By Nantoo Banerjee
A host of South Asian countries, including Sri Lanka, Pakistan, Afghanistan and Myanmar, all India’s neighbours, are faced with sovereign debt crisis and growing internal disturbances. Nepal and Bangladesh are becoming increasingly dependant on bilateral loans and FDI flow from China which they may not be able to service and sustain in the long run. Sri Lanka is facing the most alarming level of external debt crisis and human trafficking. The situation in Afghanistan is equally disruptive.
There are at least 200,000 illegal migrants from Myanmar, including tribal Chins from its north and Rohingya moslems from south, camping in various parts of India. The number of refugees and illegal immigrants from internal war-torn Afghanistan and economically unstable Pakistan is anybody’s guess. As of June 2021, Pakistan’s public debt was 83.50 percent of the country’s GDP, over 35 percent of which in the form of external debt. Unofficial reports say that Pakistan’s incumbent government has almost doubled the country’s external debt in just three years, adding US$35.1 billion to take the total figure to an astonishing $85.6 billion.
The growing financial instability in Pakistan, a major political and military support base for Afghanistan’s five-month old Taliban regime, should be a worrisome problem for India. The latter has to be constantly vigilant against infiltration and terror attacks on the country by various fundamentalist groups from the economically shattered region. Massive Chinese financial and military aids have put Pakistan’s economy under severe pressure of growing import bills, mostly on account of supplies from China.
The current year may see yet another year of record borrowing to reduce the stress on its current account deficit. In September, Pakistan’s finance ministry said that the large increase in its total public debt was due to currency devaluation. The Pakistani Rupee depreciated 30.5 percent against US$ since Imran Khan became the prime minister. A new World Economic Forum report has termed Pakistan’s debt crisis as a “top risk” facing the country. The profligacy of Pakistan’s ruling elite — politicians, civil and military bureaucracy, industrialists, businessmen and bankers — has led to its being under continuous borrowing pressure.
To what extent the change of regime in Afghanistan is additionally responsible for Pakistan’s economic crisis is not easy to assess. But, the crisis may deepen with time as China is indirectly supporting the anti-US Islamic fundamentalist Taliban group, predominantly Pashtun, that returned to power in Afghanistan in September, last year, after waging a 20-year insurgency. The Taliban poses immediate threats to Afghans’ constitutional civil and political rights created by the earlier US-backed government. Foreign governments have warned that, if the Taliban do not protect Afghans’ rights, they could stop providing aid, which could lead to a dire humanitarian crisis. International observers fear that the Taliban could allow terrorists to operate within and outside Afghanistan, threatening regional and global security. On its part India is trying to help Afghanistan with lifesaving medicines and food.
The island nation of Sri Lanka needs around US$7 billion this year to service its debts to various creditors. The total debt service liability between now and 2026 is expected to rise to $26 billion. This is too high compared to the country’s GDP, which was billed to reach $81 billion by the end of last year as per the Trading Economics global macro models and analysts expectations. Since 2007, Sri Lanka accumulated $11.8 billion worth of debts through sovereign bonds, making up the largest portion (36.4 percent) of its external debt. Sri Lanka’s Central Bank is required to arrange $2.4 billion to assist the country’s state-owned and other private companies to honour debt obligations in 2022.
This is in addition to the central government’s debt repayment obligation of $4.5 billion, reported international credit rating agency Fitch. Sri Lanka also needs around $20 billion to meet its import needs for petroleum, food and intermediate goods. The country’s foreign exchange reserves, which are said to be at a critical level, have lately been boosted by a $1.5 billion Yuan currency swap from China. India has offered a new Line of Credit of $500 million to Sri Lanka for purchase of petroleum products.
In fact, massive imports and unsustainable infrastructure credit from China have put these south Asian countries under heavy financial stress. China is the biggest bi-lateral lender to Pakistan, Sri Lanka, Bangladesh, Nepal and Myanmar. For six years in a row, China has topped the chart of FDI pledges to Nepal. According to an official statement, Nepal received FDI pledges of $268 million in 2020-21, with China accounting for 71 percent of the total. China is also a big lender to Myanmar. Two years ago, Myanmar’s national debt stood at $10 billion, 40 percent of which was owed to China. Notably, China’s investment so far accounts for over 28 percent of Myanmar’s GDP of $76 billion. China is warming up to Myanmar’s military dictators to protect its investment and grow its financial grip over the economy. Myanmar citizens are concerned about growing Chinese financial control of their country. Unclaimed attacks on Chinese factories in a Yangon industrial zone, last year, and protests outside Yangon’s Chinese Embassy were not taken lightly by China.
Although the Bangladesh economy is seemingly in a better shape than most others in the region, the country too may become a victim of Chinese debt trap in due course because of its fast growing dependence on China for funds. Bangladesh is the second largest recipient of Chinese lending in South Asia after Pakistan. Bangladesh is the biggest importer of goods from China. Two years ago, Bangladesh gave China access to two of its key ports—Chittagong and Mongla. Chittagong Port, Bangladesh’s biggest, is 50 percent controlled by China. The latter also signed a deal to develop Bangladesh’s second largest Mongla Port. It includes building embankments along the Indian border. The development cost is estimated at $1 billion, 85 percent of which will come from China as a loan. Critics are worried about the massive Chinese funding of the two top Bangladesh ports citing the example of Sri Lanka’s Hambantota port, which is now effectively under full Chinese control, and ask if Bangladesh too is getting entangled in China’s ‘debt trap’ diplomacy.
Suffice it to say that weakening economies of India’s neighbours under Chinese debt trap pose a big challenge to India’s own economic stability and growth as also its national security. India has been an easy target of illegal migration, smuggling, drug running, human trafficking and terrorist infiltration from its neighbouring countries. China’s lavish lending to these countries also add to the concern of possible sovereign loan defaults. When a country defaults, foreign lenders do not have any international court to go for recovery. They cannot forcibly take over a country’s assets. Nor they can compel the country to pay. However, some of the common effects of a sovereign default include rise in domestic interest rates, hyperinflation, rapid increase in exchange rates, trade embargo, run on banks, smuggling, economic collapse and human trafficking. India should be naturally worried. (IPA Service)