One Belt One Road: Chinese ‘debt trap’ traps India in the Maldives

From the beginning, India has been a notable exception in the region in its opposition to China’s One Belt One Road (OBOR) initiative, even as all of our neighbours but Bhutan have fallen prey to big Chinese money that accompany ceding to Beijing-backed $8 trillion infrastructure spree across mainly Asia, Europe and Africa.

However, the debt-trap problems created by China in its OBOR partner countries, almost all of them low to mid-income economies, is pulling India in.

While the election victory of President Ibrahim Mohamed Solih in the Maldives last month, in effect, put the country back in India’s sphere of influence, it has come with its own set of challenges.

One potentially embarrassing development for New Delhi is that Indian financial assistance to the Indian Ocean country, also a SAARC member, is likely to contribute to servicing Chinese debt that Male owes Beijing.

During his maiden foreign visit to New Delhi last week which firmly established his pro-India credentials, President Solih is learnt to have discussed with Prime Minister Narendra Modi the worsening debt situation in the Maldives. According to a conservative estimate, the Maldivian government owes approximately $1.5 billion in infrastructure loans to Beijing, many of them financed during the reign of Solih’s predecessor Abdulla Yameen, widely seen as Beijing’s man in Male.

The $1.5 billion figure, however, doesn’t include the loans that Beijing extended to private companies that came with sovereign guarantees. The Chinese ambassador to Male, Zhang Lizhong, has handed the new government an invoice for $3.2 billion for all that China has done for the country over the last few years. This figure roughly translates into every Maldivian owing $8,000 to China.

In fact, so precarious is the economic situation of the $3.9 billion Maldivian economy that the newly-sworn in government is finding it hard to even pay off salaries of employees working in the government sector.

India’s reaction to Maldives’ economic woes has been swift. During Solih’s visit, New Delhi announced a financial assistance of $1.4 billion to bail out the tourism-reliant economy of the Maldives.

However, the devil lies in the detail as to how the Maldives would utilise this Indian monetary succour at this crucial political juncture.

Highly-placed sources in the know have told National Herald that New Delhi carried out “a study of the economic situation” of the Maldives before announcing the financial assistance package.

“It doesn’t matter much to us if part of our financial assistance would go towards servicing the Chinese debt,” sources said.

“One has to understand that the Maldives is in a very delicate situation and is important to us from a strategic perspective. We can’t afford to act like the World Bank or the International Monetary Fund (IMF) and attach strings to our financial assistance,” said sources.

Sources added that the decision to support the Maldives was taken after taking into account the political situation of other countries, including Pakistan.

“Pakistan has approached the World Bank and IMF for loans to help it pay off the Chinese. But America is believed to have vetoed it on occasions, since they understand that the money could go to Beijing,” said sources.

India’s former foreign secretary Kanwal Sibal believes that India must help the friendly Maldivian government to “maintain its momentum.”

Saying that the Maldives was yet to give India an accurate break-up of how it planned to use the Indian money, Sibal explained, “The money is meant mainly for budgetary support and currency swap, though we have also offered them concessional credit.”

Dr Anand Kumar, Associate Fellow at the Institute for Defence Studies and Analyses (IDSA), a New Delhi-based think tank focussed on international security and strategic issues, says that approximately $200 million out of $1.4 billion could be used at the discretion of the Maldivian government.

Dr Kumar, who has authored books on the Maldives and the Indian Ocean Region, however, adds, “India expects the Maldives to use the $200 million amount for domestic purposes, mainly the paying of salary of bureaucrats.”

To what extent India allows the Maldives to use its taxpayer money to service China’s debt is what remains to be seen, considering that Prime Minister Narendra Modi wouldn’t want to cede any point to China in the crucial election year, which could boomerang for him in domestic politics.

As for China, which has felt the negative effects of its trade war with the US, it hasn’t been kind on countries that have failed to honour their debt commitments.

In Africa, China is taking over Zambia’s main international airport after the government failed to repay an instalment on Chinese debt.

In fact, as President Xi Jinping tightens his grip on power, a favourable economy is all that he has, to defend himself from his opponents within the Communist Party.

“Bedeviling Xi’s reign is the domestic economy’s slowing growth, the rise of the internet economy and the resistance of the oppressed, to name a few problems at his doorstep. As serious, is the dissatisfaction among some in the general population and within the party ranks, over what, simply put, is Xi’s power grab,” says an insightful analysis published by Taipei-based think tank Institute for National Defence and Security Research (INDSR).

The prospects for OBOR, launched amid much fanfare, don’t look favourable either. The INDSR report adds, “Beijing is now wrestling with on-the-ground complications arising from thousands of projects over diverse geographies and political interests. It will be difficult for Beijing to support the Belt and Road going forward if the Chinese economy – now also constrained by the US-Sino trade war and technology acquisition roadblocks – cannot maintain high growth.”