Djibouti struggling to repay Chinese loan
Africa Opportunities

Djibouti struggling to repay Chinese loan

Djibouti, one of the countries at the heart of China’s multibillion-dollar “Belt and Road Initiative,” is struggling under mounting financial pressure and has suspended debt repayments to China, its main bilateral creditor.

Djibouti, a tiny nation at the intersection of the Red Sea and the Gulf of Aden, owed a total of USD 2.68 billion to external creditors at the end of 2020, according to the World Bank.

The African country struggling to repay Chinese loans, has brought criticism to the Chinese model of project financing for creating debt traps for developing countries.

In its latest report on Djibouti, the World Bank stated that in 2022, Djibouti’s debt servicing costs tripled to USD 184 million from USD 54 million in 2021. A further increase to USD 266 million has been predicted for 2023.

The International Monetary Fund (IMF) after considering the sharp projected increase in Djibouti’s external debt servicing, in late 2021, declared Djibouti’s debt as being unsustainable.

Apart from pushing the small country into unsustainable debt, China’s Djibouti investment is also being looked at as an outstanding example of its military expansionism and strategic designs. China has created vast commercial and military interests in Djibouti.

Its strategic position on the Horn of Africa’s Bab-el-Mandeb Strait which controls access to the Red Sea and the Suez Canal has made Djibouti a major destination for Chinese capital, especially in the maritime and free-trade zones.

The World Bank said developing countries like Djibouti are fascinated towards China in the hope of getting funds to create vital infrastructure. But they slowly drift into the morass of unsustainable debt.

According to the Boston University’s Global Development Policy Centre data, Djibouti took USD 1.5 billion from Chinese lenders between 2000 and 2020. This is a huge amount, given the limited avenues of revenue in Djibouti to repay the loans.

Chinese companies see a lot of business potential in Djibouti. These companies have an eye on the Indian Ocean rim countries like Djibouti.

Many of these companies have invested in Djibouti’s maritime industry and free-trade zones. China Merchants Group has pumped money into turning the Port of Djibouti into an international business district.

Critics, however, say the Belt and Road Initiative does not help countries become self-sufficient. The model does not allow the local industries to develop, and create a sustained business. No employment opportunities are created for the citizens.

Now, as the Russia-Ukraine war has no signs to relent and food and energy prices are soaring, Djibouti is struggling to maintain a supply of essential goods such as food and fuel at an affordable price to its citizens, reported European Times.

Djibouti, a net importer of food and fuel, is suffering from inflation due to soaring global oil and food prices. Inflation has pushed up, with the year-on-year rate at the end of June 2022 being 11%. The rising cost of living is pushing more people into poverty.

Things have been tough for Djibouti amidst the Covid-19 pandemic and the Ukraine war.

According to experts, Djibouti’s debts were always going to be difficult to pay, “but have become un-payable because of the impact of the Covid-19 pandemic and other economic shocks on the economy.

Nevertheless, the sustainability of Djibouti’s debts was always questionable. But the pandemic further curbed its debt-servicing capacities, reported European Times.

With Djibouti deciding to suspend its bilateral debt payments, there is concern about the growing number of countries in Africa facing repayment troubles. In 2020, Zambia became the first African country to default on some of its debts. Kenya and Ethiopia are also feeling the pressure.