11 April 2018
Christine Lagarde, the IMF’s Managing Director, warned Chinese policymakers on Thursday to beware of financing unneeded and unsustainable projects in countries with heavy debt burdens.
Ms Lagarde told a conference in Beijing that while China;s Belt and Road Initiative could provide much-needed infrastructure, “ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payments challenges.”
Beijing’s multibillion-dollar initiative, seen as the underpinning of a new Silk China Road linking China to the world, is providing welcome finance to countries from east and central Asia to Europe and Africa for roads and other projects, but it has also been criticised for burdening recipients of the funds with debt.
The IMF also unveiled its first efforts to support the BRI, and Ms Lagarde announced the opening of a China-IMF Capacity Development Center, which will train Chinese development officials to work abroad. The first classes began in the city of Dalian last month.
The project is aimed at providing IMF support for the BRI, Beijing’s key foreign development initiative launched five years ago, which foresees hundreds of billions of dollars in development and infrastructure finance and is currently aimed at about 70 countries.
IMF encouragement has been treated with scepticism in some western countries, such as the US, which question whether the development effort masks a push by China to gain influence in Eurasia and Africa.
The issue of debt is also the crux of a debate within economic development circles over how to best handle the rise in Chinese investment in many countries with fragile economies.
According to a report last month by the Washington Center for Global Development, eight countries on the BRI routes may already have trouble servicing debt due to high levels of borrowing from China, including Pakistan, Djibouti,the Maldives and Laos. The study found 23 countries to be a “at risk of debt distress today” due to Belt and Road borrowing.
In a nod to these criticisms, Ms Lagarde said: “In countries where public debt is already high, careful management of financing terms is critical.”
Another challenge, she added, was “ensuring that Belt and Road only travels where it is needed” – an oblique reference to problems of insider dealing. “With any large-scale spending there is sometimes the temptation to take advantage of the selection and bidding process” she said.
Chinese officials have been keen to gain the imprimatur of the IMF and other established development agencies as seals of approval for the BRI.
“Ensuring debt sustainability [is] very important,” said Yi Gang, governor of the People’s Bank of China, in a speech welcoming Ms Lagarde to Beijing. However, he said it was just as important to consider “how to expand domestic infrastructure investment and how to improve public investment while taking full advantage of external resources.”
Developing countries have welcomed the Chinese approach – saying they often chafe at stringent IMF conditions on debt management that mean needed infrastructure must be delayed.
“The IMF conditions mean low growth,” said one African official attending the conference in Thursday, who asked that his name and country not be mentioned. “When you talk about debt sustainability, that also means low growth. It’s about finding a right balance.”
China has agreed to contribute $50m over five years to an IMF effort to train officials in China and in several other countries, including many in Africa.
In addition to announcing the IMF-China training centre, Ms Lagarde lauded an effort to bring BRI decision making under the umbrella of a newly created International Development Cooperation Agency, which is to be in charge of China’s foreign aid.