Laos default would give new impetus to China’s ‘debt trap’ diplomacy


Jul 17, 2022 8:36 AM STI

Vientiane [Laos]July 17 (ANI): Southeast Asian country Laos is on the brink of default after building a Chinese-funded high-speed train, giving fresh impetus to diplomatic criticism of the ‘debt trap’ “.
Laos faces escalating economic and financial crises and there is unlikely to be a way out without some form of Chinese bailout or debt cancellation, Asia Times reported.
Communists in Vientiane have reason to expect a bailout. Their main creditor is China, a key ally, and Beijing would surely suffer geopolitically if it allowed Laos to default so soon after completing the $5.9 billion railway, a key spur on China’s vision of the Belt and Road Initiative (BRI) for Southeast Asia.
“There is no doubt that Laos is facing huge and worryingly serious economic and financial difficulties, but I don’t think China will let Laos default,” said Toshiro Nishizawa, a professor at the Graduate School of Public Policy from the University of Tokyo and a member of a fiscal policy team that advised the government of Laos between 2018 and 2020.
“The size of the debt securities alone seems to suggest that default is inevitable, but geo-economic factors make such simple predictions unrealistic in favor of Laos,” Nishizawa added.
However, in practice, Beijing was slow to help Pakistan out of its recent financial dilemmas, but got away with it by postponing repayments of $4.5 billion due in March. He did less to help Sri Lanka and ignored his pleas when Colombo defaulted on its debt.
The exact amount of Laos’ debt to China is debatable. The World Bank estimates it accounts for almost half of the country’s official debt of $14.5 billion, which would put it around $7.2 billion, Asia Times reported.
AidData, a research lab at William & Mary’s Global Research Institute, puts it at nearly $12.2 billion, a figure that includes several publicly undisclosed transactions.
Whatever the true figure, Laos’ debt is insignificant to Beijing. The Harvard Business Review estimated in 2020 that “the Chinese state and its affiliates lent approximately $1.5 trillion in direct loans and trade credits to more than 150 countries around the world.”

The World Bank reported in January that of the $35 billion the world’s 74 poorest countries owe in debt service this year, nearly $13.1 billion is owed to Chinese entities. (Laos probably owes China around $700 million in repayments a year), Asia Times reported.
“It seems unlikely that China will let Laos default, even though Beijing has been reluctant throughout the pandemic to offer relief to its debtors in the developing world,” says Charles Dunst, partner at The Asia Group and research fellow at The Asia Group. Center for Strategic and International Studies, a Washington DC-based think tank.
A debt default by Laos would “further undermine China as a partner in the developing world, but particularly in Southeast Asia,” Dunst said.
For years, critics of China’s global expansion and infrastructure-focused foreign policy have warned that poorer countries like Laos risk falling into Chinese “debt traps.”
Beijing ensnares poor countries with big offers of lightning-fast infrastructure development, only to take possession of key national assets when those states cannot repay their loans. The possession by a Chinese entity of the port of Hambantota in Sri Lanka is the classic example provided, reported Asia Times.
Meanwhile, Laos could concede greater stake or more control in infrastructure projects to Chinese investors. In the past, Laos was also known to hand over state-owned land to Chinese entities in return for debt repayments, Asia Times reported.
Another option would be to renegotiate the repayment schedule on Chinese terms. This would likely lead to longer repayment terms, but higher interest rates.
Currency swap agreements between the Bank of Laos and the People’s Bank of China (PBC), the central banks of both countries, “could have helped save scarce foreign exchange reserves to enable debt service payments” , added Nishizawa.
Last year, the PBC extended $300 million in loans to the central bank of Laos to support its foreign exchange reserves. But Laos’ financial problems are becoming more pressing as year-end debt service payments come due. And while a Laos default would be self-inflicted, it would also give a boost to China’s “debt trap” diplomacy. (ANI)


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