[ad_1]
go through Will Jackson
(ABC – Australia) Laos has borrowed huge sums of money – mostly from China through its Belt and Road Initiative – to finance an ambitious infrastructure program.
Some have accused China of engaging in “debt-trap diplomacy,” deliberately luring Laos into taking on large loans it cannot repay.
What’s next?
Defaulting or declaring insolvency is one of Laos’ options, which provides an opportunity for Laos to restructure its debt and apply for preferential loans.
Laos is in serious economic trouble.
The developing Southeast Asian country has borrowed huge sums – mostly from China through its Belt and Road Initiative – to finance an ambitious infrastructure plan.
In an effort to become the region’s “battery,” it has built some 80 hydroelectric dams on the Mekong River and its tributaries.
But revenues for infrastructure construction have yet to arrive, while debt repayments are mounting.
Last year, total domestic and international debt guaranteed by the Lao government reached $13.8 billion, accounting for 108% of the country’s GDP.
Of the $10.5 billion in debt owed to other countries, about half is owed to China, although details of the loans remain opaque.
This begs the question: Will Laos soon go bankrupt?
What caused the debt crisis?
The former French protectorate has been a one-party socialist republic since the Lao People’s Revolutionary Party came to power in 1975 after the end of the Vietnam War.
The population here is about 8 million, most of whom are engaged in agriculture, mainly growing rice to make a living.
In the 2010s, the economy continued to grow at a solid pace, and borrowed money continued to flow in to finance infrastructure projects.
But the situation took a turn for the worse during the epidemic, and the Laotian currency, the kip, depreciated sharply, triggering rampant inflation.
According to the World Bank, Laos’ overall inflation rate is expected to average 31% in 2023.
“The main factor behind the depreciation of the kip is the country’s lack of foreign exchange, given the need to service large external debts despite some deferrals, and limited capital inflows,” the World Bank said in a report last year.
James Cook University adjunct senior lecturer in development studies Kailin Sims said Laos’ borrowing was “quite serious and arguably unsustainable”.
He said that while new infrastructure included transport projects such as highways and railway joint ventures with China, hydropower projects were the biggest cause of sovereign debt problems.
He added that slower economic growth during the pandemic had exacerbated the problem, but that was true in many countries.
“If you look at the long-term trend of Lao debt, you’ll find that this problem started long before the pandemic,” he said.
He said trying to achieve rapid economic growth and development through large-scale infrastructure projects was a flawed approach.
“Large-scale infrastructure can make an important contribution to development and often requires borrowing to finance it,” he said.
“This is not to say that all infrastructure financing in Laos should cease, but rather that a more balanced approach to development is needed – one that prioritises poverty reduction, human development and sustainable resource management over economic growth and resource extraction.”
What impacts have the Lao people suffered?
Dr. Sims said money used to pay down the debt would not be spent on education, health care, social services and other public goods.
“For Laos, a lower-middle-income economy, this has real implications for poverty reduction efforts and the country’s ability to achieve the Sustainable Development Goals,” he said.
Roland Raja, director of the Lowy Institute’s Indo-Pacific Development Centre, said the depreciation of the kip and inflation have dealt a huge blow to Lao families.
“Consumer prices, including essential items such as food and medicine, have roughly doubled,” he said.
“Urban residents are worst affected as they are more dependent on cash income and imported food.”
Associate Professor Keith Barney from the Crawford School of Public Policy at the Australian National University said rural populations could rely to some extent on locally grown or gathered food supplies.
“However, especially for the urban poor and the lower-middle class, their consumption capacity has declined significantly,” he said.
“This affects their ability to buy enough healthy and nutritious food, as well as spending on education and health.
“The economic crisis has been a disaster for Lao youth, who are dropping out of school at record rates and crossing the border by the tens of thousands to Thailand or further afield in search of work that can earn them foreign currency.”
Why is debt such a big problem?
Dr Bani said that after investing heavily in dams and transmission lines, the Lao national electricity company Electricité de Laos (EdL) owes about 40% of Laos’ public and publicly guaranteed debt.
He said the reasons for the huge debt were “many, interlocking,” including:
- “Excessive lending” and poor due diligence by Chinese banks;
- Laos is “over-borrowing”, with project lending volumes seemingly exceeding the utility’s ability to effectively manage numerous large and complex energy projects;
- Overestimation of domestic energy demand projections to justify these investments;
- Due to the seasonal mismatch between hydropower supply and demand, Laos is forced to re-import expensive electricity from Thailand during the dry season;
- Poor planning between a large number of hydroelectric plants targeting the domestic energy market and the high-voltage transmission infrastructure required to deliver the power to load centres;
- The price at which the state electricity company (EdL) sells electricity has fallen below its cost recovery.
The result is a severe overcapacity in domestic energy production, with hydropower projects being shelved or idled.
At the same time, the sharp depreciation of the kip means that the value of revenues PEI Railway receives in local currency is shrinking relative to debt repayments and operating expenses denominated in dollars.
Mr Raja said problems were “almost inevitable”.
“Laos borrowed too much money for projects that took a long time to pay off, but now has to start paying back a large debt to China,” he said.
Is China trapping Laos in a ‘debt trap’?
Some have accused China of engaging in “debt-trap diplomacy,” deliberately luring Laos into taking on huge loans so that Beijing can seize its assets or increase its geopolitical influence.
Beijing has denied the allegation.
China’s Ministry of Foreign Affairs recently told Bloomberg that China has been conducting “mutually beneficial cooperation” with developing countries such as Laos and strongly supporting their economic and social development.
The Ministry of Foreign Affairs said the “debt trap” accusation was part of the United States’ attempt to undermine Beijing’s cooperation with developing countries.
“This will not fool most developing countries,” the ministry said.
Dr Sims said there was public debate about the use of the term “debt-trap diplomacy” and whether China used it more than other countries.
He noted that other development partners such as the Asian Development Bank have been calling on Laos to invest in infrastructure such as hydropower.
“China is a country that is pumping money into the world,” he said.
But he said lending to other countries also clearly came with political leverage.
“I think we can say with confidence that if we have a high level of debt to another country, as Laos does, that country will have leverage politically and economically,” he said.
How will Laos get out of its predicament?
Mr Raja said the Lao government was now “raising funds everywhere, especially foreign currency, as much as it can”.
“This includes borrowing domestically and selling state assets,” he said.
“The main thing keeping Laos afloat right now is that it has been allowed to postpone repayment of its massive debt to China.
“But Laos has to negotiate with China every year to ensure this, but it is not a sustainable solution.
“And in any case, Laos will still need to find more funds as it still has to repay other debts and meet its import needs.”
Dr Barney said measures taken by Laos did not seem to be able to reduce inflation or move the Lao currency in the right direction.
“Inflation is hovering around 25% and the kip has depreciated 60% since 2019 and continues to slowly depreciate,” he said.
“By the end of 2024, Laos could reach one of the definitions of ‘hyperinflation’, which is a compounded inflation rate of 100% over three years.
“This again increases the pressure to repay external debt.
“We believe Laos needs to find another way out of its economic crisis.”
How close is Laos to default?
Defaulting, or declaring itself unable to repay its debts, is one of Laos’ options.
This will be an opportunity to restructure debt and apply for concessional loans from institutions such as the International Monetary Fund at low interest rates.
But a default could also make future borrowing more difficult and expensive.
Dr Sims said due to a lack of transparency in Laos – particularly when it comes to lending to China – it was difficult to tell how close the country was to that outcome.
“Whether a country defaults or not depends largely not on the country itself but on its borrowers,” he said.
“They have ways to prevent defaults by offering debt relief.
“Therefore, since more than half of Laos’ external debt is held by China, whether it defaults depends largely (but not entirely) on whether China chooses to rescue Laos, whether it is willing to postpone debt repayment, etc.”
He said it is worth noting that default may not be the worst outcome.
“Many countries have defaulted on their debts in the past, but sometimes it did not lead to the consequences that were threatened,” he said.
Raja said Laos ultimately needs substantial debt relief, not just continued short-term repayment deferrals from China.
“It seems that both Laos and China want Laos to grow out of debt through economic growth,” he said.
“This is a classic ‘delay and pretend’ approach, but it is unrealistic given the size of the debt and would impose huge social costs on Laos.
“International experience shows that countries in this situation need formal debt relief — the sooner the better.”
related
[ad_2]
Source link
