Chinese. They state:
“Our data records more than 1,000 Chinese loan commitments in 49 African countries since 2000. Between 2000 and 2019, Chinese lenders restructured or refinanced at least 26 individual African loans. We found that China has restructured or refinanced approximately US$ 15 billion of debt in Africa between 2000 and 2019… Unlike the Paris Club, Chinese lenders have tended to treat restructuring or cancellation loan-by-loan, not on the basis of the entire debt portfolio in that country. This parallels an earlier emphasis on “development sustainability” (looking at the future contribution of the project) rather than “debt sustainability” (looking at the current state of the economy) as the basis of project lending decisions.”
This is exactly the key point that is usually overlooked or entirely ignored by both uniformed economists or prejudiced geopolitical think-tankers and government officials in the West.
This point of the difference between issuing credit to build infrastructure that would enable a deeply indebted country to raise its productivity and thus be able to repay its debt, as opposed to borrowing more money from international lenders to pay old debt ending up in a real debt trap, was thoroughly discussed by BRIX member Hussein Askary and Physical-Economics expert Jason Ross in a paper issued in August 2018 under the title “Why China’s ‘Debtbook Diplomacy’ is a Hoax”. The authors used the case study of Pakistan and the Chinese investments in the China-Pakistan Economic Corridor (CPEC).
Here is the relevant section of the 2018 paper:
The Case of Pakistan!
One very pressing and clear example where a country can today be destroyed by Western debt, and be saved from this trap by China, is Pakistan. In Chapter 4 of the “Debtbook Diplomacy” study, Parker states under the title “U.S. Interests at Stake,” the clear imperialist tendency he subconsciously harbors, completely missing the beam in his own eyes. Parker’s “point 1” states that “China’s expanding regional influence and access to South Asian and Pacific Island ports has the long-term potential to alter the regional balance of power away from effective U.S. naval dominance” (emphasis added). Worse is to come in point 2: “China’s loans undermine the U.S.’ ability to use its own economic assistance to promote U.S. security objectives. This assistance has provided the U.S. a powerful means to advance its nuclear security and counterterrorism interests in Pakistan.”
Pakistan, for reasons too complex to be sufficiently explained in this article, became a conduit for the Anglo-American geopolitical practice of pitting so-called Islamic forces against the Soviet Union and Russia in the Afghan War that extended from 1979 to 1989, and the consequent emergence of so-called Islamic jihadist terrorism as consequence of that, with Pakistan itself becoming a direct victim.
In that process, Pakistan’s economic development plans were halted, and the country became more and more dependent on U.S., British and Saudi financial assistance, later combined with IMF and World Bank loans.
Today, the Paris Club of lenders (composed almost entirely of Western countries), and multilateral lenders, spearheaded by the IMF and international commercial banks, are Pakistan’s largest creditors, not China, according to official statistics provided by the State Bank of Pakistan. Pakistan’s foreign debt is expected to surpass US $95 billion this year, and debt servicing is projected to reach $31 billion by 2022-2023. In the current fiscal year, Pakistan will pay $4.2 billion to these foreign creditors. Debt servicing of China-Pakistan Economic Corridor (CPEC) loans will start this year, but amounts to less than $80 million in repayments, according to Pakistani daily Dawn. In light of this, it is quite ironic that U.S. Secretary of State Mark Pompeo, the head of the U.S. institution that commissioned Parker’s report, warned in July of this year that the U.S. will put pressure on the IMF when it considers a $12 billion bailout package requested earlier this year by the government of Pakistan. “Make no mistake. We will be watching what the IMF does,” Pompeo said in an interview with CNBC television on July 30. “There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself,” Pompeo said.
The IMF, and consequently the Paris Club members, have been actively meddling in Pakistan’s fiscal policies and its sovereignty through debt rescheduling programs and the conditionalities attached to IMF loans through the Extended Fund Facility, for example. The last such Facility included a loan of $6.4 billion in 2016. The conditionalities attached to this kind of loan is, for instance, a government fiscal deficit limit of 4.2%, meaning that any substantial state-backed investments in infrastructure would be impossible. In addition, these conditionalities included the slashing of 200 billion Pakistani rupees (approximately $1.6 billion) from Pakistan’s own development plans. It is evident, like in every other case of IMF/World Bank “bailout packages,” that the debt grows bigger, and the economy declines further after these measures are taken.
However, the international mass media continue to accuse China of being the problem, and in some cases outright falsehoods are thrown into the media barrage as if they were scientific facts. For example, one big headline in the Pakistani daily The News International published on September, 29, 2017, was “Pakistan to pay back $100 bn to China by 2024.” Without trying to explain how this bizarre number was calculated, the writer states, “Pakistan has to payback $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of banks’ loan in 19 early harvest projects mostly relating to energy sector under China Pakistan Economic Corridor (CPEC).” The article never returns to this outrageous claim and provides no explanation for its figures. The Swedish leading business daily Dagens Industri published an article on August 20, 2018 in which it claimed, without bothering to cite the source of its information, that “Pakistan has incurred debt from China amounting to US$270 billion in the past few years.” The reader is supposed to swallow this information from these leading media sources without questioning.
Pakistan’s growing foreign debt is a direct result of its giant trade deficit, due to the IMF model. Pakistan has been running a yearly deficit of over $23 billion for the past few years, and it is increasing dramatically. Pakistan’s main export items are raw materials and staple foodstuffs, and its main manufactured export is textiles. Staple food and raw materials suffer from price oscillations, whereas the textile sector is not competitive because of the collapsing energy supply. And it is exactly the energy sector, together with transportation, that is the main focus of Chinese investments in the CPEC.
In the fiscal year 2017-2018, imports stood at $60.86 billion, which was 2.6 times of exports of $23.22 billion, resulting in a historically high trade deficit of $37.64 billion. Once again, imports were heavily dominated by energy (oil and gas) amounting to $14.43 billion.
It is obvious that Pakistan’s power sector is the most critical element in resolving the country’s financial and economic crisis. A look at this sector’s capacity and power generation sources can help illustrate the situation and its resolution.
The total installed capacity for the electricity sector in the country is 25,000 MW (2017) with the average demand being 19,000 MW. The fuel sources are: 1. Oil and gas: 14,635 MW – or 64.2% of total power generation. 2. Hydropower: 6,611 MW or 29% of total generation capacity. 3. Nuclear power: 1,322 MW or 5.8% of the total generation capacity.
We have to bear in mind that the cost of importing oil and gas is at US$13 to 14 billion annually.
The CPEC’s energy aspect which is the main focus of the China-Pakistan cooperation can ensure the generations of enough electricity to eliminate the deficit in electricity supplies and preparing the economy for a further surge in industrial activity. The breakdown of the investments that are completed, under construction or negotiation is as follows: Coal plants: 8,580 MW; Hydropower: 2,700 MW; other thermal plants (natural gas): 825 MW; Solar power plants: 900 MW; wind farms: 350 MW. The expected total new electricity generating capacity is 13,355 MW.
The total cost of all these power generation projects (including mining of coal and electricity transmission lines) is estimated to be $23-30 billion, which is approximately the cost of two years’ imports of oil and gas, and less than half the annual trade deficit.
Since 1995, Iran has been negotiating with Pakistan to build a gas pipeline from the Iranian gas fields in the Persian Gulf to Pakistan and further to India (dubbed the Peace Pipeline) through which Iran would export natural gas at lower price levels than international markets to the two countries. Pakistan would not only have a cheaper source of electricity generation, but also a basis for petrochemical industries adding value to the raw material it imports. However, pressure from the U.S. and Saudi Arabia has prevented this project. In 2013, Iran had built the pipeline from its fields all the way to Zahedan, a border city with Pakistan. But the Pakistani side was forced once again to back down from the agreement. In 2016, with encouragement from the Obama Administration, Pakistan agreed to a 15-year agreement to import liquified natural gas (LNG) from U.S. ally Qatar, at market prices and with an added large cost of container transportation. Pakistan, which is suffering a chronic trade balance deficit, cannot pay for the Qatari LNG, and thus is forced to borrow from British and other Gulf and western banks, adding more to the debt servicing burden. Needless to say, the U.S. and Britain never allowed Pakistan to develop its nuclear power and technology base, focusing rather on the danger of nuclear weapons proliferation as a major U.S. national security concern.
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