An article published in International Policy Digest.
By Kimkong Heng and Veasna Var
China’s debt trap, also called debt-trap diplomacy, is a topic of significant interest which has gained increasing attention in recent years. From Africa to Asia and even in South America, the issue of the Chinese debt trap associated with China’s no strings attached aid and loans have often become news headlines.
An article which appeared in Quartz last year named eight countries that are in danger of falling into China’s debt trap. These vulnerable nations included Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan.
Another article listed seven countries which are trapped in China’s explosive loans and seem to have neither exit plans nor the ability to repay the massive Chinese debt. These countries in alphabetical order are Angola, Djibouti, Kenya, Namibia, Sri Lanka, Zambia, and Zimbabwe.
In December 2017, Sri Lanka handed over its Hambantota Port to Chinese companies for a 99-year lease as the country could not repay its huge Chinese debt resulting from multi-billion-dollar loans. Zambia is likely to do the same through the handling of its international airport to China for debt repayment.
Other countries in Africa such are Chad, Congo Republic, Eritrea, Ethiopia, Mozambique, and South Sudan are also in debt distress. Thus, there is reason to believe that China’s debt trap is not a myth. It is an issue of which leaders in developing countries should be wary.
For Cambodia, China is its strongest political backer and largest economic and military benefactor. The Asian giant is also Cambodia’s largest foreign direct investor. Both countries upgraded their relations to a comprehensive strategic partnership in 2010. Their trade volume was valued at $5.8 billion in 2017 and China pledged to expand the trade volume to $10 billion by 2023.
China’s growing economic presence in the Kingdom has significantly contributed to Cambodia’s economic growth. Most noticeable is Cambodia’s infrastructure development evidenced by remarkable a transformation, particularly in the capital city, Phnom Penh, and a coastal province, Sihanoukville.
Amid the huge influx of Chinese investment and Chinese migrants into the Kingdom over the last several years, there are growing concerns among Cambodian and Western scholars with regard to China’s debt trap.
For the time being, Cambodia seems to be far from falling into the Chinese debt trap, given its current Chinese debt which is close to $5 billion. However, the trend seems to be worrying.
China continues to draw Cambodia closer into its orbit through the provision of aid, grants, and loans, all of which appear to be condition-free. What is more, all of the Chinese aid and loans that flow into Cambodia, more often than not, have been criticized for lack of transparency, accountability, good governance and the rule of law.
There are other outstanding issues related to environmental impacts of Chinese investments and projects. With less effective management of China’s aid and loans on the part of the Cambodian government due to corruption, cronyism and abuse of power, it is reasonable to assume that the issue of China’s debt trap is not beyond imagination. In other words, lessons from Sri Lanka and other countries should make Cambodia cautious about dealing with Chinese money to avoid ending up in Sri Lanka’s position.
Despite these mounting concerns, Cambodian Prime Minister Hun Sen has reassured his people that Cambodia would not fall into China’s debt trap and that the country would stand to significantly benefit from China’s Belt and Road Initiative (BRI).
Hun Sen’s reassurance is valid if we consider the benefits and influence of the BRI on Cambodia’s economic growth and physical infrastructure development. Also, it is true that BRI has so far presented more economic benefits than risks to Cambodia.
However, this should not preclude Cambodia from being mindful of its embrace of the BRI and its acceptance of China’s unconditional aid and loans.
While taking advantage of the BRI and the influx of Chinese money and tourists, Cambodian leaders need to exercise prudence in their efforts to bring the country forward economically and socially.
To avoid falling into the China debt trap, it is advisable that the Kingdom work on reducing its public debt and improving debt management capacity. One way the government can do is to seriously engage in public institutional reforms to ensure that aid and loans are managed effectively.
At present, the Cambodian government seems to be determined to expedite reforms to the governance system. However, corruption, cronyism and perceived lack of human resources are still barriers for deep and meaningful reforms.
Cambodia should diversify its borrowing sources by reaching out to international donor agencies such as the ADB and the World Bank and other countries like Japan and European nations.
The country needs to also diversify its foreign policy and seek to improve its relations with the West. Specifically, Cambodia must address its domestic issues and negotiate with the EU in regard to the latter’s plan to withdraw Cambodia from the Everything But Arms (EBA) trade scheme. Neglecting the EU’s human rights call will result in EBA revocation, which in turn will negatively affect export growth to the EU, a key export market for Cambodia.
The Kingdom moreover should carefully manage its relations with the West and other key strategic partners such as Australia, Japan, and South Korea so that it will not over-rely on China and run the risk of falling completely into China’s sphere of influence.
A viable approach for Cambodia to keep the issue of China’s debt trap at bay is to adopt a flexible and inclusive foreign policy and maintain good relations with other major powers and ASEAN members. Continuing to engage in institutional reforms and investing in human capital are the way forward for Cambodia.
Kimkong Heng is a PhD candidate at the University of Queensland and a Research Fellow at the Cambodian Institute for Cooperation and Peace.
Veasna Var is a doctoral candidate at the University of New South Wales, Canberra.