Chinese loans will not solve external debt problems of Belarus

Belarus and China have reached several loan agreements totalling USD 3.5 billion altogether. Chinese companies will receive the bulk of this amount for supplying equipment and services. Even though thanks to the loans Belarus will implement several infrastructure projects, its public debt will increase without any effect on broad money supply.

Sino-Belarusian meetings last week have resulted in loan agreements with total worth of USD 3.5 billion. A USD 1.4 billion loan will be allocated for 14 years at 4% per annum with a 5-year grace period for the construction of Slavkaly, a new mining and processing complex. In addition, it has been agreed that Slavkaly will supply potash fertilizers to China in the next 20 years. A USD 88 million loan will be allocated for Beldzhi company to develop a plant to produce passenger cars. In addition, circa USD 2 billion will be allocated for other infrastructure projects in Belarus.

All these loan agreements will be relatively cheap with interest rates up to 4.5% and will have long-term repayment period (10 years). The loans will be tied, i.e. envisage participation of Chinese companies in the construction and equipment supply from China worth at least 50% of the total allocated funds. In addition, funds will be allocated only after Chinese financial institutions approve projects for implementation.

China has concluded such agreements to promote exports of its goods and services. Most of the allocated funds will end up on the accounts of Chinese companies, which will carry out works and supply equipment to the construction site. Meanwhile, Belarus has received the opportunity to implement some projects it had no funds for otherwise. In addition, Belarusian companies will be involved in the construction, which will create new jobs.

However, these loans cannot be used to replenish Belarusian international reserves. As a rule, Chinese fund about 85% of the total project cost, which means that Belarus will need to search for additional loans. Moreover, these are long-term projects and funds will be allocated in tranches upon completing certain amount of work – in other words, Belarus would be unable to refinance her debt from these loans. Finally, the government of Belarus will guarantee Chinese loans thus increasing the country’s external debt and its servicing costs.

Overall, thanks to the Chinese tied loans, Belarus may implement some infrastructure projects for which she has no funds of her own, but the money will return to Chinese companies engaged in the construction.