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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.
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.
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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.
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.