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As Chinese loans fuel booming economy, Djibouti risks falling into Beijing's 'debt trap'

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Wednesday, July 17, 2019 – Page A1

Red-and-gold Chinese banners hang outside the headquarters of Djibouti's freetrade zone, adding a splash of colour to the dusty desert gateway of this hugely ambitious project, the biggest of its kind in Africa.

Inside the building, Chinese businessman Robin Li stands over a scale model of the freetrade zone, telling a Ghanaian delegation that the Chinese investors will control just 40 per cent of the project. "We leave the money behind," says Mr. Li, the vice-president of China Merchants Port. "No return!"

Everyone laughs uproariously, and then a local official tries to clarify the profits that could flow to the Chinese state-owned companies. "They don't take big money," he assures the Ghana delegation. In fact, nobody quite knows what benefits Beijing will extract from Djibouti's free-trade zone - a Chinese-financed project that could cost US$3.5-billion over the next 10 years, covering a vast 48 square kilometres. But money is only one of the commodities in these transactions. Political influence and commercial power are the implicit commodities in China's financial drive.

Countries across Africa and Asia are wrestling with the same dilemma as Djibouti: How to accept Chinese money without accepting Chinese control.

Beijing's loans are accelerating the construction of the ports and railways that poorer countries desperately need. But the price could be steep: rising debts, a potential weakening of sovereignty and a possible loss of key assets if they default on their loans.

Djibouti is strategically located at the crossroads of Africa and the Middle East, on a narrow strait that controls access to the Red Sea and the Suez Canal. It has become a crucial hub in China's Belt and Road Initiative (BRI): a multitrillion-dollar plan to build modern infrastructure to connect at least 68 countries to Chinese trade routes.

John Bolton, national-security adviser to U.S.

President Donald Trump, has alleged that the BRI is a predatory Chinese strategy, deliberately deploying "bribes, opaque agreements and the strategic use of debt" to hold African countries "captive to Beijing's wishes." The Trump administration has even produced YouTube videos attacking the initiative and urging countries to seek U.S. investment instead. "Don't get caught in the debt trap," the videos warn in ominous tones.

China has denied the debt-trap accusation, insisting that the loans benefit both sides. Some analysts say the allegation of predatory behaviour is exaggerated, since China has often ended up cancelling the debts of poorer countries, and a majority of the debt in most African countries is still held by non-Chinese lenders.

Djibouti, a tiny country of fewer than a million people on the Red Sea, is a prime example of the risks. It has enjoyed a booming economy in recent years, fuelled by huge Chinese loans and investment in ports, railways, warehouses, industrial parks and even a secretive military base. But critics have warned that the country is falling into a Chinese "debt trap," in which the loans could overwhelm its economic independence.

The International Monetary Fund recently estimated that Djibouti's public and publicly guaranteed debt has climbed to 104 per cent of its GDP - and the vast majority of this external debt is owed to Beijing. The Chinese loans have "resulted in debt distress, which poses significant risks," the IMF said.

A separate study by the Center for Global Development, a Washington-based think tank, estimated that China has provided nearly US$1.4billion for Djibouti's major projects, leading to a sharp increase in the country's external debt.

Djibouti is one of eight countries worldwide where the rising debt from BRI projects is "of particular concern" because of the heightened risk of debt distress, the study concluded.

Djibouti's Finance Minister, Ilyas Moussa Dawaleh, says the Chinese loans are crucial for preventing an eruption of protest among Djibouti's poor and unemployed. "If we let the youths stay unemployed, tomorrow they will create instability, and some devil will come and make use of their frustration," he told The Globe and Mail in an interview. "We thank the Chinese for our infrastructure development, and we want our other partners to help us - not just tell us about the Chinese debt trap. Maybe they think they are attacking China, but they are disrespecting Africans. We are mature enough to know exactly what we are doing for our country."

Beijing has poured money into Djibouti in recent years. It gave a US$250-million loan for Djibouti's free-trade zone. It provided about US$500-million in financing for the Djibouti portion of a new 756-km railway line between Djibouti and Ethiopia. And it lent a further US$400-million for a new container port in Djibouti.

In addition to the loans, Chinese state-owned companies have made equity investments in the Djibouti projects and have won management contracts in the ports and railway.

GATEWAY TO THE WORLD, TETHER TO CHINA At the Doraleh Container Terminal, an ultramodern port on the edge of the capital, Djibouti cancelled a Dubai company's contract to run the port, nationalized the terminal and then has reportedly allowed China Merchants to help operate it. (The government denies that China Merchants is the official operator of the port.

The Dubai company has launched legal proceedings to challenge the takeover.)

In exchange for its loans and investments, China has gained crucial influence over the shipping lanes that flow past Djibouti to the Suez Canal - the same lanes that provide oil supplies for Chinese importers and vital routes to Europe for Chinese exporters. And if Djibouti is unable to repay the loans, China could end up with a bigger stake of the infrastructure.

Djibouti insists it is retaining a majority stake in each project. But when China finances the projects and holds a significant chunk of the equity, along with short-term contracts to manage and operate the railway and some of the ports, the Chinese influence can be massive.

"China is adept at converting developmentminded investment dollars into geopolitical power and influence," said a recent report by the Australian Centre on China in the World, based at the Australian National University.

"Djibouti's future is now more tied to China than to any other partner," it said.

Across the African continent, China has provided about US$130-billion in loans over the past two decades, and it promises a further US$60-billion over the next several years as its BRI strategy gains momentum.

But the exact terms of these loans are routinely kept secret. Africans often don't know the repayment terms or the potential loss of collateral, including infrastructure or future resource revenue, if the loans aren't repaid. Many of the benefits flow to China, since almost 90 per cent of BRI contractors are Chinese companies, which often hire Chinese workers rather than local workers.

"Countries rich in natural resources, like Angola, Zambia and the Republic of Congo, or with strategically important infrastructure, like ports or railways such as Kenya, are most vulnerable to the risk of losing control over important assets in negotiations with Chinese creditors," said a report by Moody's credit agency late last year.

Chinese loans to African countries have soared to more than US$10-billion annually in recent years, compared with less than US$1-billion in 2001. This is contributing to a growing crisis in Africa, where most countries are heavily indebted and some are unable to service those debts.

In Kenya, for example, the Chinese share of the national debt has been escalating rapidly. In total, Kenya owes more than US$5-billion to China today, a fivefold increase in just five years.

China persuaded the government of Kenya to build a costly new 485-km railway between Nairobi and the port city of Mombasa for about US$4-billion, rather than repairing an existing line for about a quarter of the cost. The project became one of the most expensive rail projects in Africa.

After opening in 2017, the railway lost US$100-million in its first year of operation, carrying far less freight than expected. The economic benefits to Kenya were limited, since Chinese contractors did most of the construction work. And the project left Kenya saddled with US$3.2-billion in debt to China. Kenyan media have reported that China could seize Kenyan assets, including the port of Mombasa, if the loan is not repaid. They also reported that the loan agreement requires any disputes to be arbitrated in China.

By 2019, the railway was continuing to lose money on each of its passenger and cargo trips, while Kenya's loan repayments to China were sharply increasing. The government insisted that the loans weren't harmful. "China is not seeking to colonize us, but they understand us and our point of need," President Uhuru Kenyatta told local journalists.

The Kenyan railway - like the similar Chinese-funded railway between Djibouti and Ethiopia - has been a publicity bonanza for Beijing, creating highly visible Chinese branding on the trains.

The Kenyan railway is operated by a Chinese company, and Chinese workers have taken many of the top jobs as conductors, engineers, managers and drivers. In each carriage, a Chinese flag is displayed. The stations are filled with Chinese signs and pamphlets, and the Mombasa station even features a bronze statue of a Chinese hero, the explorer Zheng He, who led a maritime expedition to East Africa in the 15th century.

In Djibouti, too, the new train terminal is filled with Chinese signs and banners, and most of the conductors are Chinese. Even the clocks on the wall are from China.

Chinese rail companies were hired to manage the US$4.5-billion Djibouti-Ethiopia electric railway for six years after its completion in 2017.

"Of course, if the investment is coming mainly from China, we will see sometimes Chinese signs and communications," says Mr. Dawaleh, the Finance Minister. "We need to bring global talent."

Others are more critical. "How can Djiboutians see this railway as their own if everything they see is Chinese?" asks Abdirahman Mohamed Ahmed, an economic and environmental consultant in Djibouti.

"China is doing the same as what we criticized the former colonialists for doing," he told The Globe. "China should be more sensitive.

They should be different from other empires."

Ethiopia and Djibouti have both struggled with their heavy debts to Chinese financiers for the railway, and both have sought to renegotiate their loans. Late last year, China allowed Ethiopia to extend the loan repayment period from 10 years to 30.

The concerns over the railway loans are part of a growing international anxiety about China's BRI strategy. Countries such as Sierra Leone, Pakistan and Malaysia have delayed or cancelled Chinese projects. Others, such as the Maldives, have sought to renegotiate or reduce their Chinese loans.

Many observers, including Africans, were alarmed by Sri Lanka's loss of a Chinese-built port, Hambantota, after the South Asian country was unable to repay more than US$1-billion in debt to Chinese banks. Sri Lanka was obliged to hand over the port to China on a 99-year lease.

Djibouti officials, however, insist they aren't at risk of suffering a similar fate. "We are always the majority shareholder," said Aboubaker Omar Hadi, chairman of Djibouti's ports and free-trade authority, who had made the comment about China not taking "big money."

"The mistakes in Sri Lanka were made by the Chinese contractors, pushing for the contract and short-cutting the process to get the Chinese bank loan and leaving the debts behind," he told The Globe.

"It was giving a bad name to China. The Chinese government was unhappy, so it disciplined those contractors. They've stopped these contractors from promising everything."

IN CHINA'S DEBT At a summit of BRI member countries in Beijing in April, the IMF's managing director, Christine Lagarde, warned that China's BRI policies must be fixed.

"History has taught us that, if not managed carefully, infrastructure investments can lead to a problematic increase in debt," she said. "The Belt and Road [Initiative] should only go where it is needed [and] where it is sustainable, in all aspects."

Chinese officials at the BRI summit tried to ease the fears of debt-trap loans by promising to ensure that the "debt sustainability" of the borrowing countries is always taken into account.

But concerns about Chinese loans persist. In South Africa, there has been fierce debate over a US$2.4-billion loan by the China Development Bank to the state-owned electricity monopoly, Eskom, which has been desperate for loans to stave off the need for more cuts to the country's power supply. The opposition Democratic Alliance party has argued that the loan "could very quickly result in a debt trap where repayments cannot be met and the Chinese start to take ownership of South Africa like they have done in Sri Lanka."

Those concerns deepened this year, when the first tranche of the Chinese loan was unexpectedly delayed for reasons that weren't fully explained, forcing Eskom to scramble for fresh sources of money.

While analysts worry about the loss of sovereignty or the loss of key assets, there are other concerns, too. In some countries, such as Djibouti, the massive flow of Chinese loans is helping to prop up authoritarian regimes. The financing is ultimately a greater benefit for autocratic rulers than for ordinary people.

"Nobody consulted Parliament on these Chinese loans," said Zakaria Abdillahi, one of the few independent human-rights lawyers in Djibouti. "The government made these decisions unilaterally. The Chinese debt is very opaque, and there's a risk to the sovereignty of Djibouti.

The loan conditions are dictated by China."

Djibouti has been under the firm control of one family for the past four decades. Ismail Omar Guelleh has been President since 1999, and his supporters have amended the constitution to allow him to extend his rule. He was hand-picked by his uncle, Hassan Gouled Aptidon, who had ruled the country since its independence in 1977.

The boom in Chinese loans and investment has allowed Djibouti to become more repressive than it was in the past, Mr. Abdillahi said.

The loans and investment are providing revenue to an autocratic government, helping it to prolong its rule and stifle any push for democratic reform.

As a lawyer, Mr. Abdillahi has tried dozens of times to defend journalists or union leaders or political activists who are arrested for protesting against the government - but the police refuse to let him meet the detainees. "When they see me coming, they just shut the doors," he told The Globe.

When he is invited to international events, the police at Djibouti's airport routinely prevent him from departing. Nor do they allow him to register his human-rights organization, prohibiting the organization from having a bank account or a membership list. "Everything is forbidden or controlled," he said.

At the same time, the Chinese loans don't offer much help for the majority of the population in impoverished countries. Despite years of high GDP growth in Djibouti, more than 70 per cent of its population is living on less than US$5.50 a day, and half of families have no access to basic sanitation facilities, according to World Bank data.

"A lot of money is coming in, but you don't see any trickle down," said Mr. Ahmed, the consultant. "People feel excluded."

Aden Ali, a 40-year-old labourer, has been hauling sacks of cement and sugar in Djibouti's ports and docks for the past 16 years. His arms and fingers are covered with scars and bumps from cuts and broken bones, caused by accidents in his work. He lives with his wife and three children in a shabby two-room house with a leaking roof in Balbala, a sprawling slum on the outskirts of Djibouti City where children play barefoot in dusty streets with rubble and scrap metal around them.

Mr. Ali recently began working overnight shifts at one of Djibouti's new Chinese-built ports. "It's impressive, but we don't get anything from it," he says. "Nothing has really changed for us. Our life is still in black and white."

The new port has allowed him to work more days in a month, increasing his income by perhaps US$50 or US$100 a month, but that's barely enough to keep up with the soaring cost of living, he said.

"The Chinese don't help us to survive," Mr.Ali said. "The work has become harder. The conditions are bad. If we drop something, they yell at us. Only God knows how much pain we feel."

Associated Graphic

Far left: Holding the Chinese and Djiboutian flags, people gather on July 4 before the launch of a 1,000-unit housing project. The venture is supported by the state-backed China Merchants, which also reportedly helps operate the Doraleh Container Terminal, left, and will partly control the forthcoming free-trade zone, below.


Far left: China took control of the Hambantota port it built in Sri Lanka on a 99-year lease when the South Asian country couldn't repay its debts to Chinese banks.


Left: Chinese train workers look out for passengers during the inaugural run of a new railway linking Djibouti to Addis Ababa in October, 2016.


Above: Djibouti President Ismail Omar Guelleh greets Chinese President Xi Jinping during a 2018 meeting in Beijing. Independent human-rights lawyer Zakaria Abdillahi says Chinese loans and investment have helped Djibouti to become more repressive than it was in the past.


Thursday, July 18, 2019


A map with a Wednesday news feature on Djibouti incorrectly labelled the Mediterranean Sea as the Dead Sea.

Huh? How did I get here?
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