Djibouti – the tiny nation at the intersection of the Red Sea and the Gulf of Aden, where China has vast commercial and military interests – has suspended debt repayments to two of its main bilateral creditors as it struggles under mounting financing pressures.
In its latest report on Djibouti, the World Bank said the country's external debt servicing costs tripled in 2022 – from $54 million last year to $184 million – and predicted a further increase to $266 million next year.
Behind the rise are the G20's Debt Service Suspension Initiative (DSSI) expiration at the end of 2021 and the start of principal loan repayments for Djibouti's water pipeline to Ethiopia.
Due to the DSSI, Djibouti's external arrears increased by 26.4% yearly to $101 million in June 2022, corresponding to 3% of its GDP.
REDD Intelligence senior credit research analyst Mark Bohlund said the two creditors referred to in the World Bank report 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 unsustainable in late 2021,” he said.
According to the World Bank, Djibouti owed a total of $2.68 billion to external creditors as of the end of 2020.
Its 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 Djibouti a major destination for Chinese capital, especially in the maritime and free-trade zones.
As a crossroads between Africa, the Middle East and Europe, Djibouti has been a crucial hub for China's Belt and Road Initiative, the multitrillion-dollar infrastructure plan behind numerous mega-projects across the continent.
Data from Boston University's Global Development Policy Centre shows Djibouti took $1.5 billion from Chinese lenders between 2000 and 2020.
Much of the money was advanced in 2013 – $492 million to finance the construction of its portion of the Addis Ababa-Djibouti railway and $322 million for the 101km water pipeline from the Ethiopian town of Hadagalla to the Djiboutian interior.
Djibouti borrowed a further $344 million in 2016 to construct the multipurpose Doraleh 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.
Other Chinese companies have also invested in the country's maritime industry and free-trade zones. 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 $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 the presence of so many facilities may be behind its debt servicing decision.
