3 ms·

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

by ww520 10y ago

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.

tomohawk 10y ago
Good solid World Bank math
- dwaltrip 10y ago
  Do you have any concrete criticisms? I'd be curious to learn about them.
  - tomohawk 10y ago
    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? Taking on debt means taking on risk.
    - dwaltrip 10y ago
      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.
ezzaf 10y ago
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.
- ww520 10y ago
  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.
- deleted 10y ago
  [deleted]
kalleboo 10y ago
Dunno the accuracy of this source, but http://china.aiddata.org/projects/1471 http://china.aiddata.org/projects/1471 > The loan is worth 475 million USD at the rate of Libor 6 months (0.507%) plus 2.6% with a 3 year grace period and 23 year maturity

by ww520 10y ago

tomohawk 10y ago

Good solid World Bank math

dwaltrip 10y ago
Do you have any concrete criticisms? I'd be curious to learn about them.
- tomohawk 10y ago
  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? Taking on debt means taking on risk.
  - dwaltrip 10y ago
    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.

ezzaf 10y ago

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.

ww520 10y ago
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.
deleted 10y ago
[deleted]

kalleboo 10y ago

Dunno the accuracy of this source, but http://china.aiddata.org/projects/1471 http://china.aiddata.org/projects/1471 > The loan is worth 475 million USD at the rate of Libor 6 months (0.507%) plus 2.6% with a 3 year grace period and 23 year maturity