China's Debt-Trap Diplomacy in South Asia


China has adopted 'debt trap diplomacy' as part of its soft power approach to expand its influence around the world in general and in South Asia in particular. This is evident through its extension of financial credit lines to Nepal, Myanmar, Bangladesh, Sri Lanka and Pakistan. Beijing has exploited the internal politico-economic vulnerabilities of these countries, pushing them into signing its flagship Belt and Road Initiative (BRI) in exchange for financial and technical assistance over the years. It has practised lending large infrastructural loans, which many observers have called a ‘debt trap’, as it inevitably took control of defaulter’s assets in case of failure of debt repayments, something Beijing has vehemently denied.

Sri Lanka is the most significant example of this debt-trap game. Between 2000-2020, the Sri Lankan government received over $12 billion in loans from China to fund infrastructure projects in the island country. It received 'easy credit' to the tune of $3 billion to help repay the existing debts instead of restructuring its debt through an International Monetary Fund (IMF) deal in 2020. By June 2022, Columbo owed its international lenders approximately $40 billion which included multilateral, bilateral and commercial loans. The Chinese share of debt constituted 20 per cent of the total debt, of which 43 per cent was through bilateral agreements. China’s debt trap policy in Sri Lanka started in 2007 when it extended Colombo with military and diplomatic assistance to fight the Tamil Tigers. As Colombo found it difficult to service its debt with China, the Sri Lankan government was forced to handover the Hambantota to China on a 99-year lease. The Sri Lankan government signed a $1.1 billion deal in July 2017 to sell a 70 per cent stake in the port to China. As the state’s economy went downhill in 2022 leading to political unrest, Sri Lanka went for a $2.9 billion bailout package from the IMF, which received Chinese backing on 22 January 2023.

The other South Asian country that reels under Chinese debt is Pakistan. A 2022 IMF report estimated the Chinese share in Pakistan’s foreign debts to be 30 per cent. Over the years, it has received large sums of money to create new socioeconomic infrastructure and refurbish the existing ones—($10 billion for Peshawar-Karachi Main Line (ML-1) railway project under China-Pakistan Economic Corridor (CPEC) initiative). The 2020-2021 Economic Survey of Pakistan clearly points to the growing volume of Chinese debt and the deep economic ties between China and Pakistan mostly built on debt. Most of these are short-term debt with a high interest of 4.5 to 6 per cent, risking a heavy financial burden for an already economically distressed Pakistan. Without export growth, the continuing heavy loan from China has proved heavy for Pakistan's fiscal condition. This is reflected in the current economic crisis manifested by skyrocketing retail inflation.

Bangladesh is the second highest recipient of Chinese investment, following Pakistan, with China which has emerged as Dhaka’s highest trading partner, pushing India to second position in recent years. Since their strategic partnership in 2016, China has expanded its presence in the country through various infrastructure projects. Though Bangladesh's external debt is largely owed to multilateral creditors, it has declined in recent years due to borrowing from bilateral creditors to fund its large infrastructure projects. For instance, with Chinese funding, Bangladesh completed the Payra Thermal Power Plant Project and claimed to have achieved 100 per cent electrification, a first in South Asia. In the financial year 2020-21, Dhaka owed a total of $60.15 billion in external debt, with most of it owed to Asian Development Bank and the World Bank (USD 25 billion) and the rest to bilateral partners, mainly China, India and Russia. Chinese loan amounts to USD 17.54 billion, mainly for constructing the Bangabandhu Sheikh Mujibur Rahman Tunnel beneath the Karnaphuli River. According to the World Bank, Bangladesh's public debt remains 'sustainable' with a "low risk of external and public debt distress"; it is unlikely to face a similar fate to that of Sri Lanka and Pakistan.

In the case of Myanmar, China has expanded its presence across the country, even as Naypyitaw has faced a scale-down from foreign investors owing to its internal issues. Beijing nurtures strong geostrategic interests in Myanmar, perceiving it as a bridge to the Indian Ocean. Following Myanmar's joining of the BRI in 2017, China announced the China-Myanmar Economic Corridor (CMEC) and signed 15 MoUs in 2018 and 33 projects in 2020. Mega projects involving Chinese investment include a deep-sea port and industrial park worth $10 billion, agreed upon in 2015. It has continued to push for BRI implementation even as the country witnessed a coup.

As of 2020, 40 per cent of Myanmar’s debt of $10 billion was owed to China, which is expected to have increased substantially following the 2021 coup, making the military government heavily reliant on Beijing’s largesse. It is a certain reality that the country is looking at the prospect of a default and would be forced to relinquish its control of major infrastructure to China if it continues to borrow in such a manner.

In the case of Nepal, the country has a combined debt of $7.83 billion as of 2020-21, the majority of which is owed to multilateral agencies like the World Bank and ADB. Nepal faces a trade deficit with China, comprising about 14 per cent of the country's total trade deficit. This is a matter of concern for Nepal which does not want to follow Sri Lanka's path. While Beijing has insisted that Kathmandu is a recipient of its loan for certain projects, the latter has made it clear that it prefers grants and soft loans instead of commercial loans. It has insisted on the interest rate and repayment time to be in line with agencies ADB or WB. Compared to Sri Lanka or Pakistan, Nepal is in a more comfortable zone but still not entirely out of the much-fabled Chinese debt trap. For instance, while it agreed to join the BRI in 2017, it has yet to take off because of Beijing’s intransigence to address Nepal’s concerns in the agreement. Kathmandu insists that the BRI projects be open for competitive bidding.

Through its BRI projects, China stands accused of putting poorer countries at a high risk of the debt trap, with an estimated USD 365 billion in loans which go unreported in international bodies. Besides expanding the debt trap, the BRI projects have faced accusations of corruption, environmental pollution, and labour violations across these countries. The South Asian countries should play their cards right and avoid getting sucked into the 'debt trap' being laid by China.

Ankita Sanyal is Associate Research Fellow, International Centre for Peace Studies.