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International relations

G-20 seeks to protect emerging nations from debt traps

China expected to endorse new infrastructure investment guidelines

An aerial view of the Colombo Port City construction site in Sri Lanka, backed by Chinese investment.   © Reuters

TOKYO -- Finance ministers and central bankers from Group of 20 nations are poised to agree on guidelines to boost transparency in infrastructure investment and prevent emerging nations from taking on excessive debt.

Demand has been rising for construction of roads, ports and other infrastructure in developing nations in line with their economic growth. By some estimates, this demand totals $1.34 trillion a year in Asia. At the same time, there is growing concern that emerging countries are falling into debt traps by taking on massive loans.

To address the issue, the guidelines to be adopted at the G-20 meeting in Fukuoka on June 8-9 will focus on debt sustainability. Lending nations will be asked to consider the ability of borrowers to repay debt before handing out loans. And to improve transparency in fund provision, nations will be urged to adopt competitive bidding on projects, for example.

Meanwhile, borrowers will be called on to make clear the full picture of their liabilities. While developed nations basically disclose how much assistance they provide based on Organization for Economic Cooperation standards, countries such as China and India often do not reveal such information. This has made it difficult to accurately ascertain how much debt an emerging nation has taken on.

The sharing of such information would help prevent emerging nations from borrowing beyond their means. The G-20 nations will work with organizations such as the World Bank and International Monetary Fund to provide support by creating databases covering credits and liabilities.

The ballooning debt of emerging nations has become a serious issue. According to an evaluation of default risks of low-income nations by the World Bank and IMF, 21% of nations were in the two categories suggesting the highest default risks in 2014, but this percentage grew to 42% in 2018.

This period of growing default risks coincides with China's push to increase lending to emerging nations through its Belt and Road infrastructure investment initiative. Beijing has also become a major player in infrastructure through the establishment of the Asian Infrastructure Investment Bank in 2016.

Beijing has faced criticism of baiting countries into debt traps, in which a lender take control of the facility it has financed. For example, China to over the port of Hambantota is southern Sri Lanka on a 99-year lease after the South Asian nation failed to repay debt.

China is part of the G-20 along with Japan, the U.S., the E.U. and 16 other countries that make up the world’s leading economies. Beijing apparently decided to cooperate with the group on this issue to avoid taking flak from the international community.

"Given the trade war with the U.S., China wants to show that it is making concessions to other major nations," a Japanese government official said. But the guidelines will not be binding and not have penalties for violations.

The gist of the new guidelines will be included in the joint statement to be issued at the end of the two-day gathering. The guidelines are also expected to be approved by G-20 leaders who will meet in Osaka on June 28-29.

This would mark the first time that the G-20 draws up rules on infrastructure investment. In May 2016, the Group of Seven nations adopted rules on promoting high-quality infrastructure investment.

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