Laos' acute debt crisis is China's problem to fix

Unsustainable lending by China has led to a severe debt crisis in Laos and may be the closest evidence to date of ‘debt trap diplomacy’ by China, a new Lowy Institute Analysis argues.

The paper by Keith Barney, Roland Rajah and Mariza Cooray entitled Trapped in debt: China’s role in Laos’ economic crisis, shows China lent on a huge scale to a country with weak institutions and little ability to productively absorb the investment.

Laos cannot escape the crisis in the absence of substantial debt relief.

The authors say heavy Chinese lending into the Lao energy sector has resulted in massive overcapacity, financial losses, and finally the takeover of its energy grid by a Chinese state firm.

“Whether by design or neglect, China has created a debt trap in Laos,” they write.

“China has played a far more central role in the accumulation of debt problems in Laos compared to other purported cases of debt trap diplomacy.”

“China’s approach to managing Laos’ sovereign debt crisis replicates the ‘extend and pretend’ approach of Western countries to the developing country debt crises of the 1980s and 1990s.

“China and Laos have thus settled into a hierarchical creditor-debtor relationship, underpinned through a logic of power, influence, and economic insecurity. A ‘community of shared destiny’, perhaps — but at the discretion of China.

“Laos’ need for debt relief is clear cut.”

KEY FINDINGS

• Laos is trapped in a severe debt crisis with no resolution in sight, threatening a decade of economic and social malaise.
   
• Recent global shocks were key triggers. Yet a crisis was almost inevitable, driven by poor planning and over-investment in the domestic energy sector, financed mostly by Chinese loans and exacerbated by broader fiscal and governance problems.
   
• Exiting the crisis will require China to provide substantial debt relief. However, the politics appear unfavourable, as neither side wants to admit failure and accept the consequences.
   
• Whether by design or neglect, China has created a debt trap in Laos. The crisis illustrates some of the most troubling pathologies of Chinese lending under the Belt and Road Initiative, and its unwillingness to provide sufficient debt relief, despite the clear-cut need.

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