Chinese rejection to debt restructuring and FTA may affect Maldivian economy

Beijing may have acknowledged Maldives’ appeal for debt restructuring. Still, there is a high probability that it will not happen, and the island country will end up trapped under unsustainable debt repayment like other countries that took loans from China. Maldives' close neighbours Sri Lanka and Pakistan are among these countries that are turned debt-stressed as they struggle to repay high-interest, inflexible Chinese loans and suffer from dumping (trade). Against such a backdrop, the Maldivian economy appears vulnerable as Chinese loans amount to 37 per cent of the island nation's total external debt.

The details of the loans offered by China, especially under its Belt Road Initiative (BRI), are strictly confidential. So, the terms and conditions generally remain unknown to the public. China's refusal to debt restructure has not gone well with international institutions like the World Bank since it has hurt poor countries’ economies badly. There are a dozen small nations that have felt the heat of harsh conditions of Chinese loan repayment as they are experiencing fast-draining foreign reserves and crumbling of basic infrastructure.

Zambia is among a few African countries that have been forced to cut expenditure on basic amenities such as healthcare and agriculture as it pays most of its tax revenue in repaying Chinese loans. Economists warned of severe problems for poor countries if China continues to reject debt restructuring. “China has moved in and left this geopolitical instability that could have a long-lasting effect," said Harvard University economist Ken Rogoff.

China is the biggest creditor of Sri Lanka, another island nation in the Indian Ocean Region. In recent years, Sri Lanka saw the construction of a big port in Hambantota, highways, and a city through financial loans from China. However, with the higher interest rates and non-viability of the built projects, Sri Lanka failed to repay the burgeoning debt and ended up losing its sovereign control over the Hambantota port to China.

Sri Lanka is getting buried deep in an economic crisis even as China has allowed the restructuring of the pending loans. However, there is a catch. The restructuring will not be applicable for loans worth USD 2.72 billion but just two small loans of USD 500 million. Moreover, Sri Lanka will get the benefit of the USD 500 million debt restructuring only if it repays the USD 300 million loan taken by Sri Lanka for the COVID-19 vaccine purchase, as per the terms and conditions in the original agreement.

Concerns are raised in Sri Lanka about China making debt restructuring and repayment difficult. Beijing is trying to provide favours to Chinese lenders, said Sri Lankan lawyer Manjuka Fernandopulle, who offers advice to sovereign bondholders. "China appears to be taking a strategic approach rather than pursuing the Sri Lanka case from a financial position," he said. Since Chinese loans constitute 43 per cent of Sri Lanka’s external debt, Beijing’s manipulation of debt restructuring makes the latter vulnerable to Chinese manipulations.

Similarly, Pakistan’s economy has been in shambles thanks to Chinese delays in loan tranches and reluctance to restructure debt. Pakistani economist Ammar Habib Khan, who is also a non-resident senior fellow with the Washington DC– Based Atlantic Council, said Chinese loans came in dollars and higher than market rates. “Pakistan continues to make significant dollar payments for the Chinese debt. Because of that, we continue to have a current account crisis and some serious debt issues,” he said.

Maldives President Mohamed Muizzu is going to implement the Free Trade Agreement (FTA) signed with China. However, experts warned that it will push the island nation into a debt crisis. Amitendu Palit, a senior research Fellow at the Singapore-based Institute of South Asian Studies, said, “Higher imports from China will enhance the Maldives’ trade imbalance with China and increase its overall trade deficit. Conditions might worsen with duty-free Chinese imports adversely affecting the prospects of the nascent homegrown textiles industry, resulting in further loss of incomes and jobs.”

Even China's all-weather friend Pakistan could not escape problems arising from Chinese debt and dumping under the FTA. Pakistan has even tried to reconsider trade treaties to protect its domestic market from Chinese aggression. This certainly rings an alarm for Maldives as it continues to rely on Chinese support. Andrew Small, author and China-Pakistan expert, said, “It’s important that they’re not seen to let Pakistan down because if they let Pakistan down in this situation, then the message to everyone else is that they can’t be relied on.”

Xi Lao is a freelance journalist based in Taiwan.