Djibouti, A Strategic Trade Hub Sinking in Chinese Debts

Despite Africa being a continent with a vast supply of natural resources, it lacks capital. During the Cold War, the continent largely depended on Western donors to finance major infrastructural and development projects. Western countries were always generous with their aid, for they believed it was the only way to keep communism out of Africa.

After the Cold War, however, communism was no longer considered a threat, and the West began to limit its aid to Africa. It also began to put more emphasis on accountability, human rights and democracy as a precondition for donor funding.

Unable to meet the conditions that the West had laid down, African leaders found a new friend in China. Unlike Western countries, which were guarded in their aid, Beijing, driven by the desire to achieve its own ambitions, has always been willing to go to any extent to meet Africa’s requests.

Under an initiative called “Belt and Road”, unveiled by President Xi Jinping in 2013, China’s aim is to be connected by both land and sea to Asia, Africa, the Middle East, and Europe, by building an extensive network of infrastructure.

In Africa, this infrastructure connectivity will help it to access markets, strengthen its influence, and exploit natural resources.

However, there are fears that the Chinese are indebting Africans with billions of dollars for projects that are not economically viable, knowing very well that there is a smaller likelihood of the money being repaid.

Of the African countries currently cooperating with China, none have been quite as in the spotlight as Djibouti, a tiny country in the horn of Africa which is striving to position itself as a strategic trade hub in Africa. Although lacking natural resources, its geostrategic location on the Indian Ocean, which places it at the center of major global trade, as well as economic development and security challenges, has made it attractive to world powers.

It is located between Africa and the Middle East, on the busy sea route to the Red Sea and the Suez Canal, which provides access for the transportation of manufactured goods and oil .

At the moment, China is in full control of the Doraleh Container Terminal, a major port facility in Djibouti’s Port of Doraleh. This will not only enable it to ship commodities smoothly back home, but also ensure that its exports can easily reach consumer markets worldwide.

Djibouti’s location has not only been important for commercial purposes, but also as a military staging point for operation in volatile territories in the Middle East and Africa. The US, Japan, China, and France all have military bases there. It is worth noting that this is China’s first military base overseas.

The presence of Chinese military in Djibouti has never been welcomed by the Americans, however. In 2018, Thomas Waldhauser, the commander of US Africa Command, told the US House of Representatives’ Committee on Armed Services, that the US was “carefully monitoring Chinese encroachment and emergent military presence” in Djibouti.

China has justified its military presence, saying that the base is meant for fighting piracy, and for conducting humanitarian work and emergency evacuation operations.

Even though the Americans were the first to establish their presence in Djibouti, there was little to show for this in terms of infrastructure and economic development. But when China arrived, it decided to take a different approach, which has brought visible changes to the African country.

According to African Development Bank, Djibouti’s real GDP growth was at 5.6% in 2018, up from 4.1% in 2017. It attributes this to large infrastructure investments by China and the improvement of relations with Ethiopia. World Bank further predicts that the GDP is likely to reach 7% in 2019, before accelerating to 8.0% in 2020-2023, as the country harvests dividends from China-financed projects. Among the government’s flagship projects is the 4,800 hectare International Free Trade Zone, which is being financed by China at a total cost of $3.5 billion. At completion, it will be the largest free trade area in Africa, therefore enhancing Djibouti’s position as a strategic trade hub.

According to Reuters, the trade zone will be jointly operated by China’s Merchants Holdings Company and Djibouti’s Ports and Free Zones Authority. President Ismail Omar Guelleh described it as a “hope for thousands of young jobseekers”, as it is hoped that it will generate more than 50,000 jobs for Djibouti by 2025.

Even though Chinese loans have led to great infrastructural development, which Africans really need, there are fears that failure to repay the piling debts could lead to countries such as Djibouti losing their assets.

According to Africa Development Bank, Djibouti’s debt was at 102.9% of its GDP in 2018, up from 49.9% in 2014, and 97.4% in 2016. IMF figures show that the country has spent a total of $12bn on port and rail projects, despite having a GDP of only $1.85 billion in 2017. This puts Djibouti at high risk of insolvency, according to an analysis on debt sustainability by the World Bank.

The US, which has also raised concerns about Djibouti’s piling debts, has also warned that African countries risk being burdened by unsustainable Chinese debts for projects that are not economically viable. To counter China’s initiative in Africa, in October 2018, President Donald Trump signed a bill called the Better Utilization of Investments Leading to Development (BUILD) into law.

According to US Overseas Private Investment Corporation (OPIC), “this legislation will reform and strengthen US development finance capabilities into a new federal agency to help address development challenges and foreign policy priorities of the United States.”

This is to be achieved through the creation of a new development agency called the US International Development Finance Corporation (USIDFC), which “will help developing countries prosper, while advancing US foreign policy goals and enhancing US national security interests,” according to the Centre For Strategic and International Studies.

As Ray Washburne, the former President of OPIC, said in reference to America’s new initiative:

“Instead of giving them a fish, we want to teach them how to fish. They’ll have to stand on their own two feet. So we’re not in making loans or doing projects that don’t make economic sense.”