On July 15, 2019, Ilyas Moussa Dawaleh, Djibouti’s Minister of Economy and Finance, tweeted to announce that the restructuring of China’s ExIm Bank loan for the construction of the Djiboutian section of the Djibouti-Addis Ababa railway line would be completed even though “a few small details” remained to be settled. He was back in Beijing a month later, on August 7th, to discuss these details. The minister reports “high-quality exchanges”, but the atmosphere no longer seems to be festive, judging by the two photos he posts on Twitter where the three Djiboutian envoys (including him in the middle) have to face ten representatives of the ExIm Bank of China.
Issued on October 23, 2019, an IMF report is a little more explicit about the situation, but its interpretation is not obvious, especially since it suggests that the renegotiation would not have been finalised. The Ethiopia-Djibouti railway project is a $4 billion project that Djibouti has had to finance to the tune of $550 million for the part built on its territory, both with its own funds ($58 million) and with a commercial loan of $492 million granted in 2013 by China’s ExIm Bank. Although the construction work is now complete, the line’s operation has so far been disappointing, both because of the uncertain supply of electricity and because of a shortage of products for export. The current low profitability of the project and the terms of the loan have resulted in a debt burden that Djibouti is finding it difficult to meet, hence the request to renegotiate the terms in the very year (2019) when the loan repayment is due to begin.
According to Ilyas Moussa Dawaleh and the IMF, this renegotiation would have made it possible to lengthen the duration of the loan from fifteen to thirty years and the length of the payment deferral from five to ten years. As for the interest rate, its modulation is less obvious, as it is the sum of two elements. The first element is a known fixed rate (spread) which is used to guarantee a minimum return to the lender and to cover its administrative costs. The second element is not immediately quantified, but must be equal to the London Inter-bank Offered Rate (LIBOR). The reference LIBOR rate here is the US dollar LIBOR rate for loans with a maturity of six months. While the latter two specifications (currency and maturity) express a choice among five different currencies and seven different maturities, it is difficult to know the exact amount of the interest rate that will actually apply for a given maturity. We can only observe that the interest rate of the ExIm Bank of China loan would have been reduced from LIBOR plus 3.0 per cent to LIBOR plus 2.1 per cent. However, the six-month LIBOR has historically been able – on an annual average – to reach 8.133 per cent in 1988 and 0.329 per cent in 2014. In other words, a low spread does not mean a low interest rate. Sri Lanka has paid the price. For the first phase of the Hambantota port project, in 2007, Sri Lanka borrowed $307 million from the ExIm Bank of China at a fixed rate of 6.3 per cent (plus a spread of 0.75 per cent) in preference to a LIBOR-based rate, as LIBOR had been rising steadily since 2003 and the Sri Lankan authorities preferred the certainty of a fixed rate; the choice was unfortunate since the LIBOR rate reversed as early as 2008 before stabilising at a fairly low level from 2010 onwards. Indirectly, we can see how high the ExIm Bank of China would estimate the fair amount of its remuneration.
Clearly, a variable rate does not facilitate budgetary planning of disbursements (principal repayments and interest payments). It also makes it more difficult to assess the burden of a debt and the cost of its renegotiation, so we will review what started the crisis.
Amortizing a Loan
The story begins with the issue of a loan repayment, several loans should we say. At the same time as a loan to finance the railway project, Djibouti obtained a second commercial loan of $322 million from the ExIm Bank of China, with the same term and interest rate conditions, for a water pipeline project between Ethiopia and Djibouti. To this should be added a loan of $580 million granted in 2013, again by the ExIm Bank of China, for port developments: both for the multi-purpose port of Doraleh ($340 million) and for the livestock port of Damerjog ($240 million). To our knowledge, these latter loans have not been renegotiated. Other loans, which are much smaller, have also been taken out, but we have no information on their terms and conditions.
Given the variations in LIBOR and payment deferrals, we can attempt to estimate the value of disbursements the Government of Djibouti would have to face from 2019 onwards. Note that a payment deferral is not an exemption from paying the current interest, they shall be added to the principal if not paid during the year concerned the sum of the principal and interest serving as the basis for calculating the interest for the following period. In our cases, one year’s interest was paid in the year it was due, with only the repayment of the principal being deferred from one year to the next until the deferral expires. Our calculations confirmed by World Bank data show that the expected disbursement in the second half of 2018 would have been $41.2 million (compared to $11.9 million in the previous half of the year). It is therefore at the very moment when the economic situation seems to be reversing, while the railway line is not operational and doubts are emerging as to its profitability. Not only are the expected revenues not forthcoming, but Djibouti is also experiencing a worsening of its financial environment. From July 2013 to January 2019, LIBOR increased steadily, so the interest rate paid rose from 3.506 per cent to 5.874 per cent, resulting in a 2.5-fold increase in the semi-annual cost of the loan. As interest has been paid regularly, no arrears have been added to the principal due to ExIm Bank until the end of 2018. Unfortunately, at the beginning of 2019, what money market developments suggest is a further increase in LIBOR making debt service ipso facto even more burdensome. In addition, since the Djiboutian Franc’s real exchange rate has deteriorated in relation to the nominal exchange rate, the benefit that Djibouti could have derived from cashing in additional dollars against rising exports is considerably limited, given the country’s very low export capacity. Djibouti’s determination to develop is turning into a veritable infernal debt machine, because at the very moment it has to repay this loan, the other two loans mentioned above must begin to be repaid as well.
When the Djiboutian leaders became aware of these facts and decided to renegotiate their debt, it was also because the likely evolution of LIBOR was hardly auspicious in early 2019. The loan for the Djiboutian section of the Djibouti-Addis Ababa line would have required the payment of $81 million for the year 2019; to this figure should be added the annuities corresponding to the interest on the loans for the water pipeline and the port of Doraleh ($19 million and $16 million, respectively, according to our calculations), making a total of $117 million. And so on for the following years until the grace periods for the other two loans were exhausted. If we compare this charge to the budgetary expenditure in 2019 and 2020, it would correspond to about 14% in each budget. That burden, in terms of GDP, would represent respectively more than 4% of the national wealth to be created during those same two years. Whatever the inaccuracies in our calculations, we understand the concern of the Government of Djibouti and their pressing need to renegotiate at least part of these loans.
The loan granted for the construction of the railway line was chosen, not only because of its weight, but presumably because the Government of Djibouti knew the Ethiopian Government was renegotiating the loan it contracted to finance this joint railway project. The extension of the payment deferral from 5 to 10 years would result in an additional five-year grace period; in the immediate future, the Government of Djibouti can therefore expect a reduction in its liability of almost 50% in the first year and more than 40% in the following two years.
In fact, the evolution of LIBOR peaked at the beginning of 2019, only to fall off and allow for a later period quieter than initially expected. Available data do not give us a clear and perfectly understandable picture of the situation of both the debtor – Djibouti – and its creditors – starting with China. In their report entitled Djibouti: 2019 Article IV Consultation, the World Bank and the IMF took stock of Djibouti’s external debt; it emerged that, at the end of 2018, 53.3 per cent of Djibouti’s external debt was made up of Chinese claims and accounted for 40.6 per cent of GDP, with the two major projects (railway and water pipeline) alone accounting for two thirds of that debt, while a number of other projects not clearly identified accounted for the remaining third. Djibouti’s debt is mainly owed to public creditors. With China’s share having increased considerably in recent years and payment deferrals coming due, debt service increased considerably between 2019 and 2021, rising from $48 million in 2019 to $82 million the following year (a 71 per cent year-on-year increase) and then to $104 million in 2021, an increase of 120 per cent in two years, or nearly two thirds of Djibouti’s external debt service (60.7 per cent). China is also by far the largest bilateral creditor in terms of service, receiving on average 80% of the service over the three years 2019-2020-2021. In short, while Djibouti – considered to be at high risk of debt distress – expects a reduction in its burdens, even a total cancellation of its debt to members of the Paris Club or international institutions would have only a derisory impact if China fails to make a comparable gesture.
Whatever the long-term evolution of LIBOR, it appears that the short-term impact of restructuring is to avoid the 2019 disbursement peak and to delay the most important disbursements, which will never be as high as the initial contract could have caused. Another consequence is, of course, the lengthening of the repayment. Our simulations clearly show that variations in LIBOR have little impact on the benefit of the operation (reduced disbursements), even if this results in an increase in the cost of the loan (from 24% to 39% of the initial amount).
Profitability, Feasibility and Relevance
For China as a whole, the profitability of its ExIm Bank loan is not only financial but also economic. The granting of such a loan requires the Djiboutian authorities – and the Ethiopian authorities on their own territory – to call on Chinese firms, both service providers that build the infrastructure and firms that produce the rolling stock (locomotives and wagons), rails, signage and all the other elements needed to complete the project – often including the workers and their food. Therefore, even if the financial profitability of the project was nought or only low, it would generate Keynesian profit and growth in China.
The relief in disbursements resulting from the renegotiation is certainly welcome for Djibouti’s budget. Perhaps it would have been better to question the relevance of the choices from the outset. No doubt it would have been wise for the Chinese advisers and the ExIm Bank of China to have initially checked the profitability of a railway project (or even its actual feasibility) before financing it and, above all, it would have been ingenious not to have powerfully encouraged Djibouti (and also Ethiopia) to choose a solution that was certainly splendid (a perfect showcase for Chinese technologies), but absurdly expensive for very poor countries (Djibouti and Ethiopia both are now classified as poorest countries eligible for the Debt Service Suspension Initiative) and in view of its current very limited profitability (lack of electricity to operate and goods to transport) and also the most uncertain in the longer term.
The renegotiation would also have had indirect – not to say hidden – costs that are more difficult to prove. The first of these costs would have been to vote in favor of the Chinese candidate, Qu Dongyu, as Director of FAO. We know that China’s (China’s, not Chinese companies’) interest in Africa is far more political than economic. Note that the vote took place on June 23, 2019, shortly before the first – and apparently happy – visit of Ilyas Moussa Dawaleh to the ExIm Bank in Peking. The second price to be paid would be the extension and development of the Djibouti-Addis Ababa railway line from the Nagad terminal station (12 kilometers from Djibouti City in the middle of nowhere) to the port terminals and beyond to the Chinese naval base. The works would be carried out by a Chinese firm and would be financed by a complimentary loan from the ExIm Bank. This story is unbelievable; we wonder why it was not until the budget crisis in Djibouti that the decision was made to undertake this work, which is essential for the line to operate smoothly and profitably since Ethiopian containers intended for export must necessarily be transported to the port terminals. Nevertheless, the conclusion is that ExIm Bank initially granted a loan without carrying out proper feasibility and profitability studies which should have been required to protect its funds. The third price to be paid, while the restructuring has not yet been finalized, is the granting (during the visit to Djibouti of Chinese Foreign Minister Wang Yi on 9 January 2020) to China of rights identical to those granted to the other foreign powers present for the use of its naval base.
“There are two ways to conquer and enslave a nation, one is by arms, the other is by debt,” John Adams (1735-1826), the second United States president, is quoted as saying. We suggested already that China (but not Chinese companies) sought primarily to build up a political clientele through loans rather than a commercial network. Saying this, we assumed that China was prompting African countries (but also other developing countries along the new Silk Roads) to support it in international fora. In an interview with China’s national public broadcaster CCTV on April 23, 2020, ExIm Bank President Zhang Qingsong said that 1,800 projects along the new Silk Roads would benefit from his bank’s financial support, which would have contributed a trillion renminbi – nearly $150 billion. Zhang Qingsong also emphasizes the role of these financial relations and these sovereign loans to point out their significance for the renminbi’s internationalization. In this respect, it is clearly a policy of influence and not a mere extension of a commercial strategy. Despite the huge figures quoted, I do not imagine it could be a conspiracy hatched in the secrecy of Zhongnanghai’s kitchens to put countries into debt beyond their capacity to repay, thereby enslaving them, as some authors claim when discussing the case of the port of Hambantota in Sri Lanka.
The truth is that Sri Lanka’s over-indebtedness was not the result of a conscious and considered debt strategy from Beijing. It was more likely the result of former President Mahinda Rajapaksa’s desire to be re-elected at whatever price his country would pay, as well as some Chinese pusillanimity – corrupting per se –, especially a clear reluctance to change. In any case, it was a company – precisely the China Merchants Port (CMPort) that operates in Djibouti – that bought the Sri Lankan debt to allow the new Sri Lankan government to repay the ExIm Bank of China its debts ($1.2 billion) relating to the port of Hambantota. In return, the company (i.e. CMPort, not China) obtained a 99-year concession which should enable it to get back the $1.2 billion, build and then operate the port, which is ultimately owned by Sri Lanka. Isn’t this, incidentally, one of the lessons learned from the handover of Hong Kong?
Again, the point is that individual strategies from a range of Chinese actors (CCCC, CHEC, CMPort, ExIm Bank and others) have met in Sri Lanka – as in Djibouti and elsewhere – and have added up, but they do not represent or express a Chinese government strategy towards Hambantota, Sri Lanka, Djibouti or any other country. There is, therefore, an essentialisation of China which undoubtedly can only cloud our understanding of Chinese presences in the world; hence the discourse is falling into an inappropriate and sterile China-bashing and is turning away from legitimate and justified criticism of all actors – Chinese or not; official or not – as suggested in paragraph 47 of the Monterey Consensus of the International Conference on Financing for Development, held in Monterrey (Mexico), 18-22 March 2002:
Sustainable debt financing is an important element for mobilizing resources for public and private investment. National comprehensive strategies to monitor and manage external liabilities, embedded in the domestic preconditions for debt sustainability, including sound macroeconomic policies and public resource management, are a key element in reducing national vulnerabilities. Debtors and creditors must share the responsibility [author emphasis] for preventing and resolving unsustainable debt situations.
*Thierry Pairault, Socioeconomist, and Sinologist is an Emeritus Research Director at France’s National Centre of Scientific Research (CNRS) and at the EHESS Research Centre on Modern and Contemporary China (CECMC) where he organizes and runs a seminar on the Chinese Presences in Africa. He is also an associate researcher with the EHESS France-Japan Foundation and a member of the Global Advisory Board of the CA/AC Research Network.