BRI sputters in South Asia

A decade after its launch, China’s Belt and Road Initiative seems to be sputtering in South Asia, due to a combination of over-capacity and indebtedness of the host economies. New projects and investments from China have come to a halt, while beneficiaries such as Pakistan and the Maldives are struggling with the debt that has started to come due for the completed projects. Yet China continues to remain an important economic partner for these countries.

For neighbouring countries and particularly India, the economic problems invariably lead to political instability, as evidenced recently in Bangladesh.

India refused to participate in the BRI, but its bordering states of Pakistan, Bangladesh, Sri Lanka and the Maldives, had signed on to it enthusiastically. All the four are currently facing challenges, brought on by a combination of economic and political, thereby reducing their ability to service the loans taken on for BRI projects, or attract fresh Chinese investment. Benefactor China is also facing economic headwinds, with a limited appetite to support financially unviable infrastructure overseas or make new investments.

The four debtors in the subcontinent are running a pattern of high debt and balance of payment issues, which are analysed below.

Within South Asia, Pakistan has been the most fervent proponent of the BRI. The $65 billion China-Pakistan Economic Corridor (CPEC) was described by the country’s rulers and scholars as a game changer which would transform the Pakistani economy. A decade later, the promise is unfulfilled. Pakistan certainly has several newly built power plants, funded under the CPEC plan, but its de-industrialised economy cannot use the electricity. The Gwadar Port in the gas-rich western province of Balochistan, projected to become a major trade hub, continues to operate with minimal traffic and is a central cause of discontent amongst the local communities affected by it, adding fire to a high-octane Baloch insurgent movement. The upgradation of the Karachi-Peshawar Railway Line, a $8 billion connectivity project in the north also promised by China, is stalled without the pledged funding. Incoming FDI from China, which was $1,317 million in 2017-18, fell to $927 million in 2023-24.

These numbers understate the drop in funds flow, as considerable Chinese money came to Pakistan as debt, not equity. Pakistan currently owes $30 billion to China, much of it incurred for BRI. Pakistan has also sought a ‘reprofiling’ – a fancy name for restructuring – for the $15 billion worth of loans it took for building nine new power plants under the CPEC. Throwing good money after bad, in 2020, China deposited $1 billion with the State Bank of Pakistan to shore up its foreign exchange reserves – and has since been persuaded to add another $4 billion. Now, China has agreed to roll over the repayment of that loan by yet another year as Pakistan’s empty coffers can’t repay.[1] This may be the limit to which China will make significant investments in an economy on the verge of default.

The Maldives, part of China’s String of Pearls strategy, too is currently on the verge of a default. Rating agency Fitch lowered its credit rating from CCC+ (some risk of default) to CC (default appears probable) in late August.[2] Two weeks later, Moody stepped down the already low credit rating of Maldives a notch, citing increased risk of default.[3] The culprit? Debt owed to China. The Maldives has a total foreign debt of $3 billion, about half of its GDP, of which $1.29 billion is owed to China. While the Maldives hosts a number of Chinese projects – the airport in Male, an important bridge and a number of resorts – almost all of these are older, pre-2019 projects. China hasn’t undertaken new, major projects in the Maldives since then, partly because the Maldives had a pro-India government from 2019-24, and partly due to concerns about the already unsustainable debt levels of the island nation.

Sri Lanka went on a debt-fuelled infrastructure buildout after the end of its civil war (2009), with China providing the finance as well as contractors for a series of roads, ports, water supply projects and a power plant. Some of these, particularly the Hambantota Port and Airport in the country’s south, and the expressways, cost way beyond what was needed. In the case of the Hambantota Port, the $1.1 billion debt was converted to equity, with a Chinese firm taking over the project on a 99-year lease. This has been cited as an example of debt-trap diplomacy, a charge denied by China. China’s total loans to Sri Lanka are now $7.3 billion, a little over one-sixth of Sri Lanka’s foreign loans.

By 2021, it was clear that Sri Lanka was in a crisis and heading towards a default. Then-President Gotabaya Rajapaksa directly appealed to China for help, including restructuring existing loans, which did not happen.[4] Inevitably, Sri Lanka defaulted on its external debt in 2022, after which it received $4 billion in emergency assistance from India, enabling it to tide over the immediate crisis. It is now working with the International Monetary Fund (IMF) to stabilize its economy. This means it will not pursue any new projects based on the past model.

Bangladesh is also a part of BRI but is an outlier in the Chinese financial addiction as it took on fewer projects compared to Pakistan or Sri Lanka. Most of the BRI projects were in the power and transport sectors. Three port upgradations – Mongla, Sonadia and Payra – remain either in planning or stalled soon after they were proposed starting in 2009. In 2021, Bangladesh announced it would cancel 10 proposed thermal power plants.[5] While details of all the scrapped projects are not available, five China-funded coal power plants remain on paper, indicating that capacity addition in Bangladesh has been limited. As a result, Bangladesh’s outstanding debt to China, as well as its overall foreign debt, are at more reasonable levels.

Bangladesh’s total borrowings from China stand at $5 billion, about 7% of the former’s external debt. The country has been facing stress on the external sector for some time now and committed to an IMF programme in November 2022.[6] Recently, Bangladesh has seen regime change, with U.S.-backed economist Muhammad Yunus now in the driver’s seat.[7] The fact that Bangladesh is already working with the IMF and has a U.S.-backed regime makes it an unlikely candidate for more Chinese investments.

While BRI has stalled in South Asia, China continues to be an important economic partner for these South Asian countries. Pakistan and the Maldives will need to restructure their debts – which requires the cooperation of their single largest lender, China. The economic crises the BRI leaves in its wake are rife for political unrest in the host nations. It often results in terrorism and trafficking of drugs, weapons and people in the border regions. The spillover is visible in India, as seen in the ongoing civil war in Myanmar, and its destabilizing impact on Manipur.

Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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References

[1] Pakistan has 1-year debt rollover commitments from key lenders: Bloomberg report, Dawn, Aug 6, 2024, https://www.dawn.com/news/1850513#:~:text=Pakistan%20has%20secured%20commitments%20from,)%2C%20Bloomberg%20reported%20on%20Tuesday.

[2] Fitch Downgrades Maldives to ‘CC’, Fitch, Aug 29, 2024, https://www.fitchratings.com/research/sovereigns/fitch-downgrades-maldives-to-cc-29-08-2024

[3] Moody’s Ratings downgrades Maldives’ rating to Caa2, places rating under review for downgrade, Moody’s, https://ratings.moodys.com/ratings-news/428179

[4] Uditha Jayasinghe, ‘Sri Lanka’s president asks China to restructure debt repayments,’ Reuters, Jan 10, 2022, https://www.reuters.com/markets/rates-bonds/sri-lankas-president-asks-china-restructure-debt-repayments-2022-01-09/

[5] Naimul Karim, ‘Bangladesh scraps plans to build 10 coal-fired power plants,’ Reuters, Jun 28, 2021, https://www.reuters.com/article/world/bangladesh-scraps-plans-to-build-10-coal-fired-power-plants-idUSKCN2E410D/

[6] ‘IMF Staff Reaches Staff-Level Agreement with Bangladesh on the Extended Credit Facility/Extended Fund Facility and the Resilience and Sustainability Facility,’ IMF, Nov 9, 2022, https://www.imf.org/en/News/Articles/2022/11/08/pr22375-bangladesh#:~:text=IMF%20staff%20and%20the%20Bangladesh,billion%20under%20the%20Resilience%20and

[7] ‘U.S. Delegation Meets Interim Government of Bangladesh to Underscore Continued Partnership,’ US Embassy Dhaka, Sep 16, 2024, https://bd.usembassy.gov/u-s-delegation-meets-interim-government-of-bangladesh-to-underscore-continued-partnership/