China's Belt and Road Initiative heightens debt risks in 8 countries

China's Belt and Road Initiative (BRI), which aims to invest approximately USD 8 trillion in infrastructure projects across Europe, Africa, and Asia, has raised serious concerns about sovereign debt sustainability in the eight countries that it funds, according to a recent study.

The Center for Global Development research evaluated the current and future debt levels of the 68 countries hosting BRI-funded projects.

It revealed that in eight of the 23 countries that are at a risk of debt distress, future BRI-related financing will significantly add to the risk of debt distress. They are Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan.

"Belt and Road provides something that countries desperately want - financing for infrastructure," said co-author John Hurley, a visiting fellow at the Center for Global Development. "But when it comes to this type of lending, there can be too much of a good thing."

Further, according to the study, China's track record of managing debt distress has been problematic.

Unlike the world's other leading government creditors, China has not signed on to a binding set of rules of the road, when it comes to avoiding unsustainable lending and addressing debt problems, as and when they arise.

"Our research makes clear that China needs to adopt standards and improve its debt practices, and soon," said co-author Scott Morris, a senior fellow at the Center for Global Development.

The study also recommended that China multilateralise the Belt and Road Initiative.

Currently, the multilateral development institutions (MDBs) like the World Bank are lending their reputations to the broader initiative while only seeking to obtain operational standards, that will apply to a very narrow slice of BRI projects, those financed by the MDBs themselves.

The study suggested that before going further, the MDBs should work towards a more detailed agreement with the Chinese government when it comes to the lending standards that will apply to any BRI project, no matter the lender.

It also urged China to consider additional mechanisms to agree to lending standards.

Some methods might include a post-Paris Club approach to collective creditor action, implementing a China-led G-20 sustainable financing agenda, and using China's aid dollars to mitigate risks of default.

Not long ago, the Center for Global Development (CGD) published its analysis on the impact of One Belt One Road.

The analysis indicated that many countries developed a significant dependency on China and their debt level increased significantly.