The euphoria about the Belt and Road Initiative (BRI) in Indonesia and elsewhere in South and Southeast Asia (SEA) has been felt since 2017, particularly following the country’s participation in the BRI Summit in Beijing that year, where Indonesia, along with other SAARC and ASEAN member states, was expected to receive massive investments from China to support several infrastructure projects.
This year, however, the debates concerning the BRI are again becoming prevalent after Indonesia’s Coordinating Minister for Maritime Affairs Luhut Binsar Panjaitan as Indonesia’s representative signed 28 BRI projects last April. Among the various debated subjects is the growing concern about the real nature of the BRI.
Is it a Chinese development initiative or a geopolitical instrument of Beijing’s that uses debt-trap as a tool to bring targeted countries into the desired terms?
The BRI as a Chinese debt trap
In the realisation of the BRI, China is targeted to spend $4.4 trillion divided into various infrastructure projects in 65 countries. The funds from China will be disbursed from three main institutions, namely the Export-Import Bank of China, the Asia Infrastructure Investment Bank and the Silk Road Fund. However, the implementation of the BRI has caused a wave of controversy, one of which was related to the fear of being caught in a Chinese debt trap.
Sri Lanka is one of the BRI participating countries that must give up on China’s debt. The Mattala Rajapaksa International Airport project in Sri Lanka, which cost $190 million with an interest of 6.3%, did not benefit from the airport’s operations.
As a result, the Sri Lankan government is losing money. This made the country unable to pay its debts to China. The inability to pay credit or interest at the end of June 2016 led Sri Lanka to make an agreement with Chinese Communist Party in the form of equity (surrendering land for lease) for 99 years to the country.
According to a well-known SAARC strategic analyst based in India, Brahma Chellaney, what China does with its BRI is a debt-trap diplomacy effort, where this type of diplomacy is a bilateral relationship that is interwoven on the basis of debt. In its operations, this type of diplomacy involves a creditor country that deliberately extends excessive credit to the debtor country. If the debtor country cannot fulfil its debt obligations, often the creditor country will make it possible to interfere with economic and political conditions in the debtor country.
Acknowledging this, Malaysian Prime Minister Mahathir Mohamad in August 2018 said his country would stop funding for projects from China, including a railway line worth $20 billion as there is a possibility that the country would be trapped under huge debts.
“We should avoid binary categorisations…However, a bilateral approach in developmental strategies historically does not bring back satisfactory results. Besides the Bretton Woods instruments – which is often enveloped in controversies, do not forget developmental champions. All of them are multilateral institutions of fair conditionalities, of balanced and transparent instruments: UNIDO, ADB, but also the Islamic Development Bank, OFID or UNCTAD. If not a loan, ask them at least for advice”, said Prof. Anis H. Bajrektarevic in Kuala Lumpur at a recent Economic Forum.
Indonesia and lessons from Malaysia
The same concern is also prevalent in Indonesia given that the country is in the midst of many of its own problems. The government seemed to be incessantly ambitious to continue to take part in the BRI. It is important to remember that currently Indonesia’s external debt has reached $387.6 billion during the first quarter of 2019. It consists of government and central bank external debts of $190.5 billion that have slightly risen by 3.1% (year-on-year) and private external debts of $197.1 bilion that have rocketed by 12.8% (year-on-year).
Although the ratio of Indonesia’s external debt to Gross Domestic Product (GDP) is relatively safe at 36.9% and the S&P Global Rating has just raised the long-term sovereign credit ratio for Indonesia from “BBB-“ to “BBB”, the Indonesia’s economic foundation is very fragile.
In 2018, for instance, the massive capital outflow made significant depreciation of the Rupiah against the US dollar due to the hike of Fed Fund Rates and the contagion of Turkish lira crisis. The currency hit about 15,000 rupiah against the greenbacks, the lowest level since the 1998 financial crisis, and made it one of the worst performing currencies in the region.
The extreme volatility of the Rupiah causes payments of interests and foreign debts more expensive. The 1998 financial crisis provided a precious experience that many companies faced default and the country’s economy experience chaos with economic growth of -13.1%. With such conditions, how come Indonesia dear to magnify its debts by signing massive BRI projects?
There is also a concern that the BRI project is, instead of profiting Indonesia, putting the country at a disadvantage. One example comes from the Palembang LRT project, which has the same potential as the airport in Sri Lanka, is empty with little visitors. In fact, this project must suffer losses with an operating burden of $618,545 per month.
By looking at the fact that infrastructure projects have not been able to improve economic growth and to the gap in inequality – especially in the East – as well as various other disputes, the government’s decision to sign many BRI projects is certainly questionable.
Also ironic is that the implementation of infrastructure development in Indonesia remains suffering from overt corruption practices. Instead of aiming at the welfare of society, infrastructure projects often become fields of concern for interested parties. Overall, there is a possibility that Indonesia will face the Chinese debt trap if it is not careful, which would have a negative impact on the Indonesian economy.
The government needs to be able to make sure that participating in the BRI would not lead to its loss. Similar to what Malaysia has done, Jakarta may need to renegotiate with China on the terms and conditions of those projects. Indonesia must realise that China needs them more than they need China as the planned maritime route under the BRI would not be realised without Indonesia. If they do not talk, it would not be surprising if what happened to Sri Lanka would also happen to Indonesia.