China’s debt-trap diplomacy, redolent of colonial-era practices, has claimed its latest victim — the small, resource-rich nation of Laos.
Struggling to pay back Chinese loans, Laos has handed China majority control of its national electric grid at a time when its state-owned electricity company’s debt has spiraled to 26% of its gross domestic product.
Sri Lanka and Pakistan, meanwhile, are taking fresh loans from China to pay off old loans, highlighting the vicious cycle in which they find themselves trapped.
- Both have already been compelled to cede strategic assets to China.
- SL: Hambantota Port
- Pak: Gwadar Port
- Less than three years ago, Sri Lanka signed away the Indian Ocean region’s most strategically located port, and more than 6,000 hectares of land around it, on a 99-year lease to China.
- Pakistan has given China exclusive rights, coupled with a tax holiday, to run Gwadar port for the next 40 years. China will pocket 91% of the port’s revenues. Next to the port, which is located at the crossroads of the global energy trade, China plans to build a Djibouti-style outpost for its navy.
- Tajikistan, whose borrowing binge from 2006 was followed by its ceding of 1,158 sq. kilometers of the Pamir mountains to China and then granting Chinese companies rights to mine gold, silver and other mineral ores, recently asked Beijing for debt relief.
- Another country heavily in debt to China, neighbouring Kyrgyzstan, also sought relief from Beijing last month before it plunged into political chaos.
- In Africa, a long list of states wanting suspension of their debt repayments to Beijing during the coronavirus pandemic includes
- Mozambique and
Impact of a Chinese Deal
- Laos’s ambition was to become the battery of Southeast Asia by investing in hydropower development and exporting electricity.
- So, it agreed to give China a role in harnessing its rich reserves.
- But today, Beijing has effectively taken control of Laos’s electric grid.
- This holds serious implications for environmental security and sustainable development in landlocked Laos.
- China’s deal also arms it with tremendous leverage over a country with just seven million citizens.
- Beijing’s power to dim all lights in Laos leaves little wiggle room for its tiny neighbour.
- What makes nations sink deeper into Chinese debt, despite the risks of mortgaging their foreign-policy autonomy to Beijing?
- The answer is several factors, the most important being:
- the comparative ease of borrowing from China (China does not evaluate a borrower state’s creditworthiness)
- with IMF lending normally carrying stringent conditions and oversight (which will not lend if its assessment indicates that additional loans could drive the country into a serious debt crisis)
Economic Partner to Economic Master
- Typically, China starts as an economic partner of another country, only to gradually become its economic master.
- China has a record of exploiting the vulnerability of small, strategically located countries that borrow big.
- One such example is the Maldives, where Beijing converted big credits into political influence, including acquiring a couple of islets cheaply in that Indian Ocean archipelago.
India stepped up for Maldives Help
- Unlike some other heavily indebted states, the Maldives has been lucky to escape a Chinese debt trap. Since the Maldives’s election ousted its authoritarian president barely two years ago, India has stepped in to bail it out with generous budgetary support and a recent aid package.
- Negative views of China have reached historic highs this year.
- The rising public distrust of China even in partner countries, and the fact that many Belt and Road projects are still not financially viable, have resulted in a declining number of new projects.
- Cumulatively, China is likely to pay a high price for its debt-trap diplomacy, even as the states it has lent money to are bound to suffer.