Laos-China rail controversy: After Lanka, debt trap from Beijing to impact Laos

Ever since the Laos-China Railway was launched in December last year, people
of Laos have had periodic queries about the feasibility of the project and its
contribution to the Lao’s sagging economy. These questions have remained
unanswered, even today. But when Laos-China Railway, DirectorGeneralDaochindaSihalath’sconceded that railwayhas poor management and
lack of operational readiness, the railway project has caught the attention of
world community.
The Laos-China Railway is developing its online booking system which will be
available as an application. It is expected to be completed by the end of 2022.
The rise in demand of international and domestic visitors has created problem
because brokers and travel agency companies prefer to keep more tickets
purchased from the station. The Laos-China Railway Company is likely to
separate the ticket sales areas for groups of visitors and specific travel agencies
in order to maintain order and reduce overcrowding.
However, Sihalath has assured that railway will improve the system but the
development has brought a spotlight on China which has been accused of using
`loan diplomacy’ to exploit resources of small and financially poor countries for
its own interest.
Financial experts have warned thatLaosis at high risk of defaulting on its
obligations as it is deeply indebted to China for large-scale infrastructure
projects. The international rating agency Moody’s has downgraded Laos’ credit
rating to Caa3 in mid -June, citing “a very high debt burden and insufficient
coverage of external debt maturities by (foreign exchange) reserves.” The
agency warned that Laos’ default risk will remain high.
According to World Bank report published in April, preliminary estimates
indicated that Laos’ total public and publicly guaranteed debt reached 88% of
gross domestic product in 2021. The debt is valued at 14.5 billion US dollars,
about half of which is owed to China on loans to fund projects including the
China-Laos railway.
The Laos-China railway’s 418-kilometer (260-mile) segment in Laos is operated
by the Laos-China Railway Co., a joint venture between China Railway group and
two other Chinese government-owned companies with a 70 per cent stake and
a Laotian state company with 30 per cent.
The Chinese build railway was launched in December 2021 amidst fear of debt
mounting. Foreign experts had raised questions about the potential benefits to
Laos beyond serving as a channel for Chinese trade and that too at heavy cost.
It was pointed out that the Kunming-Vientiane railway is a link in a possible
future network to connect China with Thailand, Vietnam, Myanmar, Malaysia
and Singapore. That would give southern China more access to ports and export
markets. Laotian leaders hoped that the railway will energize their isolated
economy by linking it to China and markets as far away as Europe.
Scott Morris of the Centre for Global Development in Washington said that the
railway will “generate very positive economic returns” for China and possibly
other countries, but it is harder to see “exactly what the economic benefits are
going to be” for Laos. With only 21 stations in Laos, the line has been designed
especially to serve Chinese needs to reach foreign ports quickly, Morris said. He
said that railway to serve mostly rural Laos would have more stations to connect
farmers to markets.
Right from the beginning, the Lao government was caught in a controversy. Its
original decision to invest in the railway, and thereby to increase its external
debt obligation with China in order to underwrite a large part of the cost,
attracted some controversy. Can a railway estimated to have cost 5.9billion US
dollars, equivalent to a third of Laos’s GDP, deliver an adequate return?
The World Bank, the Asian Development Bank and others had cautioned that
harnessing the full economic potential of the railway line will depend on the
successful enactment of various changes genuinely linking the railway to the Lao
economy at large. This is not just about having the right physical infrastructure
in place to ensure that people and cargo can transit to and from chosen
destinations. It is also about having the right ‘soft infrastructure’ of laws and
regulatory frameworks for railway traffic to proceed smoothly, without getting
caught up in an excessive red tape, or encountering the kinds of delays that
deter people and companies away from using it. People who were displaced
from their homes to make way for the railway, had complained they were paid
too little. Environmentalists said that the construction damaged natural habitats
and threatened endangered species in Laos, which already is a centre for wildlife
The Laos-China railway has linked China’s poor southwest to foreign markets but
piled on potentially risky debt. The line through lush tropical mountains from
the Laotian capital, Vientiane, to Kunming is one of hundreds of projects under
Beijing’s Belt and Road Initiative to expand trade by building ports, railways and
other facilities across Asia, Africa and the Pacific. The 1,035 kilometrelong
lineworth 5.9 billion US dollars, was opened to cargo initially. Regular
passengers were not permitted due to anti- pandemic travel curbs.
Laos hoped that the railway would reduce transportation costs and boost
exports and tourism. According to news reports, Laos incurred a 1.9 billion US
dollars debt for the project, an additional obligation that may push Vientiane to
seek some grace from Beijing on repayment.
China’s central bank, the People’s Bank of China,has already issued an
emergency loan worth about 300 million US dollars to the central bank of Laos
in 2021 to support its foreign exchange reserves, according to AidData Lab.
However, AidData’s Parks pointed out that Chinese state-owned policy banks
are usually more willing to extend grace periods and repayment periods than
reduce interest rates. In some cases, Chinese state-owned policy banks will even
increase the interest rates that apply [to] the debts of a sovereign borrower in
order [to] ensure that they recover enough total repayment over the lifetime of
a loan in net present value terms.”
According to the World Bank, Laos must repay 1.3 billion US dollars of external
debt every year until 2025, which almost equals the country’s federal exchange
reserves and half of total domestic revenue.
The World Bank forecasts that Laos’ economy will grow by 3.8% this year but
warns this will not be enough to generate the fiscal revenue needed for the
government to pay its foreign debt.