Many infrastructural developments, including several mega projects, have been underway in Bangladesh for over a decade. Among these projects, only Padma Multipurpose Bridge is being done with total domestic funding. Meanwhile, the rest of the projects are being funded by foreign donors and bilateral agreements. Notable donor organizations in Bangladesh’s infrastructural development include World Bank, Asian Development Bank, IMF, etc. On the other hand, through bilateral agreements, Bangladesh is also getting loan facilities for infrastructure development from Japan, China, India, and Russia. However, India has signaled China’s financial activity in Bangladesh as a potential debt trap. However, Bangladesh must pay the loan to China with an eight percent interest rate only.
Meanwhile, the country’s outstanding external debt as of March, FY 2021-22 stood at $68.25 billion, which is only 16.4% of the country’s GDP, which indicates that Bangladesh is in a safe position as per IMF recommendations. But should Bangladesh be bothered about falling into a Chinese debt trap?
In December 2017, Sri Lanka’s Hambantota seaport was leased to China for 99 years for $1.1 billion. Sri Lanka originally built this port with China’s $1.3 billion loan. However, Sri Lanka has not been able to generate much revenue since the port opened in November 2011, but not enough ships arrived there. After the country’s long-running civil war ended in 2009, the Sri Lankan government began focusing on various infrastructural development for economic development. Because of this, Sri Lanka started doing multiple development projects with loans from other countries and financial institutions, including China. In addition, since 2007, Sri Lanka has been issuing international sovereign bonds for funding. As a result, Sri Lanka’s foreign reserves began to decrease while debt servicing increased to pay off bonds issued and loans taken for development projects. To reduce the additional pressure on the reserve, the Sri Lankan government leased the Hambantota port to China Merchants Port Holdings Company Limited or CM Port, a Chinese company. Rumors about the Chinese date trap spread in Western media, including India, around this incident. But what was the reason behind such talks to the media?
China signed a security and defense strategic partnership agreement with Djibouti on February 25, 2014. As per the agreement, China established its first overseas naval base in Djibouti in August 2017, a few months before they took over the Hambantota port on lease. During the agreement signing, Djibouti invited China to build a naval base in the country. Still, China did not show interest because they were more interested in establishing a logistics center for the Chinese military in Djibouti. Reuters reported in 2017 that China had already found its first overseas military support facility in Djibouti. Djibouti’s geographical location is in the Horn of Africa, which is the gateway to the Red Sea and the busiest trade route to Europe via the Suez Canal. According to a South China Morning Post report, more than 10% of all global trade uses the Suez Canal, with China being the most prominent user. In addition, according to a Reuters source, Djibouti already has US, Japanese, and French military bases, and China’s international relations are not so pleasant with these countries. As a result, if those countries close this route for any reason, it will become challenging for China to conduct foreign trade.
Therefore, through the security and defense strategic partnership agreement with Djibouti, China has strengthened its position by establishing its naval base in the Horn of Africa. Besides, in April 2017, China also leased the Gwadar port from Pakistan for 40 years, built by Chinese firms with Chinese funding. Even this port is a part of the China-Pakistan Economic Corridor project under China’s BRI project. In addition, in 2019, Kenya constructed a railway from Mombasa to Nairobi with $3 billion of Chinese funding, which has been called Railway to Nowhere in the international media. It is mainly because of these events that the global media has termed these projects as China’s debt-trap diplomacy with such a massive amount of money funded by China.
What is Debt Trap Diplomacy?
Debt-trap diplomacy refers to a situation where one country lends a large amount of money to another for infrastructure development, and the recipient country defaults on the debt due to debt overruns or other economic reasons. As a result, the donor country takes control of a significant natural or economically viable asset of the recipient country. The concept of Debt-trap diplomacy came in front of everyone through China’s Debt-Trap Diplomacy report published in 2017 by BRAHMA CHELLANEY, Professor of Strategic Studies at India’s New Delhi-based center for policy research.
According to the report, BRAHMA CHELLANEY uses this concept to describe the risks associated with lending to China as a donor country. During his visit to Kazakhstan in September 2013, Chinese President Xi Jinping announced plans to build a modern Silk Road. Earlier, during the Han Dynasty, there was a trade network known as the original Silk Road from China through India, Pakistan, and Central Asia and the Middle East to Europe in South Asia. Xi Jinping’s announced Modern Silk Road is divided into two parts: a Silk Road Economic Belt by rail or highway and a Maritime Silk Road by sea, as mentioned. Although the initiative was initially called One Belt, One Road, it is now better known as the Belt and Road Initiative or BRI project.
Under this project, China intends to build an economic belt from Southeast Asia through South Asia and the former Soviet Union to Europe through various infrastructural developments such as new highways, railways, and energy pipelines. This is why China is providing loans to the developing countries of these regions for the necessary infrastructure development. According to a report by The Guardian, from the announcement of the BRI project in 2013 to 2017, China has invested $843 billion in more than 13,000 infrastructure developments such as roads, bridges, and ports in about 165 countries in Central Asia and Africa. These countries currently owe at least $385 billion in debt to China.
During Chinese President Xi Jinping’s visit to Bangladesh in 2016, several MoUs were signed to provide loans of $26 billion under the BRI project and another $14 billion in joint venture projects. According to a BWGED source, 64 projects were to be funded in Bangladesh under China’s BRI project. However, considering the need and economic viability of the projects, only nine projects are under BRI in Bangladesh. Padma Bridge Rail Link, Bangabandhu Tunnel, and Dasherkandi Sewage Treatment Plant are among them. According to a source from The Diplomat, China’s total investment in these ongoing BRI projects in Bangladesh will be $10 billion.
Why BD Won’t Fall Into The Chinese Debt Trap?
Various countries and economic organizations worldwide provided grants and loans to Bangladesh during the post-independence period to restructure the economy. According to the Bangladesh Economic Relations Division, Bangladesh received $72.9 billion in foreign loans from FY 1971-72 to FY 2020-21. Moreover, Bangladesh received a total foreign loan of $8.2 billion from July to May of FY 2021-22. According to a Bangladesh Bank source, the country’s public sector outstanding external debt was $62.88 billion in FY 2021-21, which increased to $68.25 billion by March of FY 2021-22.
On the other hand, according to The Daily Star, Bangladesh’s total outstanding debt in the FY 2020-21 was more than $131 billion, which has been increasing to an average of $16.45 billion for the past three years. Every year, along with Bangladesh’s foreign debt, the total outstanding debt is also increasing. Consequently, some newspapers and social media have begun speculating that, if unable to pay its debts, will Bangladesh fall into the debt trap diplomacy of China.
As per IMF’s recommendation, any country should keep its external debt below 55% of GDP and total public debt below 70% of GDP. There, the ratio of public sector foreign debt to the GDP of Bangladesh is slightly more than 16% (16.4). Thus, Bangladesh is in a favorable position regarding foreign debt. According to the Bangladesh Economic Relations Division, following up on the scenario of loans taken for the development projects of Bangladesh, Bangladesh has taken the highest loan from the World Bank, which is 36% of the external debt in the public sector. Besides, the amount of loans taken from ADB and Japan is 23 and 18%, respectively. On the other hand, Bangladesh’s loan amount from China is only 8% of public sector foreign debt or about $5.5 billion.
That is, China’s position is fourth in Bangladesh’s foreign debt portfolio. In the case of Pakistan or Sri Lanka, the amount of debt taken from China was much higher than both countries’ foreign debt. For example, University of Colombo Lecturer Umesh Moramudal told CNBC in December 2021 that Sri Lanka owes China $26.4 billion, which is 26% of their foreign debt. In the case of Pakistan, the country’s liability to China is $14.5 billion, which is very close to the Asian Development Bank or ADB’s $14 billion loan and the World Bank’s $18.1 billion loan. Even if Bangladesh holds China’s debt, it will not fall into a debt trap like Pakistan or Sri Lanka because Bangladesh’s public sector foreign debt portfolio is quite diverse, and its dependence on China is relatively low.
According to ERD, Bangladesh has always repaid loans on time, never having to reschedule installments since independence. From FY 2016-17 to FY 2020-21, Bangladesh has paid an average of more than $1 billion in debt servicing per fiscal year. Even in the FY 2021-22, Bangladesh has paid a total debt servicing of $1.8 billion, including principal and interest, which was $1.7 billion in the FY 2020-21. Bangladesh can meet China’s debt servicing obligations every fiscal year based on Bangladesh’s current economic scenario, namely import-export activities, remittance inflows, loans and financial assistance from various organizations, foreign direct investment, and foreign reserves.
Bangladesh is the second largest borrower after Pakistan to China under the ongoing BRI in South Asia. In Pakistan, China signed a loan agreement of more than $60 billion for the CPEC project, while the loan agreement in Bangladesh is only $10 billion. According to a report by The Diplomat, the average interest rate of Chinese loans to Bangladesh is 1.23%, and Bangladesh will have an average of 31 years to repay the loan with an average grace period of 8 years. As a result, according to the current economic situation of Bangladesh, debt repayment is easily possible at this time, according to the report. On the other hand, according to Economic Times, the interest rate of Chinese loans given to Sri Lanka is up to 6.3%, which is much higher than the interest rate of the World Bank or ADB, ranging from 0.25% to 3%.
Furthermore, it is a condition of taking loans from China to develop infrastructure that the loan-taking country must use Chinese labor and expertise. However, Bangladesh has been able to create such a balance through the use of financial and construction expertise from China as well as India and Japan in mega projects that Bangladesh does not have to depend on Chinese loans. Also, when China proposed a deep sea port project at Sonadia in Bangladesh, Bangladesh rejected it as it was not economically viable. At that time, Bangladesh agreed to the Japanese proposal to build the Matarbari deep sea port at a distance of only 25 km from Sonadia. Besides, World Bank, ADB, and the Japanese International Aid Agency JICA are interested in investing in Bangladesh. Even JICA is already helping to build infrastructure in the Bangladeshi regions adjacent to the Bay of Bengal under the “BIG-B” Bay of Bengal Industrial Growth Belt Strategy, which will be economically viable for Bangladesh. As a result, Bangladesh has reduced its dependence on Chinese loans in various mega projects.
In the last 50 years, Bangladesh, which was once called a ‘bottomless basket case’ by US Secretary of State Henry Kissinger, has become a model for developing countries worldwide. According to the World Bank, Bangladesh has been able to present itself as one of the fastest-growing countries in the world by maintaining an impressive track record in economic growth and wealth reduction over the last decade. The IMF reports that Bangladesh has held an average economic growth rate of 7% over the past decade. According to the IMF’s $100 Trillion World Economy Report, Bangladesh has become the 41st largest economy in the world. Therefore, considering Bangladesh’s debt management, debt servicing, borrowing, the economic viability of development projects, and the country’s overall economic condition, it is unlikely that Bangladesh will fall into the trap of China’s so-called debt trap diplomacy.