Massive loans from China have plunged Laos, a tight partner of Beijing in Asia, into a painful debt crisis, raising alarms about the country’s future.
Recently, Laos revealed that its foreign debt has nearly doubled, spurring a need for more delays to avoid default. According to a Bloomberg report, China is helping its neighbour manage its substantial debt load.
Before this week, a spokesperson for China’s Ministry of Foreign Affairs stated in a written response that Beijing is engaged in “mutually beneficial cooperation” with developing countries, including Laos.
The spokesperson described that this cooperation involves significant social and economic development support. “At the same time, it has been doing its best to help relevant countries alleviate their debt burden,” the spokesperson added.
However, the Chinese statement attempts to address a crisis it helped create. With over half of Laos’s $10.5 billion external government debt owed to China, Beijing is the country’s largest creditor.
By the end of the previous year, Laos’s total public and publicly guaranteed debt had reached $13.8 billion, which amounts to a staggering 108% of its GDP.
Last year, Laos deferred $670 million in principal and interest payments on its $950 million external debt obligations. According to earlier statements from the World Bank, these actions have provided only temporary relief.
Much of Laos’s state debt stems from infrastructure projects under China’s Belt and Road Initiative (BRI). The nation’s troubles have been compounded as its foreign reserves have declined due to borrowing billions from President Xi Jinping’s government to finance roadways, railways, and hydroelectric dams under the BRI.
Laos, a communist-run nation, gained global attention after completing and inaugurating a high-speed railway to China for nearly $6 billion.
While many see this as the start of a significant infrastructure push that could link Southeast Asia with the world’s second-largest economy, it has also contributed to Laos’s debt crisis.
The country faces a currency crisis, with rising global food and fuel prices causing the Laotian kip to hit record lows against the US dollar. This has led to zooming inflation. Suppose the current economic crisis spirals out of control; there is widespread fear that the country could face a financial collapse.
The Laotian government has implemented several measures to stabilise the situation, including raising interest rates, issuing bonds, and developing debt management strategies in cooperation with the Asian Development Bank.
These measures, however, have also reduced spending on essential services like healthcare and education, which could negatively affect the population.
Experts believe that China’s claim of helping Laos ease its debt burden may hold some truth, given that Laos is one of the few countries where the BRI has been seen as a success story.
China has projected it as a “successful model” for other nations. According to Beijing’s plan, the railway will connect Laos with Thailand and eventually extend to Malaysia and Singapore.
Despite the close diplomatic, economic, and military ties between China and Laos, the latter has become heavily dependent on the former.
Last year, the AidData research lab at William & Mary, which tracks China’s lending, calculated that Laos has the highest debt exposure to China of any country in the world.
Brad Parks, executive director of AidData, commented, “There is no country in the world with more debt exposure to China than Laos. It is a very, very extreme example…Laos went on a borrowing spree and got in over its head.”
As Laos tumbles deeper into a debt-induced economic crisis, attention has again turned to what Western critics have termed China’s “debt trap diplomacy.”
While China has a vested interest in helping Laos manage its surging debt crisis and may even consider forgiving some of the debt, troubles remain that other countries heavily indebted to China could also seek similar concessions. China has lent around $1 trillion to developing nations, significantly altering its global standing.
China is known as one of the most generous lenders in the world, offering credit more readily than many other countries. However, it is also perceived as one of the harshest lenders.
Chinese loans often come with substantial costs: numerous developing nations risk economic instability or collapse due to their debts to China.
Last year, an Associated Press investigation examined the 12 countries most indebted to China, including Pakistan, Kenya, Zambia, Laos, and Mongolia. The investigation found that the tax money needed to cover essential services like fuel, food, education, and electricity was increasingly used to repay Chinese debt. These circumstances deplete the foreign exchange reserves the nations rely on to meet their interest payments.
Sri Lanka is a notable example of this crisis. In 2022, when its foreign reserves began to decline, the country experienced its first-ever default.
Last month, the South Asian country announced it finalised restructuring deals totalling $10 billion, including agreements with China’s Exim Bank and an Official Creditor Committee of bilateral lenders.
The AP report noted that China’s unwillingness to forgive debts and the lack of transparency around the terms and amounts of loans have prevented these countries from receiving financial assistance from other nations. Analysts believe this often leaves indebted states with few options.
Critics have long accused China of using debt to trap vulnerable countries that need credit with fewer restrictions.
When these nations struggle to repay their loans, critics allege that Beijing coerces them into relinquishing critical infrastructure assets, which can further China’s geopolitical ambitions and establish a permanent presence in these countries.
This criticism was particularly vocal when China gained control of Sri Lanka’s Hambantota Port.
China, however, dismisses these allegations as anti-Chinese propaganda promoted by the West. Some analysts even describe these claims as a neocolonial strategy by Chinese President Xi Jinping.
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Human rights organisations and activists argue that Laos has had to make substantial concessions, including compromising its sovereignty, to secure financial aid from Beijing.
In exchange for loan postponements, observers say China now has some control over Laos’s electricity infrastructure. Chinese security forces and police can operate within the country to provide security for the new railway line.
Despite these criticisms, China maintains that it is working to ease Laos’s debt crisis. In a written statement, a spokesperson for China’s Foreign Ministry denied accusations of “debt-trap diplomacy,” calling it US rhetoric aimed at undermining Beijing’s cooperation with developing nations. “It cannot deceive the majority of developing countries,” the spokesperson said.
China is essentially running a juice loan scam. Not surprising considering the CCP is a criminal enterprise.