Can Indonesia Avoid the Chinese Debt Trap?

Indonesia signed 23 collaborative projects in China’s Belt and Road Initiative (BRI) scheme at the BRI conference in Beijing on April 26, 2019, which include projects in North Sumatra, North Kalimantan, North Sulawesi, Maluku, and Bali.

These projects consist of the construction of industrial estates and supporting infrastructure, waste processing power projects, and a technology park. However, the question is whether these initiatives can ultimately benefit Indonesia? What risks must be faced and considered by Jakarta?

The Chinese scheme, formerly known as the One Belt One Road, is often seen as controversial. The BRI itself is a global development strategy initiated by China’s Xi Jinping in 2013.

At present, the program has attracted the involvement of more than 20 countries around the world, and has facilitated the construction of several factories, ports, and other commercial facilities in the participating countries.

In Indonesia, many parties have criticised the country’s involvement in the BRI. Some argued that this scheme would give birth to a debt trap.

This has begun to be seen in Africa, where relatively poor African countries receive large Chinese infrastructure investment funds and use these funds for their national infrastructure development projects which are also run by Chinese companies.

For example, Tanzania’s President John Magufuli recently froze the construction of Bagamoyo Port, which was to become one of the largest ports in East Africa, due to a number of exploitative agreements.

Another example is a debt-for-equity swap agreement between China and Sri Lanka, where China was willing to remove Sri Lanka’s debt of $8 billion if the Sri Lankan government agreed to lease the Hambantota Port to China for 99 years.

Indeed, it cannot be ignored that a large part of the Belt and Road Initiative is in China’s political and economic interests. Many of these initiatives have been carried out to put China in a favorable position. But this does not mean that there are no benefits that countries like Indonesia can take from the BRI scheme, as long as they take steps to protect their national interests.

Indonesia’s homework to reap benefits from the BRI

Many Chinese infrastructure projects in Africa, for example, are very beneficial for recipient countries, the whole continent, and even global trade interests. These projects include railroad infrastructure projects, roads, ports and even a 2,600 megawatts of electricity generation projects in Nigeria as well as $3 billion-dollar telecommunications projects in Ethiopia, Sudan, and Ghana.

The Indonesian government has tried to seek optimal benefits, while at the same time minimising risks by directing Chinese investments as B2B (business to business) activities. In this case, the government plays a role more as a facilitator of investment and development. A number of countries in Africa are not as thorough as Indonesia, where they give governments guarantees for BRI projects.

There are several steps that need to be taken so that Indonesia is able to absorb the benefits of BRI without falling into the Chinese debt trap.

First, Chinese investments must be directed to industries that have high added value, both from economic, technological, and other perspectives and not something that the country can do on its own domestically.

Secondly, there must be technology transfer from China to Indonesia, so that the latter can further advance its industry in the future and its people not only act as consumers.

Third, all of these industries must be environmentally sustainable in order for natural resources, the environment, and surrounding communities to be protected.

Fourth, the BRI projects must use Indonesian workers. This is to provide opportunities and work experience for Indonesian workers. Lastly, these projects must be realised according to international level best practices.

Besides that, it must be realised that the current world trend is changing from a confrontation scheme to a collaborative pattern. Rejection of BRI will not likely to be a realistic step. Collaboration with China, as long as it is managed by considering several aspects mentioned above, is a golden opportunity that Indonesia must continue to use for its own good.