The BRI has left countries drowning in huge debts, the IMF’s numerous lending programs for developing countries create those same “debt traps”.
Over the years, China has cemented itself as a vital player in the Asia-Pacic and made giant strides in the world arena. Through its Belt and Road Initiative (BRI), also known as the ‘New Silk Road’, China has rmly established itself as an important economic partner for developing countries across Eurasia, Africa, and Latin America.
The BRI was first announced in 2013 by President Xi Jinping to enlarge China’s domestic market, increase its economic and political inuence, and foster a high-tech economy. The project claims that one of its goals is to “lift 7.6 million people out of severe poverty and 32 million out of relative poverty.”
However, the BRI has left many partnering countries drowning in vast debt to China, often leaving them with the short end of the stick. Countries like the United States and Western Financial bodies such as the International Monetary Fund (IMF) have increasingly used the existence of these debt traps to attack the BRI. While not without merit, this demonization of the BRI feels hypocritical coming from the IMF, which has launched numerous lending programs to developing countries that have created those same debt traps. As the IMF announces the tightening of interest rates to limit the accumulation of debt, it is worth looking into whether the IMF actually cares about curbing debt, or if it just does not want China to be the one reaping the benets from indebted countries.
An Overview of the BRI
Once known as “One Belt, One Road”, the BRI is a vast international development plan that aims to build world-leading infrastructure and unify economies across Eurasia and Africa with China at their head. Additionally, the project serves a more prominent strategic purpose – by providing new sponsorship opportunities and building partnerships with countries that might otherwise be
denied investment, it challenges the economic might of the United States and the international nancial order.
32 international organizations and roughly 146 nation-states have signed onto the BRI. In Asia, the inuence of China’s project accounts for 82% of the continent, increasing the Chinese government’s control of global supply chains, making borrowing nations guilty, and enabling it to intervene in international trade.
BRI ‘Debt Trap’
Through the BRI, China has cemented itself as an economic powerhouse with the capability and drive to lend massive amounts of capital to countries needing wealthy donors. Nevertheless, China is not motivated by selessness – when lending money, China can charge interest, meaning it can demand that a percentage of the original loan must be paid back to it along with the original loan itself.
For example, if a country were to borrow $1 million from China but China charges an interest rate of 2%, the borrowing country would have to pay back $1.02 million, meaning China makes a prot. China certainly is not unique in charging interests as other lending countries and international institutions do the same. However, what is happening here that has been raising concerns around the world is how China seemingly structures its lending programs and interest rates to entrap the borrowing country into a never-ending spiral of debt. Then when a country is not able to repay the loans, China swoops in and takes over its economy creating further dependence on China.
To see what this looks like in action, we can study the case of Sri Lanka. China has been providing loans for development to Sri Lanka since 2005, recently in 2021, they provided a loan to the state for 500 million dollars. However, now China has increased its interest rate which stands between three and six percent, as opposed to what was oered by the World Bank and the IMF (one to three percent). There is an economic crisis ongoing in Sri Lanka, as a result, protests began in the nation’s capital, Colombo, and quickly expanded due to the everyday power failures and scarcity of necessities like petroleum, food, and medications have been a struggle for the populace, the rate of ination has surpassed 50%. Due to its inability to repay the debts, the Sri Lankan government was forced to ask China to consider an exchange of state-owned property to pay o its debt interest, they attempted to sell properties of the state to local Chinese businesses.
The Chinese capitalist strategy in Sri Lanka works by ooding the local market with inexpensive Chinese goods, this could be one of the leading causes of the country’s economic crisis. This initiative enforced by China could be interpreted as an attempt to ruin and gain as much decisive benet as possible by trapping the current administration in pointless infrastructure projects. Due to its debt to China, which exceeds $ 1 billion, Sri Lanka has been compelled to hand over a 99-year lease to Chinese government firms for the use of the Hambantota port. This tactic and its outcome have been identical throughout Africa, Asia, and Latin America in nations that have borrowed billions of dollars from China. Research ndings by the Green Finance & Development Centre at Fudan University in Shanghai, China ranks as the second-largest individual lender to developing countries just behind the World Bank.
IMF and its Interference
When it comes to assisting countries with development, the West has established the international monetary fund, to help developing nations rise out of poverty and enable them to restore their economies. Providing funds to nations, the original goal of IMF funding is to give nations some space to implement new policies and plans without worrying about the nancial consequences. The IMF mainly focuses on advancing worldwide nancial unity, promoting trade and economic growth, and preventing unfavourable policies. To secure a loan from the IMF, a nation must comply with a series of economic changes known as a structural adjustment to obtain nancing from the IMF. These structural changes involve a package of nancial measures, such as cutting government spending, promoting free trade, easing requirements to encourage foreign companies to invest, and enhancing local taxation.
The changes are a must to ensure a country does not fail again, they come under the structural adjustment program. The SAP of the IMF has since the 1990s received a restorm of criticism from academics. Instead of promoting long-term stability, SAPs, unfortunately, produced detrimental eects on the social, economic, and political growth of many countries. The argument is that the IMF connes the borrower nation and thereby deeply inltrates its monetary system. The country’s internal economic system is disrupted and unsettled by excessive interference. As a result, the country’s national government is not able to devise social policies that satisfy the needs of the domestic sector and the aspirations of the people.
In the case of Zimbabwe, SAPs contributed to rising poverty, declining economic stability, and detrimental environmental repercussions. In a more recent example, Argentina failed to repay its debt to the IMF therefore, a new deal was reached allowing for extra-economic assistance from the IMF on the condition that Argentina completes a detailed nancial restraint strategy, and minimizes economic spending. The IMF took advantage declaring that their debt was unsustainable and dictated terms and conditions such as what are the proper steps to take to restore the Argentine economy, similar to how China has nancially entrapped other countries with the same guilt and inability to repay debt taken advantage by the IMF as well.
While there may be evidence to suggest that China is economically trapping nations through the BRI, international institutions like the IMF have historically and continue to do almost the same thing. While seeming more approachable and helpful, the IMF redesigns a country’s whole structure to meet the demands and specications of the organization.
The hypocritical stance of the IMF and Western powers must be called out. The main agenda of the West seems to be stopping the Chinese expansion and spreading the values of democracy. China’s progress has halted the inuence of the United States. By highlighting the exploitative nature of the BRI project they hope to portray China as the bad guy and lure emerging nations into taking the help of the IMF hence, falling into their traps. This is not to suggest that China is fair either, both the IMF and the BRI have self-serving objectives.
This dynamic puts developing nations in a dilemma as to whose aid and assistance they should seek and forces them to consider if the benets outweigh the costs. Trusting the intentions of China and the IMF and who is true is a dicult task indeed however one thing is sure once any nation takes a loan from either, the repayment of that said loan may take a long time, therefore countries must exercise caution when negotiating with the IMF and China to avoid falling into the debt traps set by both.