As the coronavirus pandemic enters its second year, developing countries around the world are struggling with stalled-out growth and loan repayments that are now outside their ability to pay, even while further financing is needed to rebuild their economies. Caught between a rock and a hard place, emerging markets are increasingly leaning on Beijing. The only G20 country to post positive economic output in 2020, China is streamlining its Belt and Road Initiative (BRI) for the post-Covid age and swooping in to seemingly extricate countries from their dire financial straits.
Countless examples abound just from the past few weeks. After relations soured between one-time allies Pakistan and Saudi Arabia, causing Riyadh to call in a $3 billion loan, cash-strapped Islamabad was only able to make a $1 billion payment in December thanks to a Chinese bailout— leading a Pakistani foreign ministry official to gush to Reuters that “China has come to our rescue”.
Shortly afterward, Chinese foreign minister Wang Yi embarked on a goodwill tour of Africa, notably writing off $28 million in matured loans for the Democratic Republic of Congo. The debt forgiveness, plus another $17 million in pledged financial support, offered Kinshasa a welcome gift as it became the 45th nation to sign up to the BRI in early January. Announcing the deal, Wang dubbed China “Congo’s most reliable friend”—a turn of phrase that highlights the cost emerging economies pay for Beijing’s open pocketbooks. In fact, from Djibouti to Sri Lanka, countries heavily in hock to China have allowed their relationships with other international investors to fray, leaving them dangerously dependent on Beijing’s continued support.
How many bridges will Djibouti burn to please China?
Despite a near-total lack of arable land, a harsh climate, and limited natural resources, Djibouti’s strategic location on the Bab-el-Mandeb Strait between the Red Sea and the Gulf of Aden has prompted seven countries to set up military bases in the tiny country and has drawn foreign investors from the world over. Djibouti’s increasing coziness with Beijing, however, has threatened to derail the country’s attempts to diversify its economy through foreign investment—particularly regarding an ongoing case that has seen Djibouti expropriate private property to China’s benefit and roundly ignore international arbitration rulings.
The case, which has alarmed international investors and policymakers alike, concerns the Doraleh Container Terminal, considered “the most technologically advanced port in Africa”. In 2006, Djibouti awarded a 30-year concession to Dubai-based port operator DP World to manage the container terminal, only to abruptly renege on the deal in early 2018, nationalize the facility, and sell off a significant stake to China Merchants Holding.
Reports suggested that Djibouti handed the Chinese firm the rights to manage the container terminal in exchange for an uptick in Chinese investment and loans. China certainly has splashed out cash in the nation in the Horn of Africa, holding more than 70% of Djibouti’s GDP in debt. Whether other international investors will be willing to bankroll expensive projects that might be illegally seized by the Djiboutian government at a moment’s notice is less clear, with analysts noting that the abrupt cancellation of DP World’s long-term contract “threatens to undermine the country’s overall investment climate”. Djibouti’s outright refusal to recognize six separate judgments in DP World’s favor at the London Court of International Arbitration and the High Court of England and Wales hasn’t helped matters, leaving other overseas investors in grave doubts that Djibouti would respect their rights under international law. The fate of the more than half a billion dollars DP World is entitled to recover in damages from the small African country is up in the air, especially after Djibouti initiated proceedings before its high court to nullify the ruling.
Sri Lanka still welcoming Chinese funding, even after port seizure
If Djibouti’s government has allowed its love affair with Chinese cash to throw a wrench in its relationship with other international investors, Sri Lanka has dug itself into an even bigger hole. Under former leader Mahinda Rajapaksa, the Sri Lankan government bankrolled a wide range of unprofitable endeavors and thinly-veiled vanity projects through Chinese loans with hefty interest rates. It was just a matter of time before the country became unable to service the debt, and Colombo became an international cautionary tale about Chinese “debt trap diplomacy” in 2017 when it was forced to hand over its strategic Hambantota port to Beijing in lieu of payment.
Given the outcry in Sri Lanka over the loss of the port, a vital gateway to Indian Ocean trade routes, many observers might have expected Colombo to wean itself off of Chinese funding. Instead, its reliance on Beijing seems to have grown, to the exclusion of other investors and global partners. Where once Sri Lanka mostly relied on China to fund costly infrastructure projects like the Hambantota port, it is increasingly seeking syndicated loans from China as an alternative to issuing sovereign bonds or getting help from international institutions. Desperate for cash to service $15 billion owed to foreign creditors amidst the pandemic, Sri Lanka has repeatedly rejected IMF assistance and turned instead to the China Development Bank, while reports have surfaced in recent weeks that Colombo intends to pull out of two Japan-funded infrastructure projects in order to hand them over to the Chinese on less favorable loan terms.
The consequences of this continued rapprochement with Beijing are already becoming clear: the US recently withdrew a $480 million infrastructure grant over Sri Lanka’s failure to assert its sovereignty over Chinese influence. Beijing has already stepped in to fill the funding gap, with plans to build everything from costly port cities to tire factories in Sri Lanka. Facing a record economic slump and questions over whether it can honor its debt commitments, Colombo will undoubtedly accept China’s help, like Djibouti, Pakistan and the DRC have. A repeated pattern, however, has shown how easily reliance on Chinese investment can snowball and crowd out any other investors. Beijing labels itself an emerging market’s “most reliable” partner—are countries willing to have it become their only major partner?
(Disclaimer: Devdiscourse’s journalists were not involved in the production of this article. The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)