China’s $60bn initiative; a debt trap Africa is willing to fall into

African countries already owe huge amounts in debt and is on its way to rake up more debt with President Xi Jinping’s $60 billion pledge to Africa at Monday’s opening of the 2018 Forum on China-Africa Cooperation (FOCAC).

Although a top Chinese official at the summit tried to wade off the debt criticism by stating that China is helping Africa develop and not pile up debt, however, majority of this external help always comes with a price, which Africa is willing to pay.

The continent’s median debt level is over 50 percent of GDP and no thanks to lower commodity prices, economic growth in several countries in Africa has slowed, leaving them with less revenue to service debts. This, however, has not stopped African countries from bagging more debt that now weigh down their already slouching shoulders.  

According to the International Monetary Fund (IMF), five sub-Saharan African countries are already in “debt distress” and nine more at high risk of joining them.

Africa’s friendliness with China is seen as ‘anything but the United States’. Majority of these African countries have noted that China generally offers better terms than the United States or Europe, hence the smooth relationship with Beijing, whose leadership is working hard to cement a world superpower posture, with its Belt and Road Initiative (BRI) that spans across three continents and covers almost 60 percent of the world’s population.

In the early 1990’s, many African countries had a mountain of unpayable debt and by the mid-1990’s, majority of these countries were frozen out of the global financial system. In 2005, a feasible solution was concluded; developed economies would forgive the debts of heavily indebted African countries, 30 countries owed the World Bank, IMF and African Development Bank.

Currently, most of Africa’s debt is not to China. However, with the $60 billion pledged in 2015 and another in 2018, in addition to all other loans, China is fast becoming Africa’s top lender. According to the Johns Hopkins SAIS China-Africa Research Initiative (CARI), Africa owes China about $130 billion.  Ghana owes $4 billion worth of loans to China. Mozambique owes $2.3 billion, Ethiopia’s debt is $29 billion. The same is true for several other African countries.

The ‘debt trap’ was among the things discussed at the Summit. China’s President Xi Jinping, who hosted leaders from across Africa asked if his country’s Belt and Road global trade infrastructure initiative is worsening debt problems in some countries. As you would imagine, the answer was a No. Which government with an infrastructural deficit and free cash waved at its front would admit?

“Everything we do with China is perfectly under control, including on the financial and debt side. We shouldn’t let our conscience be disturbed by criticism made regarding the nature of our relations with China,” Senegal’s President, Macky Sall said.

Before African leaders begin to shut their ears and their conscience to debt criticisms, they should look at other countries that got burnt by the over-friendly loans offered by China while taking into consideration the economic impact of these debts.

Venezuela has collected over $60 billion worth of loan from China; same goes for Argentina. Currently, Venezuela is in a state of economic collapse and Argentina has just applied to the IMF for a bailout.

Knowing there are dispensable funds in their coffers, loan or not, most countries undertake huge projects way beyond budget expectations. For instance, Kenya built a new expensive railway line that transports less than 20 percent of the freight it needs. Nigeria accepted a $31.6 million loan from China for the new Economic Community of West African States (ECOWAS) headquarters in Abuja whose core mission is to promote economic integration across the region.

Also, Laos entered a deal with the Chinese to build a high-speed railway they don’t need for a 30 percent interest-bearing loans.

Sri Lanka is one of the many countries that owe debts they cannot pay. In 2017, Sri Lanka owed over $1 billion to China and as a means of repayment, Sri Lanka handed over Hambantota port to state-controlled China Merchant Port Holdings Company on a 99-year lease. Djibouti may follow in Sri Lanka’s steps, with the country projected to take on public debt worth around 88 percent of the country’s overall $1.72 billion GDP, a huge part of which will be owed to China. However, regardless of such risks, African leaders have seen Chinese loans as a cheap source of infrastructure finance and for now, it’s a debt trap they are willing to enter.