Op-ed in Caixin: China Is Not Trying to Catch Africa in a Debt Trap
February 25, 2019
George Lwanda, 2018 AsiaGlobal Fellow
George Lwanda, 2018 AsiaGlobal Fellow, talks about the implications of Chinese loans to Africa.
Imagine if you could, a world in which Africa is completely beholden to China — a world in which China is so obsessed with controlling Africa that it is willing to risk billions of dollars by trapping African countries in debt. As an African, it is a world hard to imagine for several reasons. For starters, what would China gain that it already is not getting from Africa by impoverishing it?
Apparently, that would allow China to influence decisions of African states. There are at least also two reasons why this would be politically suicidal. Firstly, it would discredit the “Beijing Consensus” as an alternative to the Washington consensus. Secondly, although Africa is a small player globally, it has the largest voting block at the U.N. general assembly. It’s therefore likely that an Africa feeling hard done by China would unnecessarily complicate Beijing’s attempts at global leadership at the multilateral level possibly making the isolation of China easier.
Interestingly, Africa debt statistics also don’t support the accusation. The globally accepted debt ceiling for developing countries is a debt-to-GDP ratio of 40%. Africa’s current debt-to-GDP ratio stands at 50%. While loans from China grew at a very fast rate especially between 2011 and 2016, the reality is that Chinese loans account for an insignificant portion of Africa’s total debt stock (5%). Additionally, only three of the 12 African countries under high debt distress have borrowed heavily from Beijing. They are Angola, Djibouti and Zambia. Loans to Djibouti are all toward the construction of bulk infrastructure aimed at reducing the cost of doing business and fostering regional integration such as a railway and water pipeline linking Ethiopia and Djibouti and the expansion of the country’s main port enabling the country to handle more cargo as well as meet sanitary and phytosanitary standards for exporting livestock.
In Zambia, there is sufficient evidence showing that its debt distress primarily emanates from the issuance of bonds denominated in foreign currencies. Over the last five years, the yield on Zambia’s bonds has increased from 6% to 17% forcing the country to borrow an extra $750 million to service bond payments, according to a Bloomberg report. Zambia is probably the country where the biggest form of Sino-phobia has raised its head when it comes to talk of Chinese loans. Clearly false claims have been peddled that China is about to take over some national assets such as the international airport and the national electricity utility company. It is inconceivable that China or any lender, would want to take ownership of assets that are not profitable. In the case of Zambia’s airport for example, on a busy day, the airport handles a total of about 13 passenger flights and an average of 10 flights a day. A big part of the airport’s lack of profitability is simply the lack of enough traffic numbers — something that can’t be solved by just changing management or ownership. Similarly, there are policy and structural issues affecting the national electricity utility company which would still render it loss making even after any takeover. That leaves Angola as the only country where Chinese loans are greater than non-Chinese loans — one country out of 54!
That said, Angola has its nuances. For example, senior Angolan officials privately admit that China pre-conditioned continued loans on the country securing a program with the IMF — hardly the actions of a country hellbent on holding Angola captive to its wishes and demands. More controversial has been China’s “resources-for-infrastructure” approach in which countries pay for infrastructure using commodities; popularly known as ‘Angola-mode’ has been routinely frowned on. One can only guess that this is because it is seen as a new Chinese way of doing things that is out of sync with the Washington Consensus. While the practice is indeed different, it is not necessarily new. China or rather, Japan used the same approach with China many years ago. At the time, China was poor but had natural resources that Japan needed. Chinese loans have also been accused of promoting bad governance in Angola even though the World Bank World Governance Indicators have consistently shown an improvement in government effectiveness, regulatory quality and the rule of law since 2000.
What external factor or player then is the cause of spiraling African debt? Before answering that, it is important to accept that a genuine concern about Chinese loans to Africa is the opaqueness of the loan conditions — especially in countries where the process of the state securing a loan is subject to constitutional oversight. This doesn’t make China responsible for Africa’s debt as available data strongly points to the fact that access to concessional lending to African countries diminished remarkably after the 2008 financial crisis as the main reason. This coupled with the fact that several African countries (such as Zambia and Ghana) graduated into middle-income status and therefore lost access to concessional funding. Confronted by the absence of concessional financing, African countries have resorted to private debt at high interest rates which are frankly unsustainable, as the Zambia example shows. In fact, according to S&P, private loans from non-Chinese sources account for 72% of Africa’s debt stock. The concessional nature of Chinese loans are hence attractive and pretty much a rational option.
Chinese loans are attractive for African governments because of at least three other reasons. Firstly, Africa is confronted by a huge infrastructure gap estimated at around $170 billion annually. To correct this, African leaders launched the Programme for Infrastructure Development in Africa (PIDA). The PIDA naturally dovetails with China’s focus on infrastructure assistance and the Belt and Road Initiative, providing an opportunity for Africa to reduce its infrastructure deficit. Coupling this, as several senior African government officials have told me, is the fact that China’s broader assistance to Africa breaks away from past development assistance models to Africa that were based on stringent austerity measures and is not like the approach of other partners who market themselves as experts in African development problems. The new U.S.-Africa strategy for example has been criticized for not consulting with African countries and for its focus on China and not African development initiatives.
Inevitably what will matter for Africa’s development is not where the loans come from but the extent to which Africa can use loans to enhance economic productivity in general and their ability to us use the assistance to protect national economies from exposure to commodity price fluctuations. This requires collaboration by Chinese and non-Chinese development partners to assist Africa to reduce the cost of doing business and create employment which will in turn broaden African governments’ revenue base. Furthermore, greater transparency in loan agreements would also facilitate a collaborative approach to assisting Africa by reducing the default risk for all parties (Chinese and non-Chinese).
George Lwanda is a policy adviser at the UNDP Africa Centre, and a 2018 Asia Global Fellow at the Asia Global Institute, The University of Hong Kong.
This article first appeared in Caixin on February 25, 2019.
The views expressed in the reports featured are the author’s own and do not necessarily reflect Asia Global Institute’s editorial policy.
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