GDP is per year while debt is spread over time, like 30 years. Assuming 5%/yr for the amount of interest and principle repayment, 5% x 60% = 3% of GDP for debt service per year. Not too bad. Assuming the project adds 1% to GDP growth, it would boost the GDP by 35% at the end. Adding 2% would boost by 81%. And the effect will continue after the debt has been paid off. That's a good investment.
I don't think you're accounting for interest in that calculation. If they have borrowed 60% of GDP at an interest rate of 3%, it would take a 1.8% annual increase in GDP just to match the interest on the loan.
That is also ignoring the fact that you can't just take the entire GDP growth and use it to pay the loan, you have to collect fares and taxes which can only be a proportion of that growth. If you collect more in fares than the increase in GDP, you're leaving the country poorer than they would be without the railway.
Djibouti is going to need to see some pretty big additional growth from the railway to make the project worthwhile. Not to say they won't, be it's easy to underestimate just how big of a debt burden it is for a small country.
The sample 5%/year loan payment already includes the interest and principle repayment, where the interest rate incidentally is about 3%. Annual debt service is 5% x 60% of GDP = 3% of GDP. As the GDP grows, the portion of the debt service each year becomes less and less, 2.9%, 2.8%, ...
The train system presumably generates revenue, where the operating income can be used to pay off the debt, rather than paid by tax on the GDP. A train system has transformative benefits to a nation. The benefits are still there long after the debt is gone. The ROI period is way longer than 30 years.
This is an unstable area - to say the least. What happens if/when there is an extended disruption? Perhaps the Chinese government will feel justified to send in troops?
What if (as seems likely) the monotonic growth doesn't materialize? What if there's a recession for a few years and there is a decline?
Those sound like reasonable concerns. Thanks for sharing.
I don't much about the geopolitics or stability of these two countries, but assuming they aren't too unstable, it's hard to imagine that increasing mobility and ease of commerce won't have a sizeable economic boost.
Let's say you make a $100k per year and take out a $60k mortgage, that seems very reasonable. If the railway is going to make their economy more productive and efficient then it seems like a really good idea.
It depends a little bit on how much of their economy they can afford to spend on transit projects though. Home buyers can usually devote a significant portion of their annual income towards housing.
People buy cars that are worth more than their yearly salary and it's a common thing. Spend 100% of your yearly effort on a thing that will be worth 25% less in twelve months. Plus it costs probably about $5,000 per year to own and operate a vehicle.
Is that really a common thing? Cars depreciate rapidly and buying one that costs more than your early salary sounds like a complete disaster to me. Maybe the people I know are just unusually financially responsible?
You definitely would enjoy reading Confessions of an Economic Hitman, the first chapter of which I have personally verified with an Indonesian diplomat.
It's not necessarily a problem so long as the debt-financed spending accelerates growth. GDP is the amount the economy generates per year. Debt is relatively fixed (unless you borrow more or have a crazy interest rate). As long as the interest on public debt doesn't outpace the tax revenues set aside to service it, they should be fine. Djibouti is a relatively undeveloped country, so infrastructure development can bring them a long way.
Even that doesn't add up. First of all, I bet that figure represents only the debt specific to this China deal, on top of whatever other debt they already had. Secondly, Djibouti's GDP was $1.7 billion (or thousand million in British wording), but the only debt figure stated was $14 billion as China's overall investment. That's like 800% of GDP using those raw figures. The truth is probably somewhere else.
Not to worry. The Chinese leadership is thoroughly pragmatic and will eventually write off as much of the balance as necessary:
https://en.m.wikipedia.org/wiki/TAZARA_Railway
The lenders will remember that they don't have much leverage over Djibouti, unlike the Eurozone with its debt trap for Greece.
I dislike this way of describing debt. Because it sounds to most people like the country owes 60% of its GDP to foreigners, and only has 40% left to live on.
A different way to express the same situation is that the debt is 7 months of GDP.
This seems absolutely insane to me.