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After Sri Lanka, China Indebting Pakistan, Tajikistan and Turkmenistan

How has China Indebted Pakistan, Tajikistan, Turkmenistan, Laos and many other nations across the world?  Why Turkey’s currency crisis is adding to the financial troubles of developing Asian economies that have taken huge loans from China under the OBOR Project? Is China waging an economic war small, developing countries and enslaving them?

Loans from China help developing economies pay for the infrastructure developments they need to promote economic growth, but heavy debt-servicing costs endanger to undermine their economic stability.

The Center for Global Development, a U.S. think tank, says Laos, the Maldives, Mongolia, Pakistan few other nations taking part in the OBOR Project are already at severe peril.

Mongolia’s debts are now around eight times the nation’s foreign exchange reserves, while the debts of Laos and Kyrgyzstan exceed 100% of their GDP.

Deeply indebted nations are more helpless against a sudden currency devaluation. As their currencies fall in value, it becomes tougher for them to pay off their loans, which are largely denominated in dollars.

The IMF has long played the role of a global lender. But no nation is happy to take IMF assistance due to its stringent austerity measures. With China emerging as a substitute lender, some countries have started to avoid the IMF even if that means being exposed to unpredictable risks. Turkey, the epicentre of the present financial turbulence, has steadfastly refused IMF assistance, while Pakistan is also getting lured by Chinese soft loans.

Yet, as Pakistan becomes more dependent on China, fiscal regulation will take a back seat, increasing the prospect of being overburdened by exorbitant debt. Pakistan’s external debt has risen by 50% over the past three years, reaching nearly $100 billion. Approximately 30% of that debt is owed to China.

A global finance expert states that the IMF has made the lending framework more amenable. Still, for developing economies, Chinese assistance, which claims that it does not intervene in domestic affairs, looks more appealing.

This means that as long as troubled nations continue to rely on China, their fundamental difficulties will not be solved, and their debt may keep building-up. For instance, Sri Lanka recently handed over the right to manage the Port of Hambantota to a Chinese company as they were unable to pay debts.

A high-speed railway being constructed in Laos costs about $6 billion, or about 40% of the nation’s GDP. China is funding approximately 70% of the cost, but repaying those loans will be a massive strain on the economy.

Turkmenistan is fighting an economic crunch and liquidity crisis due to debt repayments to China. Tajikistan has sold the right to develop a gold mine to a Chinese company in lieu of refunding the loans.

The IMF has traditionally been the “Help Desk” for economically troubled nations. In exchange, IMF requires the nation to follow economic reforms by slashing spending or hiking taxes. China’s willingness to provide loans may offer debtors a momentary reprieve from such restraints, but at the cost of their sovereignty.

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