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Djibouti's New Free-Trade Zone Creates Opportunities, Deepens Dependency

by Salem Solomon

   In a ceremony last week attended by heads of state from across East
   Africa, Djibouti inaugurated what it says will become the largest
   free-trade zone on the continent.

   The project will take 10 years to complete and will occupy more than 48
   square kilometers when finished. In the pilot phase, it will increase
   the size of Djibouti's economy by 11 percent, Prime Minister
   Abdoulkader Kamil Mohamed told VOA's French-to-Africa service.

   But the $3.5 billion project will also add to what some experts
   consider to be an extreme reliance on Chinese financing and could raise
   the small desert nation's debt to alarming levels.

   Debt distress

   Scott Morris is a senior fellow at the Center for Global Development
   and the director of the U.S. Development Policy Initiative. He co-wrote
   a [1]report in March that highlights the debt implications of the Belt
   and Road Initiative.

   Morris and his colleagues considered the debt vulnerability of 68
   countries involved in the BRI, including China. They concluded that
   most countries have a low risk, but for eight countries, the risk is
   high.

   Djibouti is the only high-risk African country. It stands out because
   its debt represents a large portion of its gross domestic product,
   which economists consider to be a good indicator of a country's overall
   economic strength and size. By the end of 2016, Djibouti's debt had
   reached more than 86 percent of its GDP, and it owed nearly all of that
   money to China.

   Combined, these factors make Djibouti susceptible to debt distress, a
   condition that can hurt economic growth or even cause an economic
   crisis.

   The new free-trade zone will add significantly to Djibouti's Chinese
   debt, possibly elevating Djibouti's risk to "an alarming state," Morris
   said.

   'We are well-situated'

   Djibouti is optimistic its investments will pay off.

   "We don't have natural resources, but God has placed us in a strategic
   zone where about 30 percent of the maritime commerce in the world
   passes through," Mohamed said. "So, we are well-situated, and we plan
   to take advantage of this placement to have the maximum profit for our
   country and our people."

   Morris agrees that Djibouti's infrastructure deals could generate
   significant economic activity and growth, and that helps keep the risks
   of debt in check.

   The catch, according to Morris, is big infrastructure projects pay
   dividends over the long haul, but debt obligations kick in much sooner.
   "With deals like this continuing to stack up, it does seem to me that
   Djibouti is facing a real debt problem," Morris said.

   If Djibouti were to default on its loans, it might find itself handing
   full control of projects such as the free-trade zone or Chinese-built
   ports over to China. That precedent was set late last year, when Sri
   Lanka, burdened with $8 billion in loans to Chinese firms, transferred
   the [2]Port of Hambantota to China on a 99-year lease.

   If China were to take control over a Djibouti-based infrastructure
   project, the geopolitical implications could extend far beyond
   finances. But a handover wouldn't be necessary for China to sway
   politics in the region and beyond.

   "There's no doubt that the Chinese government as a creditor also makes
   its political will known on issues that matter to it," Morris said.

   Those stipulations aren't unique to China, Morris added, citing the
   United States as one example of a country that ties economics to
   politics. President Donald Trump's administration, Morris said, has
   made clear that countries would be eligible for financial assistance
   depending on their votes in the United Nations.

   The additional challenge with Chinese loans, according to Morris, is a
   lack of transparency. "It's really hard to judge the degree to which
   they are extracting political concessions."

   Risks and rewards

   An opaque approach to financing makes Chinese loans more risky overall,
   Morris said.

   "There's not a consistent reporting principle on the part of China as a
   creditor," he added. And because China hasn't agreed to be governed by
   globally accepted financing rules, the risk for countries that accept
   Chinese loans goes up.

   African countries need to vet Chinese-financed projects carefully,
   Morris said, being sure the terms adhere to accepted financing
   standards. But that doesn't mean all BRI projects should be taken off
   the table.

   "If there is a viable infrastructure project that an entity like the
   China Development Bank wants to finance, and the terms look reasonable,
   there's no reason not to proceed with that," Morris said. "But one has
   to evaluate each project on its own merits."

   In Djibouti, the government is confident its strategy is paying off.
   "Chinese interests are Djiboutian interests also," Mohamed said. "We
   are happy to profit from our position so we can develop our country."

   Idrissa Fall and Anasthasie Tudieshe contributed to this report.

   Salem Solomon is a multimedia digital journalist with the Voice of
   America's Africa Division. She covers [3]the latest news from across
   the continent, and she also reports and edits in [4]Amharic and
   [5]Tigrigna.

   Salem's multimedia and data-driven projects include [6]Unrest: Ethiopia
   at a Crossroads, [7]Zimbabwe in Transition, [8]Hunger Across Africa and
   [9]How Long Have Africa's Presidents Held Office?

   Her work has appeared in The New York Times, The Washington Post,
   Poynter.org and Reuters. She researches trends in analytics and digital
   journalism. For tips and inquiries, email: salemsolomon@voanews.com.

References

   1. https://www.cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf
   2. https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html
   3. http://www.voanews.com/author/25229.html
   4. http://amharic.voanews.com/author/25085.html
   5. http://tigrigna.voanews.com/author/25525.html
   6. https://projects.voanews.com/ethiopia-unrest/
   7. https://projects.voanews.com/zimbabwe-in-transition/
   8. http://projects.voanews.com/africa-drought/home.php
   9. http://projects.voanews.com/african-presidents/