‘Personal Loan’ from BRI
A research report by the University of William and Mary in the US has revealed that since 2018, China has changed its $900 billion Belt and Road Initiative to reduce the use of foreign currency instead of lending for BRI projects. Debts are disbursed. deficiency Brad Parks, Edtata’s executive director, said China has made a “significant shift from project lending toward balance of payments debt and toward emergency rescue lending.” Edtata reports on government documents and official documents. And, it has been said that since 2018, China has given the largest loan to Pakistan.
Pakistan has been given the highest loan
State-owned Chinese banks have provided $21.9 billion in short-term loans to Pakistan’s central bank since July 2018, while medium-term loans to Sri Lanka since October 2018, according to government documents and official documents. China on Has given a loan of 3.8 billion dollars. The report revealed that the way China has distributed its debt suggests that China is now playing the role of the International Monetary Fund itself, and when some smaller countries get stuck, they finance their balance of payments. provide However, China’s lending is not as affordable as IMF or World Bank lending, which is commonly compared to BRI lending.
Why are small countries borrowing from China?
The report states that the US banks have continuously increased the interest rates and meanwhile the oil prices in the world market have also increased significantly, due to which there has been a rapid withdrawal of foreign exchange from the developing countries. In which the coffers of developing countries have been continuously emptied and such countries were forced to extend their hands to China and China gave loans to those countries through its BRI project. According to World Bank researchers, China has provided nearly 60% of foreign debt to countries that are now in debt crisis.
African countries are also on target
The People’s Bank of China last year issued an emergency loan of ₹300 million to shore up the foreign exchange reserves of neighboring Laos. Chile expanded currency exchanges with China in 2020 to get its economy back on track during the Covid pandemic, while the Bank of China Ltd extended a $200 million loan to the African Export-Import Bank for a pandemic relief program in the same year. China is acting very smartly and Beijing is acting on the assumption that when BRE borrowers start facing liquidity pressures, Beijing will lend to those countries, the report said. Can weather the storm. Borrower countries need China’s help to solve their two problems, number one, to pay off their old project debt and secondly, to try to increase foreign exchange reserves,” Parks said.
How did China give a loan to Pakistan?
Pakistan began to borrow heavily from China at a time when Pakistan’s import costs and foreign exchange reserves began to rise rapidly and due to this, Pakistan faced difficulties in balancing its international payments in the year 2017. The crisis prompted Pakistan to enter into protracted negotiations with the IMF, and the IMF placed several conditions on Pakistan for lending to Pakistan. According to IMF data, 27% of Pakistan’s foreign debt is from China, which it has taken in the name of infrastructure projects on a large scale and all those projects are coming to fruition, but surprisingly, those who Pakistan has taken loans for projects. From China, work on those projects has not started, but Pakistan has already raised the money.
The situation in Sri Lanka has become worse
Sri Lanka’s problems in servicing foreign debt have worsened as a result of the pandemic. When Sri Lanka’s tourism sector crashed due to the Covid pandemic, a major source of foreign exchange for Sri Lanka was cut off, so Sri Lanka’s foreign exchange reserves were quickly depleted and as oil prices began to rise, what happened , the Sri Lankan economy collapsed. Sri Lanka is now seeking a loan from the IMF and Sri Lanka has also extended its hands to China. Sri Lanka has also accepted the condition of reduction in government expenditure before the IMF. Along with this, Sri Lanka says that 10 percent of its debt is from China.
The interest rate game in Chinese debt
According to Parks, China’s emergency loans have variable interest rates rather than fixed interest rates, as was the case with infrastructure lending. That is, China is free to change interest rates at will and as soon as any country tries to go against China, it raises interest rates. Also, IMF loans are for 10 to 20 years and interest rates are very low, but China disburses these loans for 3 to 5 years at high interest rates. According to Edtata, China has given an emergency loan to Pakistan only for one to three years. Which Pakistan has failed to pay. Along with this, it lends to China keeping a separate margin of 3 percent on its interest rate. Along with this, the loan given by China to Sri Lanka has been given for 10 years with a grace period of 3 years and an additional margin of 2.5 percent in the interest rate over the LIBOR benchmark. China’s loans to Pakistan and Sri Lanka are mainly channeled through currency swaps, China Development Bank, Bank of China and Industrial and Commercial Bank of China Limited People’s Bank of China (PBOC), according to Edtata.
There was no response from the Chinese banks
The PBOC and central banks in Sri Lanka and Pakistan did not immediately respond to requests for comment. Chinese banks and the State Administration of Foreign Exchange also did not respond. At the same time, countries with balance of payments issues are increasingly turning to currency-swap arrangements with the PBOC, providing them with renminbi, which can also be traded for dollars. While such deals boost countries’ foreign exchange reserves in the short term, Parks said, “nothing fundamental has changed purely, that money goes into a country and comes back.” Parks said, “If you are giving a loan to a country and that country has defaulted on the old debt, you are making the situation worse by giving it more debt.”