Strategic consequences of Chinese lending

Chinese lending has hurt smaller countries with limited ability to repay Chinese loans

After Sri Lanka, it is Uganda's turn. According to reports, Uganda is likely to lose its only international airport to China due to its inability to repay a loan. The East African country is landlocked, and the international airport is strategically significant for Uganda. The Ugandan authorities and the Chinese Embassy in Uganda denied the news. But the controversy around Uganda's Entebbe airport raises serious questions about the strategic implications of Chinese lending.

According to the agreement between China and Uganda, signed in 2015, the Entebbe International Airport was to be expanded at the cost of $200 million, with repayment in 20 years. So far, nearly 75 per cent of the work has been completed with two runways built, and the airport handles 1.9 million passengers annually. Earlier this year, Uganda sought to renegotiate the loan. However, China refused to change the terms of the agreement. Recently, Uganda's Finance Minister Matia Kasaija apologised to a parliamentary committee over the loan clauses.

In the last few years, several smaller developing countries have turned to China for loans free of conditionalities that western lenders and multilateral institutions impose, like human rights records, democratic norms, and the rule of law.

Since its inception in 2013, China marketed its signature foreign policy project of the Belt and Road Initiative (BRI) as an opportunity for developing countries and branded as China's Marshall Plan. The original Marshall Plan of the US was launched after the Second World War to rebuild the war-ravaged Western Europe.

The assistance under the Marshall Plan was disbursed in grants that were not required to be repaid. However, the BRI, despite its plans to invest in building much-needed infrastructure projects, extends loans to the recipient countries, which are to be repaid at a high cost. Often, the interest rates are high and burden countries with expensive debt.

Sri Lanka is the starkest example of the strategic implications of Chinese loans. In 2017, Sri Lanka was forced to hand over the deep-water port of Hambantota and 15,000 acres of surrounding land to China for an equity swap deal for 99 years. China portrayed the deal as purely commercial. However, its intelligence and strategic implications are hard to miss. Chinese political, economic, and infrastructure footprint in Sri Lanka is now a structural reality.

The strategically located Indian Ocean archipelagic country, the Maldives, too is indebted to China. The Maldivian debt to China is between the US $ 1.5 billion and $ 3.1 billion. Exact figures are difficult to obtain.

Chinese debt is a concern for Djibouti as well. Djibouti is described as the "most valuable military real estate in the world" owing to its geostrategic location at the crossroads of Africa, West Asia, and the Indian Ocean. In 2018, the former Commander of the United States Africa Command (AFRICOM), General Thomas Waldhauser, publicly raised concerns about Djibouti's debt to China and the vulnerability it generates for that country. Djibouti owes $ 1.2 billion to China and also hosts China's only overseas military base. China's economic footprint in Djibouti is expanding at a fast pace.

Other than Sri Lanka, the Maldives, and Djibouti, many smaller states like Kyrgyzstan, Laos, Tajikistan, Mongolia, and Pakistan are at greater risk due to the high share of loans from China in their overall national debt. Lack of transparency and expensive Chinese lending imposes severe costs on the receiving countries.

The unsustainable levels of Chinese loans will likely force many of these countries to approach international institutions, like the International Monetary Fund (IMF), for support or repayment in some other form, such as handing over strategically critical national assets.

Pakistan is a case in point. It has been in negotiations with the IMF for a bailout package. China-Pakistan Economic Corridor (CPEC) is considered the flagship project of the BRI, which will connect landlocked Western China with the Indian Ocean via Pakistan.

The development of the port of Gwadar on the Arabian Sea is a crucial project in the CPEC. The investment estimates for CPEC are to the tune of US $ 62 billion. However, questions remain whether Pakistan can absorb the proposed investments, repay the expensive Chinese loans, and the future of CPEC projects in the context of internal security challenges. Will the proposed Chinese military base at Gwadar be a price for Chinese loans even if Pakistan may see strategic benefits in such a proposition?

China's lending and the willingness to extract a high price in the form of control over national assets is often called "debt-trap diplomacy". Some scholars believe "debt-trap diplomacy" is a myth. However, in many instances across the world, Chinese lending has had an adverse political and strategic impact on smaller states with a limited ability to repay Chinese loans.

The politics surrounding expensive Chinese loans and the costly infrastructure projects compel regional powers to take necessary corrective steps to limit the growing Chinese influence. After the Chinese takeover of the seaport of Hambantota, India had to step in to acquire the airport, dubbed as the "emptiest airport in the world", at a considerable cost.

Notwithstanding the actual course of action to be taken by the Ugandan authorities on the handover of the Entebbe International Airport, the episode has underscored the strategic and political consequences of Chinese loans in contemporary international politics.

(The writer is a strategic analyst based in Delhi)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.