😲 Laos: China's Latest Victim?

Yet another South Asian country has fallen prey to an economic crisis. Is its connection to China the answer?

Sri Lanka, Pakistan and now Laos.

Yes, yet another South East Asian country is at the risk of defaulting on its debt and collapsing economically.

And what's the common factor between all three?

They all took loans from China's Belt and Road Infrastructure (BRI) initiative.

But did that lead to their downfall? Let's take a look.

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📉 Laos' Downfall

Laos, just like Sri Lanka and Pakistan, is seeing insane levels of inflation as its economy crashes around it.

Inflation is currently 23.6% and the value of its currency has declined tremendously. 

Thanks to this, the common people are struggling to pay for two square meals.

But how did Laos get here?

Well, the Russia-Ukraine war made everything pricey for all of us.

Food, oil, gold: all became too expensive.

But a country's got to eat (and to transport that food and also cook it you need oil), so the world had no choice but to buy these expensive commodities.

Now, some countries that had a lot of foreign exchange reserves could afford to pay high prices and hence they survived.

But countries like Laos, Sri Lanka and Pakistan sadly didn't have enough foreign reserves.

Like Laos only has $1 billion in reserves. Compare that to our $572 billion in reserves or China's $3 trillion in reserves.

Now, there are several reasons that these countries were low on foreign currency. But one major reason is that these countries had to make regular debt repayments to China, which was a heavy burden on their economies.

All of them had borrowed heavily from China for infrastructure projects. 

But all of these projects were either left incomplete or failed to earn enough revenue to justify the debt.

So, the debt repayments became a burden on them, slowly draining them of resources till the time where they are unable to repay anything.

Laos owes $12.2 billion in debt to China, which it used to build a high-speed train and around $2 billion in debt to other countries. 

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🧐 No More Loans From China?

Now, chances are that China will probably restructure this debt, helping Laos avoid a default and may also lend it more money.

That's the trend we have been seeing with Sri Lanka and Pakistan as well. China loaned over $4.2 billion to Pakistan and was set to give Sri Lanka $2.5 billion to help them grow their economies once again.

But these loans and the broader BRI loans could stop anytime now.

You see, Sri Lanka, Pakistan and Laos are not the only countries to whom China has loaned money.

Under the initiative, China has loaned approximately $1 trillion to over 148 poor and middle income countries.

And the actual figure could be much higher.

However, in several countries these measures have failed miserably if they were ever completed. This could make recovery prospects uncertain for China.

Already the country has had to renegotiate loans worth $52 billion this year because several countries could not afford to pay it back due to the current geopolitical situation.

So, government officials are thinking of winding down the BRI.

Plus, because of the country's slow growing economy thanks to the Covid lockdowns (China's economy only grew by 0.4% in the second quarter), it may not be able to extend more loans to the other countries who are now struggling.

This could cause a major global economic crisis, leaving several countries stranded, especially in Africa where many nations opted for BRI loans that have not worked out for them.

Reports suggest that Kazakhstan, Maldives, Djibouti and Montenegro are at special risk.

And what about China? Won't this leave the country stranded too?

Well, maybe but not really. You see, often when a country cannot afford to pay back China, the country negotiates a deal which allows it to take control of the other countries' resources.

For instance, when Sri Lanka couldn't pay its dues to China it had to give ownership of the Hambantota port (that China helped build) to the country for 99 years.

Such deals are exactly why a lot of people have called China's Belt and Road Initiative a debt trap. 

But is that really true?

Well, it does kind of look like that. But it isn't just China that has made the scheme a debt trap. The countries that took loans are also at fault.

For instance, in Laos, China's BRI helped build a high-speed train that had a cost equivalent to half the country's GDP. 

Sri Lanka also used the money to build one of the tallest towers in Asia, which citizens now see no use for.

These countries could have used the money to make more economically viable projects that would have garnered a higher revenue.

Like Addis Ababa's railway line that cut travel time from three days to about 12 hours. Or the hydropower dams in Uganda which are now a tourist attraction.

However, some countries were also duped about the actual costs of projects thanks to the delays many Chinese contractors took in completing them.

All in all, the initiative hasn't worked out as anyone had hoped and there will probably be more countries that will see their economies crash because of the huge loans they took. 

So, what's the solution? Well, the IMF, China and other wealthy countries need to come together to rescue these nations.

Otherwise not only will they undergo a humanitarian crisis but the impact of their default will be felt through the entire world economy.

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⚡In a line: Laos is facing an economic crisis and a major reason behind it is a high-speed railway line funded by China.

💡Quick question: Do you think China will bail out its borrowers?

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