"The Quagmire of China's Belt and Road Initiative"... Laos and Maldives Face Default Crisis

Bounnhang Vorachith, President of Laos (left), and Xi Jinping, President of China, shake hands ahead of a bilateral meeting at the Diaoyutai State Guesthouse in Beijing on May 16, 2017. (Photo by AFP)

[Asia Economy Reporter Jo Yujin] Along with Sri Lanka, which has secured a $2.9 billion (approximately 3.92 trillion KRW) bailout from the International Monetary Fund (IMF), many African and Asian countries including Pakistan, Ethiopia, Maldives, and Laos are facing the risk of sovereign default.

Forbes recently reported that countries burdened with massive debt to China are spreading across Africa, Central Asia, and Southeast Asia.

Forbes cited World Bank data, stating that loans provided by China to these developing countries surged more than fourfold from $40 billion at the end of 2010 to $170 billion by the end of 2020.

The British BBC analyzed that this figure only accounts for amounts procured through the Chinese government, and the actual funds disbursed could be twice the $170 billion.

Among the 97 countries surveyed by the World Bank, those with the highest debt to China as of the end of 2020 include Pakistan ($77.3 billion), Angola ($36.3 billion), Ethiopia ($7.9 billion), Kenya ($7.4 billion), and Sri Lanka ($6.8 billion).

Countries with a high proportion of debt owed to China relative to their total external debt are Djibouti and Angola. In these cases, debt to China exceeded 40% of their Gross Domestic Product (GDP). Maldives and Laos are struggling with debt levels around 30% of their GDP.

(Photo by AP News)

This debt trap stems from the failure of China’s Belt and Road Initiative (BRI), a land and maritime Silk Road connecting China and Eurasia. These developing countries, which introduced massive loans to build large-scale infrastructure such as airports, railways, and ports, are sinking into deep debt due to enormous operating costs and low utilization rates.

In Sri Lanka’s case, the port constructed with funds borrowed from the Chinese government has low usage rates and continued deficits, leading to a debt restructuring measure where part of the facility was sold to the Chinese government, which acquired a 70% stake. Laos, also burdened by debt, recently transferred 70% ownership of a newly built railway to China.

Forbes evaluated that infrastructure investments funded by Chinese capital ultimately leave developing countries facing unmanageable debt and surplus facilities, pushing them toward default risk.

On the 1st of this month (local time), the Sri Lankan government announced it had reached a preliminary agreement with the IMF on a $2.9 billion bailout package. This support will be provided through the Extended Fund Facility (EFF) program and will be finalized upon approval by the IMF Board of Directors.

Earlier, Sri Lanka declared a default by suspending external debt repayments until the IMF bailout negotiations were concluded in April, officially entering default status in May.

Since the presidency of Mahinda Rajapaksa (brother of current President Gotabaya Rajapaksa) from 2005 to 2015, Sri Lanka pursued a pro-China policy, borrowing costs from China to build ports, airports, and road networks, which caused debt to balloon to unsustainable levels.

On top of this, the COVID-19 pandemic worsened supply chains and raw material procurement, plunging Sri Lanka’s economy into severe inflation.

Sri Lanka is not the only country trapped in China’s Belt and Road quagmire. Laos attracted massive Chinese capital for the construction of a high-speed railway connecting China and Laos. Although the 422 km railway was recently completed, Laos is struggling with debt repayment due to low usage rates, causing Chinese debt to account for 30% of Laos’s total external debt.

This content was produced with the assistance of AI translation services.