Over the past 30 years, Central Asia’s geopolitical landscape has been characterized by an increasingly stable and modified Chinese presence. Alongside investments and grants, China has been generous in issuing credits and loans, accumulating into what some see as a possible “debt trap” for regional governments.
The debt trap issue has become sensitive and politicized for almost every country in Central Asia. However, the nuances and intricacies of external debt differ for each country. While for Kazakhstan and Uzbekistan, this topic still remains within acceptable risk boundaries, for Kyrgyzstan and Tajikistan, it falls under the category of state importance and significantly impacts domestic policies.
A Small Package of Measures: Nationalization and “Kusturization”
The Chinese debt trap was a legacy issue inherited by current Kyrgyz President Sadyr Japarov from his predecessors, but details of credit agreements started to gradually emerge in mass media only after 2020. One of the most resonant statements made by Japarov was about the risk for Kyrgyzstan of losing several strategic assets, such as power plants, power lines, and an alternative “North-South” highway, if it fails to repay its debt.
According to Kyrgyzstan’s debt management strategy for 2022-2024, “the maximum amount of debt to one creditor should not exceed 45 percent,” and the total national debt should not exceed 70 percent of GDP. As of July 2022, Kyrgyzstan had approached the threshold by owing China Exim Bank approximately $1.7 billion, which accounted for 42.9 percent of its total external debt.
The peak of external debt repayments to China is expected to occur between 2025 and 2027, with subsequent reductions, and by 2035, Kyrgyzstan is supposed to fully repay its debt to China. In light of this, the government has initiated measures to replenish the state budget depleted by debt repayments.
At the end of 2020, the government opened a special account to which any citizen or external investor could voluntarily contribute to debt repayment. However, these measures did not yield significant results, as of February 20, 2023, the balance in the account was around $357,000.
The nationalization of important enterprises, according to the authorities’ plan, should increase the revenue side of the budget and bring the economy out of the shadows. For instance, in 2021 the Kumtor gold mine was taken into government hands. And more recently, Ayu, a manufacturer of alcoholic beverages, allegedly “voluntarily” transferred two of its plants to the state.
These initiatives are closely linked to another aspect, as Kyrgyzstan is actively implementing a strategy known as “kusturization,” aimed at combating corruption through voluntary donations to the state by officials who are suspected and accused of corruption. The most resonant case is the payoff made by Raimbek Matraimov, the former deputy chief of the customs service, who was involved in the illegal transportation of goods from China to Kyrgyzstan and further on to other Central Asian countries. He was found guilty of corruption and fined $3,000, as he admitted his guilt and repaid the state 2 billion soms ($24 million).
However, according to international investigations by Radio Azattyk, Kloop, and OCCRP, the true damage of Matraimov’s corruption amounted to about $700 million, nearly half of Kyrgyzstan’s external debt to China. In the end, Matraimov paid the country only 3.5 percent of the amount that he allegedly siphoned off through corrupt schemes.
Other politicians and businessmen have also taken advantage of the “kusturization” opportunity, also sometimes referred to as an “economic amnesty.” Ultimately, however, the process pours cold water on any judicial processes related to corruption, strengthens authoritarianism, and lacks transparency in regard to the collected funds. Civil activists have repeatedly requested information about the destination of funds recovered from corrupt individuals, but no clear report has been provided.
Deferment, Conversion, and Tax Reforms
Given its rapidly escalating problems, the Kyrgyz government sought a deferment from China on debt repayments in 2021. Beijing granted a six-year deferment at an annual interest rate of 2 percent. As a result, the deferment will cost the budget an additional $3.8 million in interest.
This situation forces the government to explore new ways to replenish the state treasury, and the most straightforward approach is through tax code reform and revising the “rules of the game” for businesses. For instance, a new tax code was adopted this year, and cash registers have been introduced, but the most significant resistance has been regarding the implementation of electronic goods transport invoices. Mass protests by traders demanding the repeal of these new measures have already occurred in several regions of the country, including the capital. These measures are being introduced alongside a reduction in the tax burden for casinos and the legalization of illegally acquired assets, leading to price hikes and inflation while the government plans to increase its revenues.
Observing the gradual rise of social discontent, authorities are resorting to populist measures to mitigate the debt situation. For example, there is an initiative to exchange external debt for green projects such as hydropower plants, solar power stations, and environmental protection in Kyrgyzstan. While some European countries have already begun signing new debt conversion agreements, China has shown little enthusiasm for this “scheme.” Additionally, Kyrgyzstan, according to its agreements with China, is deprived of the possibility to appeal to international arbitration courts; disagreements related to external debt can only be addressed in Chinese courts.
One of the most primitive ways to get rid of external debt is through resource transfers. Projects in the mining industry remain on the agenda but adopting this approach is sensitive due to the risk of social unrest and protests, which have been witnessed regularly in the past decade.
A flagship project for Kyrgyzstan’s economic development is the construction of the China-Kyrgyzstan-Uzbekistan railway. While the parties have compromised on the necessity of launching the project, the route, and track gauge after more than two decades, the details of financing have yet to be disclosed. Kyrgyzstan, burdened with debt in the coming years, represents the weakest link in the project, with the cost of the railway estimated at $4-5 billion.
The seemingly simplest solution would be an uncompromising fight against corruption, smuggling at the Chinese border, and optimizing state expenditures. However, despite attempts to modernize checkpoints with China, the problem of corruption remains unresolved. Enormous discrepancies in trade statistics with China for 2022 possibly indicate the persistence of smuggling: according to Chinese statistics, trade turnover with Kyrgyzstan amounted to over $15.5 billion, while Kyrgyzstan’s national statistics indicate around $4 billion. The whereabouts of the approximately $10 billion seemingly lost en route from China to Kyrgyzstan remain a matter of speculation.
In 2022, the president’s office expenses exceeded all records in recent years, increasing sevenfold to 744.82 million soms, surpassing the allocated sum. Dastan Bekeshev, a member of the Kyrgyz parliament, stated that private jet flights alone for Japarov cost 140 million soms. All the while, new investors and creditors show little interest in major infrastructure projects in Kyrgyzstan.
It seems that Kyrgyzstan faces a dilemma of obtaining new credits for the railway construction while still having unpaid debts to Beijing. The paradox, or perhaps the “new normal,” is that while high levels of corruption among the government elite are sustained by Chinese loans, the results are low incomes for the wider population, new forms of tax burden, and increasing generational inequality.
Undoubtedly, debt obligations have both indirect and direct impacts on the internal and external policies of countries. Debts to China influence the domestic policies of the region’s countries, shaping discourses on “mutually beneficial cooperation with China” and reforms aimed at reducing the state’s social commitments and increasing taxes.
Although the elites of Central Asian countries distanced themselves from the promoted Chinese formula of “investments in exchange for resources,” in practice, this scheme has proven to be functional but under the term of “mutually beneficial cooperation.” If a precedent is set in Central Asia where strategic assets are transferred in exchange for debt to China, especially if this list includes roads or strategically vital infrastructure, regional connectivity and cooperation will be under threat.
Despite this, the region’s countries have not attempted to synchronize measures for managing external debts, such as project prioritization and transparency. The way small countries like Kyrgyzstan and Tajikistan will be able to satisfy China will determine not only Beijing’s image but also the future of new projects in the region. The mechanism for repaying debts to China from Central Asian countries will demonstrate the real, not just declared, content of the “community of shared destiny”: whether it will be mutually beneficial cooperation or enrichment of the elite at the expense of impoverishing the population.