The World Bank is encouraging China to overhaul its lending practices to stop burdening developing countries with crippling loan obligations that critics have dubbed “debt trap diplomacy”.
In an interview with The Australian Financial Review, the bank’s president for East Asia and the Pacific, Manuela Ferro, also expressed concern about the “fragmentation” of development assistance amid the geopolitical competition among countries to build influence in the region.
Manuela Ferro, World Bank vice president for East Asia and Pacific region. “If you want to maintain a certain level of sustainability and I would even say sovereignty, you would want to have cautious and more informed borrowing policies.” Rhett Wyman
Ferro, visiting Canberra for talks with senior government officials, said the bank was keen to strengthen its engagement with Australia on development assistance, most notably helping poor countries adapt to climate change.
“Australia has been one of our strongest partners given its own interest in the development of the Pacific region, but also now more broadly the South-East Asia region,” she said.
Ferro said the bank had expanded its assistance to the Pacific six-fold over the past decade.
“We have a portfolio of US$3 billion active in the Pacific. We see that continuing to grow over the next three years,” she said.
The Pacific and South-East Asia have become a fierce battleground in recent years for countries to use aid spending, grants and loans to bolster their influence, both bilaterally and multilaterally.
For instance, the Morrison government established the $4 billion (US$2.27 billion) Australian Infrastructure Financing Facility for the Pacific, and is partnering trilaterally with the US and Japan on projects, such as electrification in Papua New Guinea. The U.S is tripling funding for economic development and resilience to US$60 million a year.
On the Chinese side, it has its flagship bilateral Belt and Road Initiative, while Beijing also initiated the establishment of the Asian Infrastructure Investment Bank, which includes Australia as a member.
Beijing has also successfully courted Solomon Islands and Kiribati to switch their diplomatic recognition from Taiwan to China, opening the door to greater Chinese aid and investment.
But China’s approach has attracted accusations that it is saddling countries with hefty debts and leaving them vulnerable to undue influence from Beijing.
Although China was “barely lending” for now, Ferro said it was important to have recipient countries’ interests at heart.
“If you want to maintain a certain level of sustainability, and I would even say sovereignty, you would want to have cautious and more informed borrowing policies,” she said.
“I think all borrowers and lenders need to be responsible borrowers and lenders in terms of the terms they charge, in terms of the transparency of operations.
“We are engaged both with our client countries but also with China on how it can be a provider of finance to developing countries on terms and conditions that are helpful and consistent with a country’s ability to pay, so that most of the resources that are collected in taxes in these poorer countries can be directed to health, education, climate change adaptation instead of honouring expensive debt.
“That we don’t think is a very productive role. It is something we are actively discussing with Chinese authorities and development institutions to see if we can see a change on that side.”
Ferro warned the fragmentation of development assistance in the Pacific was “a real strain” on the “very weak” capacity to implement programmes.
“It makes absolute sense to co-ordinate action, to a certain extent pool resources for the same development objectives. That is, in fact, an excellent example of our partnership with Australia in the Pacific,” she said.
“What is also important is that new sources of finance are integrated … so they do not work at cross purposes.”
Ferro said the bank had engaged in a “robust expansion” of support for climate-related projects, which now made up 47 per cent of financing for climate in the Pacific.
She said funding needed to be offered on two fronts, to support Pacific nations adapting to climate change and supporting the rest of the world to reduce emissions.
“We need to, in a collective effort, to try to slow down the pace of emissions growth in the world and many of the large emitters in the world are in this region,” she said.