Cambodia and Chinese Debt Trap Diplomacy

The Chinese Belt and Road Initiative (BRI) projects are well known on the international stage. It is a known fact that the Chinese government is partnering with many other nations in order to build a trade route that will supposedly be beneficial to all countries.

However, what is strange is that fact that all the partners that China has chosen to work with are now under some kind of financial duress.

Consider the case of Sri Lanka, Djibouti or even Pakistan. All of them are China’s biggest allies. However, all of them are also inching closer to bankruptcy.

Cambodia is another country that China is showing a lot of interest in. This interest is also being reciprocated by Cambodia. This is the reason why a lot of Belt and Road Initiative related loans are being made in this country.

However, many critics are wary that China is creating yet another debt trap. The United States has openly warned Cambodia that its economy might be damaged because of Chinese loans. In this article, we will have a closer look at the issue of Chinese loans in Cambodia.

How China Benefits From Belt And Road Initiative Projects?

Any country agreeing to a Belt and Road Initiative Project is great news for China. This is because China finances these very risky infrastructure projects that no other country or the World Bank would.

China finances these projects because they are built by Chinese companies.

Hence, all the money that a country like Cambodia spends on its projects immediately becomes an income for Chinese companies. They use this money to pay Chinese workers which increases the wealth and consumer spending in China.

The Chinese government immediately recoups a part of the spending in the form of taxes on companies as well as on workers.

Hence, the money loaned out by China goes back to China itself!

On the other hand, the country that has decided to build projects finds itself severely indebted to China. Even though the money is technically a part of their GDP, the people of Pakistan, China or Cambodia, don’t really have access to much of it.

If the projects being funded were viable and self-sustainable, then they are able to make loan repayments to China for the initial cost borrowed. In this case, they actually add value to the economy.

However, if the projects being funded are not self-sustainable, then they take money away from the foreign exchange that the exports have generated. This is the reason why countries like Pakistan have a foreign exchange crisis. China will not accept repayments in local currency.

If the country defaults on debt, China just takes over the asset that was funded and starts charging money for its use. To sum it up, this process is definitely a win-win for China whereas it may be a disaster for other countries.

Cambodia’s Current Situation

At the present moment, the financial situation in Cambodia is not at all bad. This is because the debt to GDP ratio of Cambodia stands at 40%. This is much lower than the debt to GDP ratios of many other countries.

For instance, the United States itself has a debt to GDP ratio of 105%. However, what is precarious is the fact that the borrowing in Cambodia has grown very fast in the last 10 years. The rate of borrowing has grown twice as fast as the income of Cambodia. The problem isn’t really with the current situation in Cambodia.

  • Instead, the problem is twofold. Firstly, the rate at which the debt is growing is alarming. It is likely to lead to a crisis in the medium term.
  • Secondly, Cambodia owes close to 65% of its debt to China. This is an extremely dangerous situation to be in. Even in Cambodia wants to borrow more funds it needs to diversify the sources. Otherwise, in the event of a default, Cambodia will end up becoming the colony of China. At the present moment, Chinese loans to Cambodia are equivalent to 20% of its GDP!

Cambodia’s Small Loan Problem

The worst part is that the Cambodian government is taking more debt when their citizens are clearly not in a position to pay. Many Cambodians are already struggling to repay the loans that they have taken from micro-finance companies.

At the present moment, more than 10% of the population of Cambodia owes more money than they can possibly repay. All these small loans are really adding up. All of them work out to be a combined 12% of the national GDP. Also, since some of these loans have been given to borrowers with no credit history, exorbitant rates are being charged.

This is relevant because if a country fails to repay its debt, its starts taxing citizens more. In order to bear more taxes, citizens must have the financial wherewithal.

However, in Cambodia, the citizens are also not in a good financial situation. Hence, in the event of a default, there will be no recourse at all. The country may simply be at China’s mercy!

To sum it up, mathematically Cambodia doesn’t have a debt problem as of now. However, the fact that debt is growing at an alarming rate and that all of it owed to China is alarming.

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