DJIBOUTI SUSPENDS DEBT REPAYMENTS AS PRESSURE RISES
Analysts say China one of the affected creditors, but Beijing is likely to seek a solution because of the African country’s strategic importance
The African nation of Djibouti, where China has vast commercial and military interests, has suspended debt repayments to two of its main bilateral creditors, according to a World Bank report, as it struggles under mounting financing pressures.
In its latest report on the country released this month, the World Bank said Djibouti’s external debt servicing costs had tripled in 2022 – from US$54 million last year to US$184 million – and predicted a further increase to US$266 million next year.
It did not say who the two creditors were, but REDD Intelligence senior credit research analyst Mark Bohlund said they were likely to be China and Kuwait, “although it doesn’t matter which the other creditor is, as Chinese debt widely surpasses that owed to other creditors”.
Bohlund said Djibouti’s action was unsurprising, given the sharp projected increase in its external debt servicing. “The International Monetary Fund declared Djibouti’s debt as being unsustainable in late 2021,” he said.
Djibouti owed a total of US$2.68 billion to external creditors as of the end of 2020, according to the World Bank.
The country’s strategic position on the Horn of Africa’s Bab-el-Mandeb Strait that controls access to the Red Sea and the Suez Canal has made it a destination for Chinese capital and a crucial hub for Beijing’s Belt and Road Initiative, the multitrillion-dollar infrastructure plan behind numerous projects across the continent.
Data from Boston University’s Global Development Policy Centre shows Djibouti took
US$1.5 billion from Chinese lenders between 2000 and 2020. Much of the money was advanced in 2013 – US$492 million to finance construction of its portion of the Addis Ababa-Djibouti railway, and US$322 million for a 101km water pipeline from the Ethiopian town of Hadagalla to the Djiboutian interior.
Djibouti borrowed a further US$344 million in 2016 for construction of the Doraleh Multipurpose Port. All three of these loans were extended by the Export-Import Bank of China. In 2017, another US$150 million was provided by China Merchants Port Holdings Company Ltd, to build the Djibouti free-trade zone.
China Merchants Group has pumped money into turning the Port of Djibouti into an international business district. It has also funded the port’s mega extension – the US$590 million Doraleh Multipurpose Port – just west of the capital.
China’s first overseas military base opened in 2017 next to the Chinese-operated port of Doraleh. The country also hosts US, French and Japanese bases, and it is the presence of so many facilities that may be behind its debt servicing decision.
Bohlund said the Djibouti government was likely to reason that its hosting of a “multitude” of military bases would keep it safe from any repercussions, as “Beijing prioritises its military presence on a key trade route over any pecuniary losses on its Djibouti claims”.
“While this is likely to be true, Beijing is likely to be concerned that other Belt and Road Initiative creditors will also suspend payments,” he said.
Alex Vines, head of the Africa programme at London-based think tank Chatham House, said Djibouti continued to be disproportionately affected by the steep rise in global food prices and the war in Ukraine, including disruptions to food supply chains. Djibouti is a net importer of food and fuel, covering up to 90 per cent of its food needs through imports.
“The spillover effects of conflict in Ethiopia have also led to periodic shortages of produce imports and a depressed Ethiopian market, on which Djibouti is highly reliant,” Vines said.
Djibouti’s decision to suspend its bilateral debt payments adds to concerns about the growing number of countries in Africa facing repayment troubles. In 2020, Zambia became the first African country to default on some of its debts. Kenya and Ethiopia are also feeling the squeeze.
Tim Zajontz, a research fellow at the Centre for International and Comparative Politics at South Africa’s Stellenbosch University, said the sustainability of Djibouti’s debts was questionable long before the pandemic further curbed its debt-servicing capacities.
“It is likely that Djibouti will not be the last African country not able to service its loans. The acute social and economic repercussions of multiple global crises demand multilateral debt relief from Africa’s main creditors, including China.”
Zajontz said Djibouti was of “immense geopolitical and geoeconomic importance to China, as it hosts a Chinese naval base and is the most important logistical entrepot for China in the Horn of Africa”.
“To maintain sound relations, it is possible that Beijing will accommodate the Djiboutian government with a debt restructuring plan, as they previously did in the case of neighbouring Ethiopia,” he said.
In 2019, when Djibouti faced similar debt challenges, it reached a deal with China’s Exim Bank to restructure the railway loan, according to the IMF.