APAC: IMF head warns on Belt and Road debt risks 

13 April 2018 - 12:00 am UTC

International Monetary Fund (IMF) Managing Director Christine Lagarde said China’s Belt and Road Initiative has progressed, but warned of debt risks for countries getting involved.   

Speaking at a conference organised by the IMF and People’s Bank of China (PBOC) on Thursday (12 April), Lagarde noted that there had already been “signs of progress” in the trillion dollar strategy to improve infrastructure links across Eurasia.

“But there is a concern that some investments — if not properly tended — could wither on the vine,” she said, according to an official transcript. 

The IMF and PBOC have stepped up capacity building collaboration. The China-IMF Capacity Development Center was launched in Beijing yesterday. It will offer macro-financial training courses to officials from countries along the Belt and Road. 

In her speech yesterday, Lagarde highlighted a few challenges that need to be tackled.

“With any large-scale spending there is sometimes the temptation to take advantage of the project selection and bidding process,” Lagarde said. She highlighted a risk of “potentially failed projects and misuse of funds”.

Even when the right project was picked, difficulties often arose during implementation, she continued. 

In order to address potential political, legal, and environmental obstacles during the implementation stage, it is necessary to select projects that “fill true infrastructure gaps” she added.

Though acknowledging that the Belt and Road strategy can provide much-needed infrastructure financing to partner countries, Lagarde warned some projects can also lead to a “problematic increase in debt”.

As a consequence, the ballooning debt could limit other spending, and create balance of payment challenges. 

“In countries where public debt is already high, careful management of financing terms is critical.” she said, adding that this will protect both China and partner governments from entering into agreements that will cause financial difficulties in the future.

For projects that have already been approved, dispute resolution systems can prevent small problems from turning into major complications, Lagarde said. 

In a report published earlier this year, the Center for Global Development highlighted “sovereign debt risks” escalating against the backdrop of the planned “USD 8 trillion network of transportation, energy, and telecommunications infrastructure” projects in the China-led initiative. 

Twenty-three countries were highlighted by the Washington-based think tank as prone to “debt distress.” These include Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan in a “high risk” category.

A good starting point in mitigating debt risks is ensuring transparent decision-making the IMF chief said. 

Lagarde observed an “overarching framework” between the various agencies involved in the strategy would help provide clarity to all stakeholders.

The International Development Cooperation Agency “could potential play this role,” she said, referring to the agency recently set up by China’s State Council to take charge of the country’s foreign aid including the Belt and Road Initiative.