Vientiane: Laos is grappling with severe financial stress, finding itself caught in a debt trap fueled by unsustainable Chinese loans. As the nation struggles to repay the costly debts accumulated under China’s Belt and Road Initiative (BRI), concerns are rising about growing Chinese influence and dominance in the country.

The Laotian public is increasingly worried about China’s expanding economic foothold. A recent survey, the State of Southeast Asia 2023, indicates a shift in sentiment, with many Laotians now favoring the United States over China. The survey noted a significant decline in the perception of China’s political and strategic influence, particularly in Laos and Myanmar.

Chinese loans have financed the construction of dams, railways, hydroelectric power plants, hotels, and residential complexes across Laos. However, these projects, though funded by Laotian debt, are largely controlled by Chinese companies, leading to concerns about the erosion of local autonomy.

Local businesses, particularly small shops in areas dominated by BRI projects, have been forced to close as Chinese workers flood the country. “Laos is so indebted to China that the Chinese can come over here and take our land,” said Nin, a vegetable seller from Vientiane. Reports of harassment and detention by Chinese companies have added to the growing resentment among local workers.

Laos’ ability to repay its mounting Chinese debt is increasingly in doubt, exacerbated by financial difficulties, high inflation, and a decline in purchasing power. "It is on the brink of default," warned Anushka Shah, Vice President at Moody's Investors Service. The country’s external public debt servicing costs soared from USD 507 million in 2022 to USD 950 million in 2023, deepening the financial and political crisis.

Chinese loans now account for nearly half of Laos' total external debt. While international agencies like the World Bank and Japan International Cooperation Agency (JICA) offer loans at rates under 1%, Chinese loans come with a steep 4% interest rate.

Currency depreciation and rising inflation are compounding the challenge of repaying these loans. "Laos simply borrowed too much for projects that could only pay off over the long term, but it had to start making big repayments to China now," explained Roland Rajah, Director of the Lowy Institute's Indo-Pacific Development Centre.

Chinese debt to Laos has ballooned to USD 10.9 billion in recent years. However, when including potential "hidden" sources of public debt, this figure could rise to approximately USD 17 billion, equivalent to 88.9% of Laos' GDP, according to Bradley Parks, Executive Director of AidData. This level of debt exposure makes Laos more vulnerable to Beijing’s predatory loan policies than any other country.

"I think Laos is at the mercy of being part of China's economic plans, whether it is train connections or the hydropower that Laos can produce," said Erin Murphy, a fellow at the Washington-based Centre for Strategic and International Studies (CSIS).

China maintains that the BRI projects are mutually beneficial and will drive social and economic development in Laos. However, the returns from these projects have been disappointing. The China-Laos rail line, a key BRI project, has been labeled a "white elephant," contributing to a 30% decline in Laos’ currency value in 2023 and soaring inflation, according to Zachary Abuza, a professor at Washington-based National War College.

While China has gained access to Laos' mineral resources through BRI-related transport projects, Laos has yet to see the intended benefits. The country, already reeling from the economic impact of the COVID-19 pandemic, now faces an even bleaker future as it struggles with debt repayment. "Most people will not know the scale of the debt, nor will they associate the debt to Chinese having any direct impact on their lives," said a Laotian, speaking anonymously for security reasons.

As Laos contends with this growing crisis, the consequences of its deepening financial ties with China are becoming increasingly apparent. The nation’s economic future remains uncertain, with the burden of debt threatening to exacerbate existing challenges.