Indonesia: Avoiding China’s Debt Snare

South and Southeast Asia (SEA) have been euphoric about China’s Belt and Road Initiative (BRI) since 2017, particularly following Jakarta’s participation in the BRI Summit in Beijing that year, in which Indonesia and other states were expected to be the focus of massive infrastructure investment.

This year, debate over the BRI has arisen again after Indonesia’s Coordinating Minister for Maritime Affairs Luhut Binsar Panjaitan signed off on 28 projects last April. Prominent in the debate is the growing concern about the real nature of the BRI. There is equal concern growing in Indonesia over President Joko Widodo’s commitment to vast spending on infrastructure. The 2020 projected budget earmarks US$29.78 billion for infrastructure projects.

The words ‘debt trap” have over the past two years come into common currency, and nowhere are they more regarded ominously than when Chinese developmental initiatives come up. Is the BRI a geopolitical instrument a tool to bring targeted countries into the desired terms?

The BRI as Chinese debt trap

China is targeting spending US$ 4.4 trillion, divided into projects in 65 countries over the next decades. The funds are to be disbursed from three main institutions, the Export-Import Bank of China, the Asia Infrastructure Investment Bank and the Silk Road Fund, all China creations. However, implementation has caused controversy.

Sri Lanka is the poster child for BRI-participating countries drunk on Chinese debt. The Mattala Rajapaksa International Airport (MRIA) project, which cost US$190 million at 6.3 percent annual interest, in an area where it attracts no passengers, has provided almost no benefit to the country. Colombo, unable to pay, at the end of June 2016 was forced into an agreement to surrender land for lease for 99 years.

Brahma Chellaney, an India-based strategic analyst with the South Asian Association for Regional Cooperation, called the BRI a “debt-trap diplomacy effort, a bilateral relationship interwoven on the basis of debt” in which a creditor country deliberately extends excessive credit to the debtor country to the point where the debtor cannot fulfil its obligations, making it possible for the creditor 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-backed projects from China, including a railway line worth US $20 billion.

“We should avoid binary categorizations,” Anis H. Bajrektarevic said recently in Kuala Lumpur at the Economic Forum. “However, a bilateral approach in developmental strategies historically does not bring back satisfactory results. Besides the Bretton Woods instruments – 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 Islamic Development Bank, OFID or UNCTAD. If not a loan, ask them at least for advice.”

Indonesia and lessons from Malaysia

Indonesia seems incessantly ambitious to continue to take part in the BRI. It is important to remember that currently the country’s external debt reached US$387.6 billion in the first quarter of 2019, consisting of government and central bank external debt of US$190.5 billion that rose by 3.1 percent year-on-year and private external debt of US$197.1 billion, up a troubling 12.8 percent.

Although the ratio of Indonesia’s external debt to gross domestic product is relatively safe at 36.9 percent and S&P Global Rating has just raised the long-term sovereign credit ratio for Indonesia from “BBB-” to “BBB,” Indonesia’s economic foundation is in fact very fragile.

In 2018, for instance, massive capital outflows drove the rupiah down against the US dollar as the US Fed hiked rates and the Turkish lira crisis caused contagion. The currency hit about Rp15,000 against the greenback, the lowest level since the 1998 financial crisis, and made it one of the worst performing in the region.

This extreme volatility makes interest payments and foreign debt more expensive. The 1998 financial crisis meant many companies faced default and the country’s economy experienced chaos with economic growth declining by a stunning -13.1 percent.

Those conditions, combined with the memory of 1998, should make the government extremely cautious about tying itself up with BRI debt, no matter how much Indonesia needs infrastructure.

There is also a concern that the BRI projects, instead of profiting Indonesia, would put the country at a disadvantage. One example is a light rail project in Palembang, 550 km northeast of Jakarta, which is still struggling with its own light rail difficulties. Critics charge the project has little potential besides amassing debt. The project must suffer losses with an operating burden of Rp8.9 billion (US$618, 545) per month.

Given 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 such projects is 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 Chinese debt trap is it is not careful, which would have negative impacts on the Indonesian economy.

The government needs to be able to make sure that participating in the BRI would not lead to losses. As Malaysia has done, Jakarta may need to renegotiate the terms and conditions of those projects. Indonesia must realize that China needs them more than they need China as Beijing’s planned maritime routes can’t be realized without Indonesia. The Malaysian case demonstrates that negotiation is possible. If not, it wouldn’t be surprising if what happened to Sri Lanka could also happen to Indonesia.

Muhammad Zulfikar Rakhmat is a lecturer at Universitas Islam Indonesia and a research associate at Jakarta-based Institute for Development of Economics and Finance. Dendy Indramawan is a research assistant at the institute.