Africa Falling into Chinese "Debt-Trap"

China’s rapidly rising economic and commercial relations with Africa have received much global attention in recent years. Over the last twenty years, China has climbed from being a relatively small investor in Africa to becoming its largest economic partner. Most importantly, China’s billions of dollars in aid and financing have helped many African countries, including Ethiopia, to pursue their most ambitious infrastructure development projects. However, as debt to the Asian Giant piles up, some experts fear the cost. EBR’s Samson Berhane investigates.

From the Akkadian and Roman to the Ottoman and British empires, supreme kingdoms have depended on their military forces to conquer the world and dominate global trade. Even the United States, which became a global force after the collapse of the British Empire, has used its military supremacy to cast a shadow over the world.

In the same way, China, the second most powerful state in the world, is trying to assume a leadership role in the global arena. But instead of military force, China seems to favor infrastructure development and investment initiatives not just to bolster its own economy, but also leverage its economic strength and increase its influence.

In fact, it has been more than a decade since Beijing started to assert itself on the world stage, both on diplomatic and economic fronts, to bring back the Chinese version of a ‘new world order’. The chief strategy deployed by the Asian giant is the prominent Belt and Road Initiative (BRI). Introduced by Chinese President Xi Jinping, the Initiative envisions restoring China’s glory during the ancient Silk Road period, where a network of routes were established to facilitate trade.

Using the initiative as a guideline, China has already financed billions of dollars’ worth of infrastructural projects all over the world. So far, the country has spent an estimated USD200 billion on the initiative, and predictions say the country’s aggregate expenditures over the lifetime of BRI will reach between USD1.2 and USD1.3 trillion.

Over 60 countries, that account for two-thirds of the world population and 30Pct of global gross domestic product (GDP), have shown interest in being part of the initiative, which Chinese government has stated is open to all countries, and regional and international organizations. African countries have also become willing partners, wanting to capitalize on the opportunity.

Of course, China’s influence on Africa didn’t start with the introduction of Xi’s divisive initiative in 2013. Rather, over the past two decades, China has gone from being a relatively small investor to becoming Africa’s largest economic partner. China’s abundant and fast-growing financing has helped many African countries to realize ambitious infrastructure projects.

However, Beijing’s rising influence has become a hot-button issue. While some say that China is strategically using this approach to keep Africa’s economic future under its influence, others argue that it can significantly improve trade costs and connectivity that will result in higher cross border trade and investment, as well as improved growth in the region.

Debt-Trap Diplomacy or Genuine Support
Whether it is trade, investment, or infrastructure financing, no other country has the depth and breadth of engagement in Africa as China. Chinese firms of all sizes and from all sectors brought capital investment, management know-how, and entrepreneurial skill to every corner of the continent, including Ethiopia.
China-African trade increased by a whopping 681Pct from 2001 to 2007, and beat the United States as Africa’s biggest trading partner in 2009, when trade reached USD106.8 billion. By 2018, USD205 billion was traded between China and Africa.

To meet its growing needs for natural resources, China, whose trade with the continent has risen more than 40-fold over the last 20 years, buys mineral items from Africa, which make up over 70Pct of its imports from the continent. Although China accounts for more than a third of Africa’s total trade, the continent only accounts for four percent of the Asian giant’s global trade.

China’s influence on Africa is not only trade-based. Over the past decade, more than 3,000, largely critical infrastructure projects have been financed by China, according to China Aid.  Between 2000 and 2017, China disbursed USD143 billion in loans to African countries, an average of about USD8.4 billion a year. President Xi pledged USD60 billion in commercial loans to the region in 2018, which would push the country’s loans to Africa to around USD20 billion a year.

However, some analysts regard the Sino-African relationship as neocolonialism, based on debt obligations that African nations cannot repay, rather than an economic partnership among equals. “Domestic spending that could be used for alternative means such as supporting social services is being cut to service the debt burden, which indirectly impacts economic sovereignty,” argues Alisa Strobel, a senior economist for sub-Saharan Africa at London-based global information provider, IHS Market. “A lack of experience in negotiating debt restructuring agreements has in some cases, such as in Mozambique, pushed the country’s credit rating into the default category.”

Gedion Jalata, CEO of Centre of Excellence International Consult, has similar concerns. “There is no doubt that the Chinese government’s approach has impacted the sovereignty of African nations. The cases of Djibouti and Zambia proves this.”

China, according to Gedion, understands the big infrastructural gap on the continent, and came up with finance opportunities that cannot be easily accessed from other creditors and superpowers. “This, in turn, gives African countries low negotiating power.”

Heads of government and top officials of developed countries have also expressed their concerns over China’s methods. French President Emmanuel Macron, while on a recent visit to Djibouti, warned risks to the sovereignty of African countries from China’s increasing economic presence. Former U.S. Secretary of State Rex Tillerson also expressed the same worry during a visit to Ethiopia in 2018. The same year, US National Security Adviser, John Bolton, said that the continent is “captive to Beijing’s wishes and demands” due to its huge debt.

But President Xi, meeting with African leaders in September 2018, defended his administration, saying, “China’s cooperation with Africa is clearly targeted at the major bottlenecks to development. Resources for our cooperation are not to be spent on any vanity projects but in places where they count the most.”

Supporters of Africa’s relationship with China mention three reasons for their views. First, they say China’s growing financing has greatly improved the continent’s infrastructure. Second, it has fueled trade. Finally, they raise the point that China is providing assistance with no strings attached, the opposite of what western countries do.

Critics such as Panos Mourdoukoutas, professor and chair of the Department of Economics at LIU Post in New York, however, are not convinced. “On the surface, Chinese projects seem to serve the quest of African nations to build sound infrastructure. But on closer examination, they serve China’s ambitions to write the rules of the next stage of globalization,” Mourdoukoutas says, citing three reasons.

“First, the most significant Chinese investments are undertaken by state owned companies, not by the Chinese private sector. Second, they tend to focus on infrastructure like highways, ports and dams, and on public networks like the electrical grid. Thirdly, these investments help tie countries to China politically, and through debt obligations, it creates a form of leverage that China can use to force these countries to support Chinese ambitions globally.”

David Shullman, a senior international economist, in a commentary published in Brookings in January 2019, also wrote: “Although China’s approach in developing countries is less aggressive, it is still frequently corrosive of democratic institutions, increasing corruption and undermined financial and political independence.” Shullman cited the case of Sri Lanka, which assumed unsustainable debt burdens as a result of Chinese infrastructure financing deals, resulting in a loss of sovereignty over its strategic assets.

Gedion and Alisa agree. “The nature of Chinese loans is opaque. This, coupled with the Chinese government’s willingness to entertain Africa’s infrastructure expansion plans, puts many African nations at risk to default,” Gedion says.

Alisa contends that it is difficult to understand some of the Chinese financing loan terms given to African governments. “Chinese state-sponsored lending is often difficult to track compared to the lending of multilateral institutions such as the African Development Bank or World Bank, which have their financing terms publicly available.”

The sustainability and effectiveness of Chinese loans has also been criticized, including, for example, the “White Elephant” infrastructure projects which resulted from weak due diligence on China’s part prior to a project. Officials from Sinosure, the Chinese state-owned insurer, recently stated that it had been forced to write off one billion dollars in losses due to the loan extended for the construction of Djibouti-Addis Ababa railway project.

Despite such uncertainties, the pace at which China has become a major creditor to Africa, which continues to rise despite risks of default, has also stirred up controversies.

There are several points of view regarding why China has become such a risk taker. The most famous is that debt to Africa provides business opportunities for Chinese contractors and other businesses. According to a report published by McKinsey in 2017, the number of private Chinese firms working toward their own profit motives suggests that Chinese investment in Africa is a more market-driven phenomenon than is commonly understood.

Many analysts with a similar sentiment have repeatedly voiced their concerns mentioning that China’s finance for infrastructure usually favors Chinese companies (especially state-owned enterprises). While helping China pursue its strategies by creating international opportunities for its companies and employment for its citizens, this approach has caused Africa to sink into debt while China pays itself through contracting, observers say.

As the Belt and Road Initiative marked its fifth anniversary six months ago, the debate over the consequences of China’s financing, also referred to as debt trap diplomacy by analysts and various head of states, picked up steam. The concept of debt traps was first proposed by Brahma Chellaney, professor of strategic studies at the New Delhi-based Center for Policy Research, in 2017. Chellaney argues that China’s financial support to Africa is often intended not to support local economies, but to facilitate access to natural resources or open the market for its low-cost, shoddy export goods.

Those with similar views also argue that China is burdening African countries with unsustainable debt and seeking to use indebtedness to further increase its geopolitical control over the continent. Xiaochen Su (PhD), a scholar at the University of Tokyo, is one of them. “By ensuring that debts are paid in some form or the other, whether it is economic concessions, political agreements, or a combination of both, China may in the long term formulate a new kind of diplomatic relationships with Africa,” he says.

Amid worries over the sustainability of Chinese-backed infrastructural developments, today, roughly half of African countries have outstanding public debt that exceeds 50Pct of their GDP. The pace of total debt accumulation in recent years has been worryingly rapid. By 2016, the ratio of gross public debt to GDP nearly doubled from 15Pct to 24Pct, while real GDP growth in terms of US dollars averaged four percent over the period. “Widening current account deficits have left the region more dependent on external loans, with inward financial flows boosted by a global search for yield, which has eased access to non-concessional borrowing,” Alisa told EBR. “Chinese loans to Africa, however, are still a fraction of total Chinese loans to the world.”

Although steadily growing by double digits since 2006, the share of Chinese loans from Africa’s total loans was 14Pct in 2017, down from 42Pct in 2016, the highest recorded so far. Yet, the IMF, in its latest report, categorized six low-income African countries as suffering from “debt distress”—meaning they have already struggled to service the loans on their books. Nine others, including Ethiopia and Djibouti, were said to be at “high risk.” What’s more, a recent report by African Confidential suggests that Zambia will be the first casualty of a China takeover after defaulting on loan repayment.  

Zambia owes 28Pct of its sovereign debt to China, although it has not ceded any national assets yet. But ZNBC, the national radio and TV broadcaster, and ZESCO, the national power utility, have both helped guarantee Chinese loans by establishing joint ventures with state-owned Chinese companies. Critics say these deals give China a dangerous degree of leverage over key national resources and it is likely that it will fully acquire the assets in case of defaulting.

This is why Moody, a credit rating company based in London, recently issued a warning to sub-Saharan African countries concerning the risk of losing strategic state assets to China if they fail to repay loans. Ethiopia is one of the countries with the highest risk of distress in the event of additional debt financing.

Is Ethiopia Failing into a Debt Trap?
Belachew Mekuria, a lawyer by profession, served as the Deputy Investment Commissioner and Investment Chief for five years. During his tenure, he oversaw the licensing of hundreds of Chinese investors, whom he believes, have greatly contributed to the country’s development. Belachew thinks China has been a dependable partner to Ethiopia, financing significant infrastructure development projects. Under these circumstances, he says, China’s few-strings-attached financing should be considered a good thing in and of itself. “The foundations for BRI, for instance, are, as its initiators framed them, related to infrastructural connectivity, facilitating unimpeded trade, financial and policy integration and above all else, building people-to-people relations,” he says. “At the moment, we are seeing phenomenal results in many of these objectives, and particularly in the people to people connections. Marriages between Chinese and Ethiopian people are becoming more frequent than perhaps those between Europeans and Ethiopians.”

Granted, beyond creating close ties between people, Chinese lending has helped pay for roads, railways, power plants and other facilities. With a lack of infrastructure dragging country’s growth back for a long time, the help from China has been significant, as it allowed Ethiopia to register one of the fastest economic growth rates in the world. But as this growth was funded through debt, largely from China, insufficient returns have been increasing Ethiopia’s credit risk.

Ethiopia has received different kinds of loans from China – a blend of interest-free, commercial and concessional borrowings. As one of the top African destinations for Chinese loans, Ethiopia has received over USD12.1 billion from China’s state policy banks since 2000, according to a report by Johns Hopkins University. China accounts for more than a third of Ethiopia’s total external debt of USD27 billion-29Pct of the country’s GDP.

Some infrastructure projects were expensive and took a long time to complete — for instance, the USD 4.5 billion Ethiopia-Djibouti railway, which started work five years after construction began, but has not yet created much-needed returns. “Usually, China provides funds without caring much about monetary returns. Most big projects financed by China are undertaken without proper feasibility studies,” says Alemayehu Geda, professor of economics at Addis Ababa University, who thinks there is a high likelihood of countries like Ethiopia failing into a debt trap.

But Belachew, who thinks that the debt trap narrative was created by creditors who see China as a main competitor, argues differently. “If one analyzes how much African countries, including Ethiopia, owe to China and on what terms, compared to what they owe the Paris Club, other multilateral creditors and bondholders, one would immediately understand that it is mostly about ‘competition’ for a ‘dependable debtor’ than anything else,” he says.

Countries have been debtors to the Paris Club for a long time without losing their sovereignty. But when countries turned their attention to a non-traditional lender, alarms were raised about the erosion of sovereignty. According to Belachew, this seems like a ‘big brother’ type of paternalism. “For instance, the case of the Sri Lankan port has been repeated like no other. You enter the term ‘Sri Lanka port-China’ into a search engine and you will find over 100 million results in less than a second. There is no doubt that some governments make bad deals and do so quite often with utmost disregard to public interest, but to claim China’s loan deals are different is to disregard the whole truth.”

These worries, coupled with a long-term foreign exchange shortage, which was exacerbated by poor export performance, repaying loans is becoming a daunting task for the Ethiopian government, which is expected to pay over USD1.6 billion a year to its creditors, mainly China. Repayments on the principal for the Chinese-funded Ethio-Djibouti railway loan, for instance, began in 2017, before the railway was even operational. But by the beginning of 2019, the Ethiopia Railway Corporation was not only unable to repay its loan to China, but also failed to cover the remainder of the management fees for the Chinese companies operating the railway.

It seems the only choice the government has is winning the favour of the Chinese government to extend the repayment period. So far, China cancelled payment on all interest-free loans to the end of 2018, on top of previously negotiated extensions of major commercial railway loans agreed earlier the same year.


8th Year • Jun.16 - July.15 2019 • No. 75


 

Samson Berhane

Editor-in-Chief

samson.b@ethiopianbusinessreview.net

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