Is Serbia falling into China's debt trap?

Montenegro is already in trouble. Serbia's debt to China is much smaller in relation to GDP, but strong billions have yet to be calculated. Why do the Balkan countries borrow from China at all and how much corruption is at stake?

"The big question is how it will end. Their fiscal space has narrowed tremendously. They drowned themselves, and for now it is a highway to nowhere. "This is how Reuters transmitted the words of an unnamed EU official about Montenegro and the Bar-Boljare highway, the construction of which is credited by China, in the summer of 2018.

At that time, no one even thought of a pandemic that would practically wipe out tourism and shake the economy of tourist countries. With a 15.2 percent drop in GDP last year, Montenegro is one of those hard hit countries. For the sake of comparison, according to the data of the World Bank, in 1999, after several months of bombing, Serbia had a decline in the economy of 9.4 percent.

Montenegro's indebtedness also exploded from 76.5 to 103.3 percent of GDP during the year. Debt to China has grown from zero to as much as 640 million euros (15.3 percent of GDP) since 2014. Podgorica's requests for the EU to help prevent the country from falling into debt bondage to China do not yet have a concrete answer from Brussels.

The question is whether Montenegro will go bankrupt or cede part of its territory to China in exchange for debt repayment? There is speculation about that land giving, although that provision is not in the publicly available version of the highway contract.

"Currently, Montenegro has money. Last year, it borrowed 750 million by issuing Eurobonds, and that money is enough for two years, "Goran Radosavljevic, professor of economics at the Faculty of Economics, Finance and Administration (FEFA) in Belgrade, told DW.

During the summer, Montenegro will receive the first installment of a loan of about 37 million dollars, while this year Montenegro should withdraw another 130 million euros of Chinese loan to continue construction.

According to Montenegrin Finance Minister Milojko Spajic, it is "the most expensive highway in the world in general", as he told the Financial Times.

The section "from nowhere to nowhere" is actually 41 kilometers long between Podgorica and Kolasin. In order for the highway to make sense, it is necessary to make sections from Bar to Podgorica, and from Kolasin to the border with Serbia, but also for Serbia to complete Corridor 11 to the Montenegrin border. It's all on a long stick.

Why do countries borrow from China?

If the profitability of the highway business was, to put it mildly, questionable, the borrowing conditions were favorable. China gave Montenegro a loan with 2.5 percent annual interest. For the

sake of comparison, in December 2020, after a catastrophic economic year, with a significantly higher public debt, Montenegro borrowed on the international market with an interest rate of 2.95 percent.

"There are European infrastructure corridors, projects and plans ruled by the EU, and very often the countries of the Western Balkans have been bypassed," Dragana Mitrovic, a professor at the Faculty of Political Sciences in Belgrade and director of the Institute for Asian Studies, told DW.

"Addressing its internal problems, the EU has completely ignored how much help was needed for these countries and how important transport, energy and communication infrastructure are for them - both because of mutual networking and because of raising the quality of the business environment," says Professor Mitrovic. "It was only after they saw that China was running into that empty space that they began, but very modestly, to activate some of the channels through which they could provide funds."

Goran Radosavljevic, who was also the state secretary in the Serbian Ministry of Finance, recalls that the negotiations for Corridor 10 with the European Investment Bank (EIB) were very long and painful. "When the public debt of Serbia was 27 percent of GDP, we negotiated Corridor 10 with the EIB and that lasted for two years. And it's all very painful, and then the Chinese come and say - what do you need, how much do you need and when do you need it? The flexibility that the Chinese have cannot be compared to Europe, it is heaven and earth. "

"And then when politicians sit down and think, they say - it's easier for me to take from China, it costs me more, but I don't repay it, it's more flexible, I'll do something, I'll do it some time - now you go and explain to someone from Cacak that a Chinese loan is more expensive than a European one: he doesn't care, he got the way ", says Radosavljević.

How is it in Serbia?

According to the Public Debt Administration, Serbia currently has slightly less than 1.1 billion euros in debt to China, which, according to DW's calculations, amounted to 2.31 percent of Serbia's GDP. However, the budget revision for 2021 envisages another 2.02 billion euros in loans from Chinese banks. At the same time, the budget says that Serbia has taken over at least another 1.1 billion euros of debt to China by 2039, with different maturity dates and interest rates mostly between 2 and 3 percent.

However, the budget (still) does not include the 3.2 billion euros that Serbia allocated to China without any public procurement for the construction of sewers and infrastructure for the disposal of municipal solid waste, nor does it have billions of euros for the construction of the Belgrade subway, nor 165 million euros for future heating pipeline New Belgrade-Obrenovac.

All projects are based on the Agreement on Economic and Technical Cooperation in the Field of Infrastructure between Serbia and China, which was signed in 2009 by the then Minister Mladjan Dinkic. According to this agreement, the Chinese partner does not pay VAT, customs duties, it is not subject to the obligation of public bidding.

China is no exception - almost all of the infrastructure is built on the basis of interstate agreements. In this way, the most expensive projects go beyond public procurement, there is no competition, no public insight, no discussion about whether the project is needed and what the consequences will be - so the highway to Sarajevo is being built (agreement with Turkey), Moravian Corridor (USA) , Corridor 11 (China), railway to Budapest (Russia and China) ...

"If there are a lot of unknowns about the agreements themselves, then it is assumed that there is a corrupt practice, which already exists in our region, in many third world countries, it is known to exist in China," says Dragana Mitrovic and recalls:

"The European Commission evaluated the project of modernization of the Belgrade-Budapest railway, since there is one EU member there, and the EC regularly evaluated this project as extremely expensive. As soon as these projects are so evaluated by the professional public, then we wonder why they are expensives? ”

"The country itself is to blame for allowing non-compliance with its regulations," Goran Radosavljevic agreed. "There are dozens of serious companies from the West that have done the same in countries where those countries have allowed it - pollution, corruption, for example Siemens in Africa."

"The responsibility for corruption, pollution, disrespect of the law lies exclusively with the state of Serbia. If the country allows them to do that, they will not run away from it. There is no reason for the inspection not to go, measure the air pollution in Bor and apply the law. But - the state is silent ", concludes Radosavljević.