Lanka, Kyrgyz Republic and Zambia, raising concerns over collateralized debt obligations, debt transparency and weak governance in countries that are large recipient of financing from China.

The assessment of the impact of BRI on countries’ debt sustainability outlook faces significant challenges due to lack of comprehensive and consistent information on investments and financing terms. Accurate and comprehensive debt data are important for policy makers so that they make informed borrowing decisions, thus safeguarding debt sustainability and macroeconomic stability. Yet, there is no official source of BRI investment nor systematic information of the size and terms of public and private debt financing, as well as non-debt financing related to identified BRI projects. This paper therefore relies on a variety of data sources and makes several strong assumptions, which are discussed in detail below, to establish a range of estimates for the impact of BRI on debt sustainability in 45 countries. In particular, it assumes that on average 60 percent of BRI identified investment would be financed through public or publicly guaranteed debt.<sup>6</sup> The paper estimates that BRI may be associated with heightened debt dynamics in 12 out of 43 (or 28 percent) low and middle-income countries, over the medium term. Of these 12 countries, 10 have already high debt vulnerabilities before BRI. At least two additional countries would experience a severe worsening of their debt situation over the medium term, as a result of the estimated BRI financing. These estimates are bound estimates: they assume an optimistic impact of BRI investment on growth, no materialization of additional fiscal risks and no negative feedback effects from debt to growth.

Over the long-term, including the full impact of BRI investment, one-third of countries (11 out of 30 with available data) are projected to have a higher debt-to-GDP ratio as a result of BRI. In these 11 countries, the debt-to-GDP ratio resulting from BRI is projected to be higher compared to a scenario excluding BRI. However, BRI is estimated to increase the debt-to-GDP ratio only in two countries relative to at end-2016, the base-year for the simulations. In five more countries the debt ratio resulting from BRI would be higher than their levels at end-2016 if the cost of financing would increase. These findings are largely driven by the assumption of continued negative interest-growth differentials in many BRI recipient countries, which helps keeping debt dynamics under control.

The projected impact of BRI investment on public debt dynamics will worsen if fiscal risks associated with large investment projects were to be realized. Financing and implementation of large infrastructure projects could result in additional expenditure or loss of revenue depending on allocation of risks in contractual clauses. These risks are particularly relevant in case of “megaprojects” of US$ 1 billion of more as many BRI investments.

This paper is structured as follows. First, it provides an overview of the relevant literature in section I and presents the data in section II. It summarizes the debt situation of BRI-recipient countries in section III. It provides a forward-looking exercise, based on growth elasticities to investment, to project the evolution of debt-to-GDP ratios in BRI-recipient countries in section IV. It presents a metric, based on lower bound estimates of the impact of BRI on debt-to-GDP ratios, to identify countries with likely higher debt vulnerability in the medium term and provides long-term debt dynamics simulations in section V. It

> 6 Authors have checked information available for Belarus, Djibouti, Kyrgyz Republic, Pakistan, Sri Lanka, Tajikistan, and Ukraine.

3