Myanmar’s auditor general has cautioned government officials about continued reliance on high-interest Chinese loans, as the Southeast Asian country begins to pay off debt taken on during decades of military rule and accepts new loans under China’s massive Belt and Road Initiative.
As Myanmar’s largest lender, China holds considerable leverage over the underdeveloped and largely impoverished country. China also is the nation’s biggest trading partner and one of its largest sources of inward investment in its southwestern neighbor.
Myanmar’s current national debt stands at about U.S. $10 billion, of which U.S. $4 billion is owed to China, Auditor General Maw Than told a news conference in Naypyidaw on Monday.
State and regional governments now must repay a total of 3 billion kyats (U.S. $2.1 million) on loans used for regional development during the administration of former president Thein Sein (2011-2016). The Office of the Auditor General ordered the money to be repaid on June 8.
“The truth is the loans from China come at higher interest rates compared to loans from financial institutions like the World Bank or the IMF [International Monetary Fund],” he said. “So, I would like to remind the government ministries to be more restrained in using Chinese loans.”
Myanmar lawmakers and analysts said Tuesday that China’s loans to Myanmar have become burdensome because the country has had to repay as much as U.S. $500 annually in both principal and interest.
Most of the loans are 30-year debt dating from 1988-2010, when a military junta ruled the country, and have been coming due since 2018.
“Most of these loans are to be paid back after 30 years,” said Than Soe, an economic analyst and lawmaker from the ruling National League for Democracy (NLD) party. “Now we are paying around U.S. $500 million a year, including principal and four-percent interest.”
The interest rate is high relative to the other international loans, making the loans a burden for the current government, he said.
In January, lawmakers urged the government to quickly repay Chinese loans issued in past decades, which carry a 4.5 percent interest rate that is the highest among other countries that have lent to Myanmar.
No choice
The civilian-led NLD government which came into power in 2016 also has borrowed money from international organizations to which it will eventually owe repayments, Than Soe said.
Ye Htut, who served as information minister during Thein Sein’s administration, said Myanmar had to take out Chinese loans with high interest rates in the past because it had no other choice.
At the time, Myanmar was subject to harsh economic sanctions imposed by the U.S. in 1997 to isolate the military junta then ruling the country. The Obama administration oversaw a gradual easing of sanctions and lifted remaining ones in 2016 in light of Myanmar’s political reforms.
“During the military government’s tenure, countries like the U.S., Japan, and the United Kingdom, and groupings like the EU, were forbidden to issue loans to us,” Ye Htut said.
“Organizations like the World Bank or the Asian Development Bank also didn’t lend to us because of U.S pressure, so only China was left,” he said.
Without the ability to shop around for loans, Myanmar had to accept the terms and high interest rates set by China, Ye Htut said, adding that some of the borrowed funds were used to finance failed national projects implemented without proper feasibility assessments.
Economists now suggest that the government should negotiate with China for loan forgiveness because of the coronavirus pandemic, which has dented the nation’s economy.
China has said it will suspend debt repayment for impoverished countries, though it is unknown whether it will do so for Myanmar’s outstanding loans.
“We have seen China forgive the debts of some countries,” said economist Zaw Oo. “It has relaxed the repayment conditions. The ruling government should negotiate with China for loan forgiveness. It would settle many issues that are holding us up.”
Myanmar’s risk of external debt distress is low as is the overall risk of debt distress, according to an IMF country report issued in March.
The country’s external debt accounts for just over 38 percent of its gross domestic product, according to the IMF.
“While the overall debt outlook remains positive, it remains vulnerable to a slowdown in FDI [foreign direct investment], exports, and natural disasters,” the report said.
BRI projects
Myanmar’s involvement in China’s Belt and Road Initiative (BRI) means that it is continuing to take on new debt to finance huge infrastructure projects, analysts said.
In January, Chinese President Xi Jinping and Myanmar leader Aung San Suu Kyi agreed to speed up key infrastructure projects under the BRI, resulting in 33 exchange letters, protocols, and memorandums of understanding on mega-project development, railways, industrial and power projects, and trade and investment.
“Chinese loans often have higher interest rates than those from other international lenders, so scrutiny of the costs of BRI projects, their financial viability, and their sources of financing will be particularly critical to ensure that the Myanmar government avoids a disproportionately high debt burden,” said a November 2019 report by the Transnational Institute, an international nonprofit research and advocacy think tank based in The Netherlands.
Aung Thu Nyein, director of communications at the Institute for Strategy and Policy–Myanmar, said the loans issued by China under the BRI are making the situation worse.
“Chinese loans are now widely called a debt trap, especially with China now implementing the BRI projects,” he said. “The funding for these projects has turned into loans.”
As with the loans issued to the previous military juntas, there is growing concern in Myanmar that the BRI debt also will accumulate over time, Aung Thu Nyein added.
“We need to be cautious about not falling into the debt trap,” he said.
Chinese development banks issue loans for BRI infrastructure development projects that are rated as too risky by other lenders. But if the countries cannot repay the loans, China gains access to the assets or to other local resources.
This occurred in 2017 when the Sri Lankan government could not service a loan on a major port project under the BRI. As a result, it was forced to lease the port to a Chinese venture for 99 years.
Reported by Thiha Tun and Thet Su Aung for RFA’s Myanmar Service. Translated by Ye Kaung Myint Maung. Written in English by Roseanne Gerin.