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Who pays? Central Asia and China’s debt dilemma


Who pays? Central Asia and China’s debt dilemma


The World Bank and the IMF have called on China to forgive the debt of low-income Central Asian countries (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan).


– Analysts forecast that economic growth in Central Asia will shrink considerably as the economic ramifications of the COVID-19 pandemic reverberate around the globe.
– The economic conditions will limit Central Asia’s ability to pay off Chinese loans on various infrastructure projects.
– Beijing will have to explore a handful of debt relief avenues that will likely give it major financial and security advantages in Central Asia.


For the most part, Central Asian states have been remarkably proactive in mitigating the spread of COVID-19, especially considering their proximity to and economic relationship with China. As of today, the region as a whole boasts only 47 deaths. However, some capitals have adopted draconian quarantine measures, including punishing those going out in quarantine, while Turkmenistan and Tajikistan have somewhat questionably denied having any cases for months. Nevertheless, businesses in all the Central Asian countries are open and the Asian Development Bank has facilitated the disbursement of loans across the five states.

Data suggests that economic growth in the region will dwindle this year. The World Bank expects the already small economies of Central Asia to shrink by 5.4%, in part because these economies are heavily reliant on Chinese consumption of oil and other commodities. Through the Belt and Road Initiative (BRI), China has extended hefty loans into Central Asian states, all of which have extremely low sovereign credit ratings, causing an economic reliance on their gargantuan neighbour. With COVID-19 reducing trade and growth, unemployment is plaguing the region. For example, Tajikistan, which is highly reliant on remittances, saw record-high levels of unemployment in the last month. While some states are able to rely on reserves — Kazakhstan has dedicated $10 billion to fight the pandemic and $740 million to ameliorate employment — most Central Asian states are finding themselves strapped for cash.


Photo: The Kremlin

Since Chinese President Xi Jinping’s visit to Kazakhstan to promote the New Silk Road in 2013, Beijing’s economic foray into Central Asia has had mixed results for the region. On the surface, the Silk Road Economic Belt has been a panacea for transportation across the region, eliminating previous barriers erected by Uzbekistan, Tajikistan and Kyrgyzstan. The Kazakhstan-China oil pipeline, one of many Chinese-led energy projects in the region, pumps over 130,000 barrels per day from the Caspian shore to Xinjiang, turning Kazakhstan into a globally relevant oil exporter.

But key performance indicators, such as standard of living and income security, remain weak. Take the Rogun Dam, for example. Chinese construction of the dam should in theory be a boon for employment in Tajikistan. Instead, construction jobs have been outsourced to Chinese workers and air pollution in Tajikistan has increased at a faster rate than elsewhere in Central Asia. The nexus of railroads built by China Railway, and other major Chinese corporations, has done little to facilitate Central Asian growth and a lot to expand Chinese energy extraction. China also accounts for anywhere from 50% to 80% of new foreign debt undertaken by Uzbekistan, Turkmenistan, Tajikistan, Kazakhstan and Kyrgyzstan, causing a crippling rise in these countries’ debt to GDP ratio.

Some analysts allege Chinese debt is reflective of problems of economic diversification. While China is not responsible for helping Central Asian states diversify their economies, economic projects have nonetheless achieved little in this regard. Natural resources account for roughly 65% to 75% of exports in Kyrgyzstan, Tajikistan and Uzbekistan and more than 90% in Kazakhstan and Turkmenistan. Furthermore, unlike ASEAN in Southeast Asia, no economic bloc represents the interests of the Central Asian nations. The nearest body is the Russia-led Eurasian Economic Union, but it doesn’t include Tajikistan, Turkmenistan and Uzbekistan, rendering Central Asia without a unified voice. The lack of regional integration makes Central Asian states more dependent on trade with external countries and gives them less collective leverage during negotiations.


Photo: Rudolf Rantzau/Pixabay

As Chinese-lead investment and infrastructure projects in Central Asia are on a hiatus due to varying degrees of lockdowns and supply and labour shortages, a key decision will likely be made in China — what type of debt relief measures, if any, Beijing will offer.

One possible avenue China has explored in Africa — and will likely apply to Central Asia given the region’s abundant oil supply — is what the World Bank refers to as “barter deals.” Here, loans are repaid in oil. At a time when global consumption has dwindled and prices are at historic lows, barter deals for oil would allow China to secure its energy imports and add to its oil stockpiles. As the World Bank points out, China’s practice of denominating loans in barrels of oil results in uneven numbers that heavily favour Beijing’s slice of the oil markets. This type of loan relief strategy will cause Central Asian states to produce more oil just to repay loans, which might steer government resources away from ameliorating public health concerns and economic diversification. Another avenue for debt relief might come in the form of Chinese companies gaining control of Central Asian energy firms by entering joint ventures, granting Beijing a significant amount of sway in these companies.

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Alternatively, the Chinese Development Bank and the Export-Import Bank of China may declare force majeure, absolving parties of any penalty. Beijing might be interested in writing off loans due to the BRI’s significance to China, in one critical sector: Beijing’s security apparatus abroad.

China has extended its surveillance regime in Xinjiang, where there are numerous Kazakh and Kyrgyz prisoners among the over one million Muslims being detained, to the neighbouring Central Asian region. In Uzbekistan, Chinese loans have facilitated the implementation of Uzbekistan’s Safe Cities project, which will implement monitoring and surveillance systems throughout the country. The quiet extension of such programs, and the data and insights they may offer, could be appealing to Beijing. China’s security aspirations look southward and westward as well, focusing on Islamic terrorism coming from Afghanistan’s Wakhan Corridor. Beijing’s clandestine military base in Tajikistan, one that serves as a springboard into the Middle East, highlights that defence and economics go hand in hand for the PRC. The security benefits of Chinese loans could motivate Beijing to continue to write off loans in the name of achieving broader strategic goals.

China could also forgive the debt to sustain infrastructure projects and energy market domination because such projects have helped slash Moscow’s regional influence. China’s presence in Central Asia was originally concerned with security and counter-terrorism and was most felt through the Shanghai Cooperation Organization, which was co-founded by China and Russia in 1996. This relationship has evolved considerably: in the last ten years, according to the OECD, China has eclipsed Russia as both a top importer of Central Asian goods as well as exporter to Central Asia. Evidently, Central Asian states see greater value in Chinese markets than Russian ones.

China is the largest global creditor, having surpassed the World Bank and IMF. In many ways, its status will make any of the above options equally as beneficial to its long-term goals. On one hand, Beijing could be hawkish and secure its oil supplies. On the other, Beijing may foot the bill of infrastructure projects in exchange for an expansion of the police state. Either way, Central Asia’s economic future will be largely decided by China’s choice.

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