In this Horn of Africa country, Beijing is helping to build an ultramodern trade hub and, some fear, tighten its grip on Africa through multibillion-dollar loans. Can Djiboutians escape the debt trap?

Red & gold Chinese banners hang outside the headquarters of Djibouti’s free-trade zone, adding a splash of colour to the dusty desert gateway of this hugely ambitious project, the biggest of its kind in Africa.

Inside the building, Chinese businessman Robin Li stands over a scale model of the free trade zone, telling a Ghanaian delegation that the Chinese investors will control just 40 percent of the project.

“We leave the money behind,” says Mr. Li, the Vice President of China Merchants Port. “No return!”

Everyone laughs uproariously, and then a local official tries to clarify the profits that could flow to the Chinese state-owned companies. “They don’t take big money,” he assures the Ghana delegation.

In fact, nobody quite knows what benefits Beijing will extract from Djibouti’s free-trade zone a Chinese financed project that could cost US$3.5-billion over the next 10 years, covering a vast 48 square kilometres.

But money is only one of the commodities in these transactions. Political influence and commercial power are the implicit commodities in China’s financial drive.

Countries across Africa and Asia are wrestling with the same dilemma as Djibouti: How to accept Chinese money without accepting Chinese control.

Beijing’s loans are accelerating the construction of the ports and railways that poorer countries desperately need. But the price could be steep: rising debts, a potential weakening of sovereignty and a possible loss of key assets if they default on their loans.

Djibouti is strategically located at the crossroads of Africa and the Middle East, on a narrow strait that controls access to the Red Sea and the Suez Canal. It has become a crucial hub in China’s Belt and Road Initiative (BRI): a multitrillion-dollar plan to build modern infrastructure to connect at least 68 countries to Chinese trade routes.

John Bolton, national-security adviser to U.S. President Donald Trump, has alleged that the BRI is a predatory Chinese strategy, deliberately deploying “bribes, opaque agreements and the strategic use of debt” to hold African countries “captive to Beijing’s wishes.” The Trump administration has even produced YouTube videos attacking the BRI and urging countries to seek U.S. investment instead. “Don’t get caught in the debt trap,” the videos warn in ominous tones.

China has denied the debt-trap accusation, insisting that the loans benefit both sides. Some analysts say the allegation of predatory behaviour is exaggerated, since China has often ended up cancelling the debts of poorer countries, and a majority of the debt in most African countries is still held by non-Chinese lenders.

Djibouti, a tiny country of fewer than a million people on the Red Sea, is a prime example of the risks. It has enjoyed a booming economy in recent years, fuelled by huge Chinese loans and investment in ports, railways, warehouses, industrial parks and even a secretive military base. But critics have warned that the country is falling into a Chinese “debt trap,” in which the loans could overwhelm its economic independence.

The International Monetary Fund recently estimated that Djibouti’s public and publicly guaranteed debt has climbed to 104 per cent of its GDP – and the vast majority of this external debt is owed to Beijing. The Chinese loans have “resulted in debt distress, which poses significant risks,” the IMF said.

A separate study by the Center for Global Development, a Washington-based think tank, estimated that China has provided nearly US$1.4-billion for Djibouti’s major projects, leading to a sharp increase in the country’s external debt. Djibouti is one of eight countries worldwide where the rising debt from BRI projects is “of particular concern” because of the heightened risk of debt distress, the study concluded.

Djibouti’s Finance Minister, Ilyas Moussa Dawaleh, says the Chinese loans are crucial for preventing an eruption of protest among Djibouti’s poor and unemployed. “If we let the youths stay unemployed, tomorrow they will create instability, and some devil will come and make use of their frustration,” he told The Globe and Mail in an interview. “We thank the Chinese for our infrastructure development, and we want our other partners to help us not just tell us about the Chinese debt trap. Maybe they think they are attacking China, but they are disrespecting Africans. We are mature enough to know exactly what we are doing for our country.”

Beijing has poured money into Djibouti in recent years. It gave a US$250-million loan for Djibouti’s free-trade zone. It provided about US$500-million in financing for the Djibouti portion of a new 756-km railway line between Djibouti and Ethiopia. And it lent a further US$400-million for a new container port in Djibouti.

In addition to the loans, Chinese state-owned companies have made equity investments in the Djibouti projects and have won management contracts in the ports and railway.