At the last minute, Montenegro last month successfully paid off the first installment of a billion dollar loan owed to the Exim Bank of China, a loan that threatened to crush the country’s economy as its national debt reached 103% of GDP.
Montenegro gave itself a bit of a breather last month, making the first in a series of repayments to China’s Exim bank for a nearly € 1bn loan that was taken out to build a much-needed highway .
The repayment was made possible after the government of Montenegro reached an agreement with banks in the European Union and the United States to cover the debt. This means that the loan interest rate has now gone from 2% to 0.88%.
Finance Minister Milojko Spajić said the country had saved four million euros for the July installment alone, and annual savings would amount to more than eight million euros.
He pledged that the money saved would be used for development projects and to deal with the “food price crisis” in the country.
Details of the coverage are scarce, with Spajić telling local media that it was a 14-year deal, with the option to reconsider the terms – and the banks involved – after two years.
According to the minister, the agreement was concluded with Deutsche Bank in Germany, Société Générale in France and two American banks, Merrill Lynch and Goldman Sachs.
“This should give Montenegro some breathing space, even if the burden on public finances remains high,” said Filip Šebok, researcher at the Czech-based Association for International Affairs.
Breathing space, however, doesn’t mean the debt is gone.
“This will give Montenegro the opportunity to work on a more lasting solution, but the debt has not gone away, China is still a creditor, and the remaining installments will have to be repaid to the partners in Beijing”, Stefan Vladisavljev, coordinator of the program at the Belgrade Fund for Political Excellence and research contributor to CHOICE, tells Emerging Europe.
“The course of events in the future depends solely on the strength of the Montenegrin economy and its financial stability.”
At present, the country’s economic situation remains troubled. According to the World Bank, Montenegro’s GDP shrank by 15.2% in 2020. For Montenegro, dependent on tourism, the impact of the Covid-19 pandemic and the restrictions on international travel have been particularly harsh.
However, the European Bank for Reconstruction and Development (EBRD) is forecasting better numbers for this year, recently improving its growth projection to 8.5%.
The most expensive motorway in Europe
To make the problem a little worse, the highway that the Chinese loan was supposed to pay for remains incomplete.
The pandemic has pushed the completion date back from 2019 to November this year, and this is just the first 41-kilometer stretch of the 164-kilometer highway that will eventually connect the seaside town of Bar to the Serbian border.
“It is not known when the construction of what is arguably Europe’s most expensive motorway will be completed,” says Nina Marković Khaze of the Department of Security and Criminological Studies at Macquarie University in Sydney.
While the hedging deal gives Montenegro more leeway and keeps its head above water, according to Luka Šterić of the Belgrade Center for Security Policy, the issue has simply been dismissed.
“This only lessens the immediate danger of a debt crisis,” he said. “Regarding the scale of the loan, as well as several delays that we have already seen with the completion of the first section, the construction of the highway is a long-term, expensive and unpredictable project that will weigh heavily on Montenegro. for decades to come. “
Chinese department trap avoided?
Others fear that Montenegro has not really avoided the Chinese “debt trap”.
Visar Xhambazi, a policy researcher at the Kosovo-based Democracy for Development organization, certainly does not think so.
“I don’t think Montenegro has escaped the Chinese debt trap because it is currently suffering the consequences,” he said. Emerging europe. “The lesson here is that the next time China offers a lot of money, everyone will look to Montenegro as a perfect example of China’s debt trap. Montenegro will serve as a classic example of Chinese debt trap diplomacy. I think the Western Balkans have learned their lesson.
Will other countries in the region really learn the lesson? Time will tell, but ebok notes that there might be a conflicting effect.
“Instead, they may feel emboldened to take out Chinese loans because when they find themselves unable to repay them, there is now a precedent of Western institutions getting started.”
Many lessons for the rest of the region
There are many lessons for the rest of the region, according to Marković Khaze.
“More prudent fiscal forecasting and economic planning should take place in the transition economies of the Western Balkans, some of which – like Montenegro – depend too heavily on foreign capital flows, FDI and fiscal revenues from volatile sectors such as the tourism – which during the Covid- 19 pandemic was decimated.
Although the Montenegrin hedging deal is made with private investment banks and the exact details have not been released, it is widely believed that Brussels and Washington played a role in setting it up.
Originally, however, the EU did not want to intervene directly when Montenegro first asked for help in April.
“If actors like the EU and the United States want to limit current and future Chinese influence in the region, they must be ready to offer alternatives for economic and infrastructural development, to cooperate closely with the countries of the Western Balkans during the accession process and to make the enlargement process once again a priority, ”says Vladisavljev.
One thing that the current situation clearly shows is that the EU and the United States understand the threat that China poses to their interests in the Western Balkans.
“However, over the past decade, Beijing has successfully capitalized on the EU’s passivity and gained both economic and political influence with major loans and projects across the region. Given the seemingly endless accession process and the sharp rise in Euroscepticism in most countries in the region, Brussels needs an ambitious comprehensive strategy to gain the upper hand in the Western Balkans in the years to come. », Concludes terić.
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