Ethiopia needs this debt relief, as it works to reform its political system while stabilising and growing its economy. Spanning 48 sq. China's 'Debt-Trap' Diplomacy with Third-World Nations. Our calculations confirmed by World Bank data show that the expected disbursement in the second half of 2018 would have been $41.2 million (compared to $11.9 million in the previous half of the year). China is not the only global power with a military base in Djibouti. In short, while Djibouti – considered to be at high risk of debt distress – expects a reduction in its burdens, even a total cancellation of its debt to members of the Paris Club or international institutions would have only a derisory impact if China fails to make a comparable gesture. While the railway currently carries passengers, in the future it is expected to add full-scale cargo runs. In any case, it was a company – precisely the China Merchants Port (CMPort) that operates in Djibouti – that bought the Sri Lankan debt to allow the new Sri Lankan government to repay the ExIm Bank of China its debts ($1.2 billion) relating to the port of Hambantota. But Djibouti has refused to comply, and the dispute is expected to go unresolved for a long time to come. It also makes it more difficult to assess the burden of a debt and the cost of its renegotiation, so we will review what started the crisis. However, the six-month LIBOR has historically been able – on an annual average – to reach 8.133 per cent in 1988 and 0.329 per cent in 2014. As interest has been paid regularly, no arrears have been added to the principal due to ExIm Bank until the end of 2018. It is therefore at the very moment when the economic situation seems to be reversing, while the railway line is not operational and doubts are emerging as to its profitability. There were many signboards written in Chinese, such as China State Construction Engineering and China State Construction Harbor Construction. The first element is a known fixed rate (spread) which is used to guarantee a minimum return to the lender and to cover its administrative costs. Clearly, a variable rate does not facilitate budgetary planning of disbursements (principal repayments and interest payments). Outside, on the front of the big chalky station building, a Chinese flag is displayed between the Djiboutian and Ethiopian flags. On July 15, 2019, Ilyas Moussa Dawaleh, Djibouti’s Minister of Economy and Finance, tweeted to announce that the restructuring of China’s ExIm Bank loan for the construction of the Djiboutian section of the Djibouti-Addis Ababa railway line would be completed even though “a few small details” remained to be settled. While China helps to build railroads and improve other pieces of infrastructure, Djibouti's debt to China has reportedly increased to more than 70% of its gross domestic product. Djibouti downplays China debt as US fears loss of critical port. It is projected that Djibouti’s debt is worth 88% of its GDP, with China responsible for the bulk of this. No doubt it would have been wise for the Chinese advisers and the ExIm Bank of China to have initially checked the profitability of a railway project (or even its actual feasibility) before financing it and, above all, it would have been ingenious not to have powerfully encouraged Djibouti (and also Ethiopia) to choose a solution that was certainly splendid (a perfect showcase for Chinese technologies), but absurdly expensive for very poor countries (Djibouti and Ethiopia both are now classified as poorest countries eligible for the Debt Service Suspension Initiative) and in view of its current very limited profitability (lack of electricity to operate and goods to transport) and also the most uncertain in the longer term. Government Debt to GDP in Djibouti averaged 54.73 percent from 2003 until 2019, reaching an all time high of 68 percent in 2015 and a record low of 38.50 percent in 2019. Given the variations in LIBOR and payment deferrals, we can attempt to estimate the value of disbursements the Government of Djibouti would have to face from 2019 onwards. With China’s share having increased considerably in recent years and payment deferrals coming due, debt service increased considerably between 2019 and 2021, rising from $48 million in 2019 to $82 million the following year (a 71 per cent year-on-year increase) and then to $104 million in 2021, an increase of 120 per cent in two years, or nearly two thirds of Djibouti’s external debt service (60.7 per cent). If Ethiopia realizes this goal, Djibouti would gain prominence as a strategic hub. Another consequence is, of course, the lengthening of the repayment. Copyright ©2019 The China-Africa Project. In a 2017 report, the International Monetary Fund said Djibouti’s public debt—the lion’s share of it owed to China—rose from 50 percent to 85 percent of GDP over the previous two years. China holds around 80% of the country’s debt. A year or so ago, Kenyans were up in arms over, Sign up for our free China-Africa Week in Review email newsletter, Get the Week's Top China-Africa News Delivered Straight to Your Inbox, tweeted to announce that the restructuring, high-quality exchanges”, but the atmosphere no longer seems to be festive, Issued on October 23, 2019, an IMF report, Monterey Consensus of the International Conference on Financing for Development, Finally, Some Straight Talk on Chinese Loans to Africa, The China Development Bank’s Debt Deferral in Zambia is a Good Start, But It’s Not Enough, Q&A: Measuring the Effectiveness of Chinese Agricultural Assistance in Africa. Coronavirus in Djibouti increases risk of China debt trap, Nagad Station, the terminus at the Djibouti end of a railway that snakes 750 km to a suburb of Addis Ababa, the capital of Ethiopia, is staffed by Chinese. concentration of that debt with China as creditor. Saying this, we assumed that China was prompting African countries (but also other developing countries along the new Silk Roads) to support it in international fora. https://chinaafricaproject.com/analysis/djiboutis-chinese-debt CMPort, not China) obtained a 99-year concession which should enable it to get back the $1.2 billion, build and then operate the port, which is ultimately owned by Sri Lanka. The conductor, who walks back and forth on the train, is Chinese. It was more likely the result of former President Mahinda Rajapaksa’s desire to be re-elected at whatever price his country would pay, as well as some Chinese pusillanimity – corrupting per se –, especially a clear reluctance to change. In Djibouti, public debt has risen to roughly 80 percent of the country’s GDP (and China owns the lion’s share), placing the country at high risk of debt distress. In this respect, it is clearly a policy of influence and not a mere extension of a commercial strategy. The CMG debut in Djibouti traces back to 2013 when CMG became a 23.5% shareholder of the Port de Djibouti SA—a Djiboutian state-owned enterprise that operates the Djibouti Port. Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century. 2017 report, the International Monetary Fund said Djibouti’s public debt—the lion’s share of it owed to China—rose from 50 percent to 85 percent of GDP over the previous two years. Therefore, even if the financial profitability of the project was nought or only low, it would generate Keynesian profit and growth in China. DP World brought the case to the London Court of International Arbitration, which in January ruled that Djibouti must return the rights to DP World. The story begins with the issue of a loan repayment, several loans should we say. In the company's Djibouti office, young Chinese in their 20s and 30s walk back and forth, and hold heated discussions in the conference room, creating an atmosphere not dissimilar to that of a startup. American armed forces are also there, and the U.S. is growing nervous about China's bridge-and-roading into the region. In 2012, the IMF found that China owned 15% of Africa’s external debt, and hardly three years later roughly two-thirds of all new loans were coming from China. According to Ilyas Moussa Dawaleh and the IMF, this renegotiation would have made it possible to lengthen the duration of the loan from fifteen to thirty years and the length of the payment deferral from five to ten years. Djibouti’s determination to develop is turning into a veritable infernal debt machine, because at the very moment it has to repay this loan, the other two loans mentioned above must begin to be repaid as well. km, the project has been partly completed. The granting of such a loan requires the Djiboutian authorities – and the Ethiopian authorities on their own territory – to call on Chinese firms, both service providers that build the infrastructure and firms that produce the rolling stock (locomotives and wagons), rails, signage and all the other elements needed to complete the project – often including the workers and their food. Perhaps it would have been better to question the relevance of the choices from the outset. (Photo by Masanori Tobita), China and Ethiopia are two of the countries that have big plans for the Doraleh Container Terminal, which has a strategic location on the Horn of Africa. Although not yet official, it seems likely that the Djiboutian government will soon cede control of the port to CMP. (Photo by Masanori Tobita), China's coronavirus aid to Pacific islands is part of geopolitical game, Pakistan moves to save face as coronavirus hits Belt and Road, Into Africa: India vies with China for post-pandemic clout, Coronavirus gives China an edge as it expands sway in the Pacific, China expands influence in Africa as US plays catch-up, Beijing-backed Pakistan port opens as hub for Afghanistan trade, Pacific islands avoid China's 'debt-trap' diplomacy for now, Djibouti has 'no choice' but China for infrastructure development, China drops $11bn anchors to expand Maritime Silk Road. Landlocked Ethiopia plans to use Djibouti as a trading port in an attempt to attract manufacturers from abroad. The third price to be paid, while the restructuring has not yet been finalized, is the granting (during the visit to Djibouti of Chinese Foreign Minister Wang Yi on 9 January 2020) to China of rights identical to those granted to the other foreign powers present for the use of its naval base. Despite the huge figures quoted, I do not imagine it could be a conspiracy hatched in the secrecy of Zhongnanghai’s kitchens to put countries into debt beyond their capacity to repay, thereby enslaving them, as some authors claim when discussing the case of the port of Hambantota in Sri Lanka. Thierry Pairault, Socioeconomist, and Sinologist is an Emeritus Research Director at France’s National Centre of Scientific Research (CNRS) and at the EHESS Research Centre on Modern and Contemporary China (CECMC) where he organizes and runs a seminar on the Chinese Presences in Africa. Debtors and creditors must share the responsibility [author emphasis] for preventing and resolving unsustainable debt situations. To this should be added a loan of $580 million granted in 2013, again by the ExIm Bank of China, for port developments: both for the multi-purpose port of Doraleh ($340 million) and for the livestock port of Damerjog ($240 million). Did Beijing send these young prospects to this geo-strategic point to learn railway operations as they train to be future leaders? For China as a whole, the profitability of its ExIm Bank loan is not only financial but also economic. To our knowledge, these latter loans have not been renegotiated. A carefully curated selection of the day’s most important China-Africa stories. According to Johns Hopkins University, Djibouti has 1008 cases of coronavirus so far, increasing from a mere 30 a month ago. The minister reports “high-quality exchanges”, but the atmosphere no longer seems to be festive, judging by the two photos he posts on Twitter where the three Djiboutian envoys (including him in the middle) have to face ten representatives of the ExIm Bank of China. Our simulations clearly show that variations in LIBOR have little impact on the benefit of the operation (reduced disbursements), even if this results in an increase in the cost of the loan (from 24% to 39% of the initial amount). The railway is "convenient because we can go to Ethiopia cheaper than flying," a female Djiboutian dentist said. Nikkei Inc. No reproduction without permission. On April 2, the World Bank approved $5 million in credit to the cash-strapped country to respond to the epidemic. DP World signed a contract in 2004 to operate the Doraleh Container Terminal for 25 years. Warning sirens are sounding about the level of debt Djibouti owes to China for Belt and Road projects. In a 2017 report, the International Monetary Fund said Djibouti's public debt-the lion's share of it owed to China-rose from 50 per cent to 85 per cent of GDP over the previous two years. Noting that Djibouti is an important node in China's BRI, Niu Zengxiang, a Djibouti-based top official of China Civil Engineering Construction, said, "This railway will become the point of origin to freight goods across Africa.". The renegotiation would also have had indirect – not to say hidden – costs that are more difficult to prove. We suggested already that China (but not Chinese companies) sought primarily to build up a political clientele through loans rather than a commercial network. China’s grip was tightening as Djibouti’s debts were soaring. Seemingly fed up with the past week of overheated controversy in Nigeria over Chinese loans, Transportation Minister Rotimi Amaechi is telling it like it is. In 2016, a new railway was completed that spans 750 km and connects the DIFTZ to a suburb of Addis Ababa, the capital of Ethiopia, in 13 hours. National comprehensive strategies to monitor and manage external liabilities, embedded in the domestic preconditions for debt sustainability, including sound macroeconomic policies and public resource management, are a key element in reducing national vulnerabilities. Due to the rising number of cases in the country, the US military based in Djibouti declared a public health emergency on Apr. The works would be carried out by a Chinese firm and would be financed by a complimentary loan from the ExIm Bank. Get trusted insights from experts within Asia itself. by Joel Gehrke | March 09, 2018 01:28 PM Print this article. Once again, Djibouti’s staggering debt is causing it to bend to China’s will. And for a military with global aspirations, there is no better guardhouse than Djibouti. A unique professional network of China-Africa scholars, analysts, journalists and other practioners from around the world. We can only observe that the interest rate of the ExIm Bank of China loan would have been reduced from LIBOR plus 3.0 per cent to LIBOR plus 2.1 per cent. Issued on October 23, 2019, an IMF report is a little more explicit about the situation, but its interpretation is not obvious, especially since it suggests that the renegotiation would not have been finalised. Once again, the administration described Chinese lending as predatory: "the strategic use of debt to hold states … The refinancing comes in the wake of dispute between Djibouti and yet another global terminal operator, DP World (Nasdaq Dubai: DPW), showing the risks awaiting companies as they look […] In return, the company (i.e. The CAP is passionately independent, non-partisan and does not advocate for any country, company or culture. Critics of China’s lending practices in Africa and much of the developing world have gone suspiciously quiet over the past 6-7 months. Isn’t this, incidentally, one of the lessons learned from the handover of Hong Kong? The nation looks out at a busy international shipping lane through which 20,000 vessels pass every year, and its geography has won Djibouti much global attention, with troops from multiple countries including the U.S., China and Japan stationed there to combat piracy. The Bridge and Road Initiative, publicly touted as a global Silk Road for modern-day trade, is also laying foundations for China's military ambitions. “There are two ways to conquer and enslave a nation, one is by arms, the other is by debt,” John Adams (1735-1826), the second United States president, is quoted as saying. In other words, a low spread does not mean a low interest rate. The first of these costs would have been to vote in favor of the Chinese candidate, Qu Dongyu, as Director of FAO. Sri Lanka has paid the price. That burden, in terms of GDP, would represent respectively more than 4% of the national wealth to be created during those same two years. This chart shows global debt levels cause by direct loans from China (as percentage of GDP) in 2017. While China helps to build railroads and improve other pieces of infrastructure, Djibouti's debt to China has reportedly increased to more than 70% of its gross domestic product. Djibouti may be the next domino to fall to China's influence. Zhang Qingsong also emphasizes the role of these financial relations and these sovereign loans to point out their significance for the renminbi’s internationalization. Djibouti’s debt is mainly owed to public creditors. The loan granted for the construction of the railway line was chosen, not only because of its weight, but presumably because the Government of Djibouti knew the Ethiopian Government was renegotiating the loan it contracted to finance this joint railway project. Nevertheless, the conclusion is that ExIm Bank initially granted a loan without carrying out proper feasibility and profitability studies which should have been required to protect its funds. But the fate of the Djibouti-Addis Ababa railway represents the financial challenges of BRI in a 756-kilometre microcosm. During a visit before the coronavirus outbreak, Chinese and Djiboutian construction workers were busy on sites for a high-rise and hotel. The local view is that they need the money and China is the country that is offering it. After trains leave Nagad Station, with Chinese and Djiboutian station employees waving goodby to the passengers, they snake through a wild land of sand and rocks. Government Debt to GDP in Djibouti decreased to 38.50 percent in 2019 from 46.50 percent in 2018. The second element is not immediately quantified, but must be equal to the London Inter-bank Offered Rate (LIBOR). Djibouti is also believed to have granted China Merchants Holding rights to operate the Doraleh Container Terminal in exchange for investments and loans from China. Furthermore, the coronavirus pandemic may have a negative impact on Djibouti's budget, bringing about the need to increase spending on health care and employment. The reference LIBOR rate here is the US dollar LIBOR rate for loans with a maturity of six months. Stay ahead with our exclusives on Asia; the most dynamic market in the world. Again, the point is that individual strategies from a range of Chinese actors (CCCC, CHEC, CMPort, ExIm Bank and others) have met in Sri Lanka – as in Djibouti and elsewhere – and have added up, but they do not represent or express a Chinese government strategy towards Hambantota, Sri Lanka, Djibouti or any other country. The China Development Bank’s (CDB) announcement yesterday that it will allow Zambia to push back an interest payment that was due last Sunday to next April was an unexpected development. We next describe the credit risk that China faces in each of the eight countries. The current low profitability of the project and the terms of the loan have resulted in a debt burden that Djibouti is finding it difficult to meet, hence the request to renegotiate the terms in the very year (2019) when the loan repayment is due to begin. We are reposting our analysis of Djibouti's debt to China, in view of the launch of the Trump administration's new Africa strategy last week. The truth is that Sri Lanka’s over-indebtedness was not the result of a conscious and considered debt strategy from Beijing. The loan for the Djiboutian section of the Djibouti-Addis Ababa line would have required the payment of $81 million for the year 2019; to this figure should be added the annuities corresponding to the interest on the loans for the water pipeline and the port of Doraleh ($19 million and $16 million, respectively, according to our calculations), making a total of $117 million. As for the interest rate, its modulation is less obvious, as it is the sum of two elements. Indirectly, we can see how high the ExIm Bank of China would estimate the fair amount of its remuneration. The entrace to the zone has a huge yellow gate and flies the Chinese flag. He was back in Beijing a month later, on August 7th, to discuss these details. The largest part of the debt was for the construction of the $4bn Ethiopia-Dji… ... Pictured: Soldiers of the Chinese People's Liberation Army at the opening ceremony of China's military base in Djibouti… China’s Economic Investment in Djibouti Djibouti has expanded its economic ties with China, to which it owes a growing amount of sovereign debt. And so on for the following years until the grace periods for the other two loans were exhausted. But Djibouti’s finance minister Ilyas Moussa Dawaleh, who has just returned from Beijing where he sought to restructure Chinese loans, says Djiboutian state enterprises should not be included in the IMF’s assessment … At Nagad Station, the railway's terminus at the Djibouti end, Chinese sell tickets while a monitor displays information in English and Chinese. According to the International Monetary Fund (IMF), Djibouti’s public external debt is estimated to have risen from 50% of GDP in 2016 to 104% by the end of 2018, much of it based on Chinese lending. In addition, since the Djiboutian Franc’s real exchange rate has deteriorated in relation to the nominal exchange rate, the benefit that Djibouti could have derived from cashing in additional dollars against rising exports is considerably limited, given the country’s very low export capacity. The $4 billion project was financed mostly by China. Updated 24 hours a day by human editors. The relief in disbursements resulting from the renegotiation is certainly welcome for Djibouti’s budget. At the same time as a loan to finance the railway project, Djibouti obtained a second commercial loan of $322 million from the ExIm Bank of China, with the same term and interest rate conditions, for a water pipeline project between Ethiopia and Djibouti. China holds 77% of Djibouti’s debt, largely because of Vision Djibouti 2035, the country's agenda to become a logistics and commercial hub for continental trade and spur medium-term growth of 10% per year. When the Djiboutian leaders became aware of these facts and decided to renegotiate their debt, it was also because the likely evolution of LIBOR was hardly auspicious in early 2019. Unfortunately, at the beginning of 2019, what money market developments suggest is a further increase in LIBOR making debt service ipso facto even more burdensome. {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}}. China is also by far the largest bilateral creditor in terms of service, receiving on average 80% of the service over the three years 2019-2020-2021. Among them, China is eager to promote road and port construction in Djibouti, positioning it as a linchpin of its Belt and Road Initiative. In China… In January 2018, Djibouti suddenly annulled the deal, nationalized the terminal and transferred a stake of more than 20% to China Merchant Holdings.
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