Laos reinforces its dependence on China for key transport projects

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BANGKOK – A number of Chinese-backed highway projects are underway in the small Southeast Asian country of Laos, generating both hope and fear among a nation desperately trying to break through the ranks of the least developed countries in the world.

The new infrastructure projects are believed to be part of China’s ambitious Belt and Road Initiative, a vast economic zone connecting it to Europe by land and sea. But concerns are growing that loans taken to finance projects could lead Laos into a “debt trap” if it cannot repay its Chinese creditors.

Yet Laos has no choice but to rely on Chinese largesse if it wants to see its economy recover, as the impoverished and landlocked country remains mired in the economic slump of COVID-19.

According to the official Chinese news agency Xinhua, the Laotian government gave the green light in early June to the layout of a new highway connecting the capital Vientiane in the center of the country to Pakse in the south.

Laos presents the 578 km and $ 5.1 billion highway as its flagship infrastructure project. The route was proposed by the Henan Provincial Institute of Communications Planning and Design, a Chinese consulting firm also known as HNRBI.

According to the state-run Laotian Times, the new highway will cut the travel time from Vientiane to Pakse to seven hours from the current 10 hours, thus boosting connectivity with two major foreign cities further south, Bangkok and the center. Vietnamese commercial from Ho Chi Minh City.

Laos has also just embarked on the study of a model of another highway project linking Boten, on the border with China, to the province of Bokeo on the border with Thailand. The 180 km highway would cost $ 3.8 billion and would allow travel from southern China to Thailand via Laos in just an hour and a half.

The two projects, details of which are still being negotiated, will allow China easier access to the Indochinese peninsula.

A Chinese-run highway has already been completed. The 110 km highway connecting Vientiane to Vang Vieng, a tourist destination in the north, was inaugurated at the end of 2020 as the country’s first highway and the first in a China-Laos highway network under BRI. He reduced the trip between Vientiane and Vang Vieng to less than two hours from what was once a three-hour trip.

“It’s convenient and safe,” said a 35-year-old Laotian. “Even if I have to pay a toll, I can save time and gas. It’s better than driving on bad roads.

The Vientiane-Vang Vieng highway is currently 95% Chinese-owned under a build-operate-transfer program. After 50 years, control and profits from the highway will revert to Laos.

Yet although the Lao government participation in the project is only 5%, the financial burden is not light for a small country that is constantly in deficit. Construction costs for the three Chinese-run highways will total $ 17.8 billion, four times more than government spending for fiscal 2020 and close to the country’s gross domestic product.

Highways are not the only infrastructure for which Laos depends on China. The high-speed rail service from Vientiane to southern China is expected to open in December. China-made trains will run at speeds of 160 km / h in a country that currently lacks conventional rail.

When the railway project started in September 2016, Xinhua reported, “The China-Laos Railway [will be] the first Chinese overseas rail project which was mainly financed, built and operated by China, and connects with [China’s] own rail network. “

In 2019, the two countries signed a “master plan to build a Laos-China community of destiny”, elevating their relationship from “strategic partnership” to “a community of destiny.”

China’s economic support for a country of just 7 million people reflects Beijing’s strategic goal.

Beijing’s claim to sovereignty over almost all of the South China Sea has pitted the country against some members of the Association of Southeast Asian Nations, such as the Philippines and Vietnam. Winning over Laos – an ASEAN member that is not part of the South China Sea dispute – is pushing the consensus-driven 10-nation bloc to weigh heavily on Chinese concerns when making decisions.

In the end, Laos has little choice but China to support its economy, as it tries to step out of the ranks of the least developed countries in the world. The country’s new cabinet, inaugurated in March, has set an annual growth target of over 4% in its social and economic development plan for the five-year period until 2025.

The COVID crisis, which has decimated the very important tourism industry in Laos, is holding him back. This forced the country to look to China’s development projects as a source of funding.

But Chinese debt continues to swell.

According to the World Bank, borrowings from China represent 75% of the outstanding debt to other countries. Debt repayment to China alone is expected to increase 7% from the previous year to around $ 442 million in 2021.

Laos’ official debts have exceeded 60% of GDP, casting a cloud over its repayment capacity.

In September 2020, Fitch Ratings downgraded the long-term default rating of Laos ‘foreign currency issuers to CCC’ from B-, saying the country’s foreign exchange reserves are “insufficient” relative to its future repayment plan from the debt.

If Laos is in arrears, it could eventually fall into a “debt trap”, leading to the seizure of many of its infrastructure assets by China. In 2018, the American think tank Center for Global Development cited Laos as one of eight countries with particularly heavy debts to China.


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