Train in Shenzen, China. (Photo: Pixabay)

JAKARTA (TheInsiderStories) – The International Monetary Fund (IMF) Managing Director Christine Lagarde has warned potential debt problems for partner countries involved in China’s Belt and Road Initiative (BRI) joint projects, including Indonesia.

Lagarde was speaking at a conference in Beijing organised by the IMF and the People’s Bank of China to discuss the macroeconomic and financial frameworks needed for the implementation of the BRI.

“One challenge is to ensure that the BRI only travels where it is needed, and the second is to focus on sound fiscal policies,” Lagarde said in a speech at a Belt and Road conference in Beijing on Thursday.

China’s President Xi Jinping unveiled the initiative in 2013, aims at building a modern-day Silk Road connecting China by land and sea to South-east Asia, Central Asia, the Middle East, Europe and Africa. China has pledged US$126 billion for the ambitious plan.

BRI is widely seen as China’s strategy to boost its global leadership in promoting an open world economy through enhancing connectivity by covering 65 countries on three continents.

According to Asian Development Bank, Southeast Asian states will need investment equal to 5 per cent of their GDP to cover infrastructure growth between 2016 and 2030. Through the BRI, Chinese investments can fill a critical funding gap for Southeast Asian countries, especially when funding through private investors and international financial institutions remains limited and falls short of the region’s demand.

Through the BRI, Chinese investments can fill a critical funding gap for Southeast Asian countries, especially when funding through private investors and international financial institutions remains limited and falls short of the region’s demand.

China has already made huge investments in Southeast Asian infrastructure and will seek to continue to build on these given the increasing willingness of Southeast Asian economies to turn to Japan and India – who are themselves funding infrastructure projects.

In countries where public debt is already high, careful management of financing terms is critical.

Indonesia

Indonesia for instance, President Joko Widodo‘s ambition to build infrastructure financed through leveraging public debt since he asumed power in 2014 has created unease among the public. Indonesia has been struggling with wide budget deficit after experiencing revenue shortfall in recent years.

The country’s foreign debt has reached US$375.5 billion in late January or 10.3 per cent growth compared to the same month last year.

Indonesia’s tax revenue over eight years.
(Graphic: The Insider Stories)

According to Bank Indonesia, the increase of foreign debt was mostly used to finance infrastructure projects and other productive activities. Despite this bulge, Indonesia’s public debt is still considered ‘safe’ at just 29.2 per cent of gross domestic product (GDP).

However, Indonesia keens to take benefit from BRI realization.

During the BRI forum last year, President Widodo and President Xi Jinping had a bilateral meeting and signed three documents. The first was related to an action plan for the implementation of a comprehensive strategic partnership for 2017 to 2022.

The second was related to a Rp 150 billion (US$11.25 million) grant for financing a site study on infrastructure development. The third one was related to the financing agreement of the Jakarta-Bandung high-speed railway project.

How important is BRI from Indonesia’s perspective? One may argue that China’s OBOR has both geo-economic and geostrategic objectives.

However, Indonesia mainly sees BRI as an economic opportunity. Clearly, Widodo sees this as an opportunity to seek the needed investment for infrastructure development in the country.

 

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com

LEAVE A REPLY

Please enter your comment!
Please enter your name here