Risky Business: The Drawbacks of the Kyrgyz Republic and Tajikistan’s Borrowing
China’s Belt and Road Initiative (BRI) is projected to deliver trillions of dollars in infrastructure investment to 68 participating countries worldwide. The Kyrgyz Republic and Tajikistan are among the poorest countries in Asia and have been assessed by the World Bank and the International Monetary Fund (IMF) as being a high risk for debt vulnerability. In the summer of 2020, the Kyrgyz Republic and Tajikistan had accumulated $4.08 billion and $3.096 billion in total external debt, accounting for 63.3 percent and 44.7 percent of their GDP respectively. Furthermore, 43.4 percent of the Kyrgyz Republic’s debt and 36.6 percent of Tajikistan’s debt is held by China’s Export-Import Bank (Eximbank). In addition, the COVID-19 pandemic has placed a considerable strain on the economies of the Kyrgyz Republic and Tajikistan and has worsened debt dynamics in the region.
The Kyrgyz Republic and Tajikistan are becoming increasingly weighed down by their debt with China. Most of the Kyrgyz Republic and Tajikistan’s external loans stem from bilateral agreements with China that began in 2010 and have steadily increased since the two Central Asian countries became involved in the BRI. Research from the Central Asian Bureau for Analytical Reporting indicates that China is working towards employing credit diplomacy in Central Asia. These experts claim that under this framework, China will use the Kyrgyz Republic and Tajikistan’s accumulating debt to sway the Central Asian republics’ domestic and foreign policies in favor of its strategic ambitions.
Concerns that the Kyrgyz Republic and Tajikistan’s growing indebtedness to China has placed them among the top eight countries most susceptible to debt distress, according to a study by the Center for Global Development. The Kyrgyz Republic and Tajikistan are the fifth and twentieth most indebted countries to China respectively. Tajikistan is continuing to increase its debt load to its eastern neighbor. For example, Chinese foreign direct investment is reportedly financing a $3 billion segment of the Central Asia-China gas pipeline that will pass through Tajikistan. In addition, domestic investment has not been sufficient to finance the completion of the Rogun hydroelectric plant, prompting officials to allow foreigners to invest in the project. Additional financing from foreign companies, multinational banks, and China will only increase the debt owed to foreign entities by the Kyrgyz Republic and Tajikistan.
The COVID-19 pandemic has aggravated existing debt-related risks. In April 2020, then-Kyrgyz President Sooronbai Jeenbekov requested that his Chinese counterpart, Xi Jinping, consider “easing and prolonging payments on Kyrgyzstan’s external debt to China.” Moreover, the Kyrgyz Republic participated in discussions with China’s Eximbank to restructure $1.8 billion of debt. The economic consequences of COVID-related shutdowns led the country to be the first recipient of IMF emergency funding, receiving a $121 million relief package. Continued discussions on the construction of hydropower plants, the China-Kyrgyzstan-Uzbekistan railway, and highways highlight a desire of the Kyrgyz government to sustain borrowing practices from China’s Eximbank, but these practices also leave the Kyrgyz Republic vulnerable to economic shocks, such as the COVID-19 pandemic. Furthermore, the COVID-19 pandemic is expected to worsen the debt-to-GDP ratios of the Kyrgyz Republic and Tajikistan. Officials are bracing for a fifteen percent increase in the Kyrgyz Republic and an eight percent increase in Tajikistan. The pandemic has emphasized the need for the Kyrgyz Republic and Tajikistan to better insulate their economies in order to prevent external shocks from transforming into debt crises.
China has become wary of continued lending to its Central Asian neighbors and will likely not be as forgiving with loan repayments as the Kyrgyz Republic and Tajikistan hope. For instance, China has not employed a uniform policyfor debt forgiveness among countries in Africa that have requested financial assistance from their debtor. Therefore, the Kyrgyz Republic and Tajikistan should diversify their sources for investment to avoid becoming economically exposed to Chinese creditors. The COVID-19 pandemic has underscored the drawbacks of acquiring high amounts of debt owed to one source and will cause further debate on the sustainability of the borrowing practices of these countries.