Jun 21, 20239 min read

Varied Political Impacts of China's International Lending to African countries: Debt trap diplomacy

By Sangeetha Saravana

Article: 12/2023

Introduction

When it comes to global economics, China's debt to many African nations has been a contentious issue. In fact, U.S. Treasury Secretary Janet Yellen spoke passionately about the issue when she visited Africa in January 2023, accusing China of creating a debt trap for poor African nations.[1] China is distributing billions of dollars in the form of concessional loans to developing nations, mostly for their massive infrastructure projects, in an effort to quickly consolidate its political and economic dominance throughout the world. As these mostly low or middle-income developing countries struggle to make the payments, Beijing has the opportunity to demand benefits or concessions in exchange for debt relief.

Data from the World Bank show that countries with high Chinese debt are mostly in Africa, but they are also spread across Central Asia, South Asia, Southeast Asia, Latin America, and the Pacific. In 2020, China held 37% of the debt owed by the countries from the regions mentioned above. The African nations with the highest Chinese debt at the end of 2021 are Angola (USD 25 billion), Ethiopia (USD 13.5 billion), Zambia (USD 7.4 billion), the Republic of Congo (USD 7.3 billion), and Sudan (USD 6.4 billion).[2] Djibouti and Angola had the highest relative debt loads. China has increased its leverage over financially weak states by giving them sizable loans with conditions attached. Some of these states have also been caught in debt traps that undermine their sovereignty.

Some accuse China of employing this tactic to advance its geopolitical interests in Asia and Africa by providing them with sizable loans and taking control of the borrowing countries' assets when they fail to repay. On the other hand, others have portrayed China as a great entrepreneur which recognised an economic opportunity in lending to struggling nations and profited greatly from it, both financially and in terms of resources. This study looks at both sides supporting the claim that is most realistically supported. Was China's multibillion-dollar Belt and Road Initiative conceived as a grand scheme to entrap and plunder resource poor and needy nations? Or is the idea of a debt trap just a coincidence that resulted from China's initiatives to support and aid developing nations financially?

A brief overview of Chinese-African economic relations

China's economic connection with Africa is motivated by the size, composition, and growth of the continent's population, which presents huge market prospects for the present and the future. Chinese financial organisations gave Africa more than USD 152 billion in credit, loans, and grants between 2000 and 2018 sponsoring initiatives like digital migration programmes, stadiums, hospitals, and railway lines. The sum increased to USD 696 billion from 2000 to 2020 by comprising 12% of Africa's commercial and state external debt being held by Chinese lenders.[3] Although China is a significant creditor to many African countries, its financing has decreased recently and is expected to continue at a lower level. But, the concern over debt hardship has grown in recent years and is projected to get worse throughout the continent especially in countries such as Zambia, Ethiopia, Kenya, and Djibouti. For example, the unproductive projects owned by Chinese in African land began to cause an unusual burden on the African countries to repay their debts while instead raising money on their domestic issues such as to provide broader social reforms for their citizens and tackling climate change issues in the region. Also, during uncertain situations like the covid-19 outbreak, the loan repayments by African countries were left behind with no public funds when they simultaneously needed to raise public health spending. And China's motivation behind it's lending practice is put to suspicion due to the political advantage.[4] For example, China sees Africa as a 'no threat' continent that enables access to the Atlantic Ocean which provides enormous economic benefits, unlike European or western countries. However, China has also emerged as a key actor in Africa's urbanization effort with Chinese firms and/or finance supporting a significant portion of the infrastructure projects on the continent.

Some of the African projects acquired by China

The African Development Bank estimates that the continent's countries would need to invest USD (130–170) billion annually to address their infrastructure demands, but they are now falling USD (68–108) billion short. Multiple waves of colonizers have been obsessed with filling the infrastructural gap in Africa, and China is the next in line to reach deep into the heart of the continent. China has boosted its investments in infrastructure, such as roads, ports, bridges, and airports, across the African continent as a result of the Belt and Road Initiative (BRI), which was unveiled in 2013. With its abundant resources and significant infrastructural gap, Africa has drawn Chinese investment. As a result, China's economic interests are aligned with those of these nations in terms of resources and trade prospects, which is the justification for increased connection between China and Africa by enhancing the latter’s industrialisation drive. For example, in late 2018, Ghana and China inked a memorandum of understanding (MoU) permitting China to spend USD 2 billion in infrastructure improvement projects in Ghana in exchange for a 5% share in Ghana's bauxite reserves. On average, Chinese investments are projected to total USD 19 billion.[5]

China started making investments in African nations in the 1980s, but since the year 2000, these investments have increased significantly and diversified in terms of sectors such as manufacturing, service, trade, infrastructure, energy, construction/real estate, etc. The Tanzam railway line, which connects Zambia's Copperbelt and Tanzania's Port of Dar es Salaam, was one of Africa's major infrastructure projects when it was approved by Chinese leader Mao Zedong in 1969. It helped break the South African and Rhodesian shackles preventing landlocked Zambia from accessing ports, for instance. In the 1990s, as foreign investment and aid to Africa began to decline due to weakening domestic economies and the Asian Financial Crisis, China emerged as a relatively benevolent financier, promising flexible, quick, and frequently sizable loans with no strings attached. During an official visit to China in 2002, the former Ethiopian prime minister Meles Zenawi noted that Chinese finance offered strong economic help to African nations.[6]

Through the Forum on China-Africa Cooperation (FOCAC), African governments owed 19% of their foreign debt to China in 2018. Between 2015 and 2018, the average debt repayment rate throughout the continent increased from 5% to 11% of total government revenue for trade and development financing as part of the BRI. The China Africa Research Initiative (CARI) researchers found that by May 2020, China has spent around USD 38.7 billion of this total.[7] But by that point, debt levels had already reached an unsustainable level.

China has invested in Kenya's Port of Mombasa and is currently spending USD 3.5 billion to create a 450 km railway line between the port city and the nation's capital Nairobi which was ruled unconstitutional by the Kenyan Supreme Court in June 2020. By 2021, China owned 72% of the total external debts of Kenya which amounted to USD 50 billion.[8] The favoured investment locations appear to be chosen based on economic and political factors, despite the fact that China's involvement is widespread and covers at least 43 of the 55 African countries. China acquired control of Entebbe International Airport in Uganda in April 2021 after Uganda failed to repay a loan of USD 200 million it had previously obtained from the EXIM bank of China to construct the same airport.[9]

Due to the necessity of relying on host governments to provide some assurance of security, countries with stable governments that can provide security for China's economic interests, such as Ethiopia, are widely favoured. In 2018, Ethiopia convinced Beijing to extend a 10-year loan for a USD 4 billion railway to 30 years and waive some interest.[10] Although the annual payments were decreased, there were two more decades of interest charges. Due to excessive borrowing, primarily from China, Djibouti is particularly in a debt crisis, with its public external debt as a percentage of GDP rising from 50% to 80% in just two years. By unilaterally canceling the 30-year port concession deal for the Doraleh Container Terminal it had signed in 2006 with UAE's DP World (DPW) and handing over DPW's part to China merchants, it has been charged for violating the rules of international arbitration for the settlement of investment disputes. The specifics about loan size, length, and interest rates are frequently kept secret, which fuels growing international and domestic anxiety and serves as a foundation for China's debt-trap diplomacy tales.

Strategy and risks undertaken by China to win African contracts amidst the big players

China's approach and risks taken in competing with other major players for contracts in Africa includes the contractors frequently negotiating directly with African governments instead of having to take part in competitive bidding processes or raise money for construction via private capital markets, as companies from other countries do. This is because they can quickly obtain financing capabilities through the China Export-Import Bank and other state-owned funds when they enter African markets. Most of the Chinese companies are state-owned enterprises and it's government support to the companies in Africa represents a significant competitive advantage for Chinese contractors. It is hardly unexpected that six of the top 10 international Engineering, Procurement, Construction companies (EPC) are Chinese. Due to the fact that China's total outstanding claims surpass 5% of the global GDP, it is widely recognised as the greatest creditor in the world.[11] Even the world's official top creditors, including the IMF, World Bank, etc., have fallen behind it.

The Peterson Institute for International Economics, Kiel Institute for the World Economy, and the Centre for Development and Aid recently collaborated on research that assesses the legal conditions for Chinese loans abroad. It is based on the largest collection of debt agreements between Chinese government lenders and borrowers from underdeveloped nations ever put together. IFFRAS, the International Forum for Rights and Security, has provided data and according to this study, China took advantage of borrowers by using legal contracts to its benefit. The majority of the agreement's clauses are tight in nature and don't grant the borrowers any rights. This investigation has shown that the majority of the contracts had secrecy restrictions, which prevented the countries from disclosing any information to other creditors. This further hurts the competitiveness of counterpart's businesses and paves way for critics at a global scale. They cannot hold their government accountable for the hidden debts because they are never made aware of these. In addition, almost all of the contracts under review contain stipulations stating that lenders may terminate the contract and demand quick repayment if laws or policies change, or even only at their discretion, giving Chinese lenders the upper hand and removing any rights from the borrowers.

The China International Commercial Court (CICC), which offers a "one-stop shop" for conflict resolution was established by the Supreme People's Court of China in 2018. The CICC differs from other International Commercial Courts (ICC) mainly by using Mandarin as its working language rather than English.[12] The capacity of a party to participate in and comprehend judicial processes may be significantly hampered by the use of Mandarin in the proceedings. Therefore in order to present their case before the CICC, foreign parties would need to contact solicitors and law companies in China that discourages effective international participation and emerging concerns over bias in favour of Chinese parties.

Conclusion

As of November 2022, the International Monetary Fund (IMF) and the World Bank believe that 22 low-income African nations are either experiencing debt distress or are at a high danger of experiencing it. In this context, debt distress refers to a nation's struggles to pay down its debt. While systemic and financial collapse owing to debt burdens is not currently a concern, urgent action is required to stop this trend. This is due to the fact that the continent's existing debt problems make it difficult for it to address other crucial development challenges. According to the China Africa Research Initiative (CARI) at Johns Hopkins University, China has cancelled 23 interest-free loans in 23 nations as of 2022. Although this was viewed as a positive step, the majority of Chinese loans on the continent are not interest-free. More discussion and action are required.

The best strategy for handling the current circumstance would include a number of elements. The G7, China, African nations, and other parties interested in lending on the continent must all engage in conversation first. In order to address the current problem of unsustainable debt burdens and to make sure that nations do not continue to accumulate additional debt in the future, such a dialogue must produce an action plan. Fixing the Common Framework for Debt Treatments could be one approach to finding a solution to this problem. Beyond the Debt Service Suspension Initiative (DSSI), the G20 reached an agreement in principle for a common framework for debt treatments in 2020. The framework intends to deal with the issue of unmanageable debts that many nations are continuing to deal with as a result of the Covid-19 pandemic. The common framework is having trouble staying credible in the coming years. Growth vulnerability, or more specifically, Africa's economies' inadequate economic diversification, is the continent's other main debt concern. As seen in the case of Africa, nations that heavily rely on globally exposed industries like commerce, tourism, and commodities have proven to be more susceptible to the negative consequences brought by covid-19 pandemic. The pandemic has also made it clear that the majority of the continent's nations require more funding from China and other nations, not less, in order to deal with the pandemic's impacts and avoid the vulnerabilities that result from their economies' underdeveloped economic structures. In other words, evaluations of Africa's debt status must consider the need for more funding in African nations to achieve the SDGs. Additionally, creating new debt systems is a more urgent necessity than simply raising money to support Africa's post-COVID-19 recovery and the attainment of the SDGs. China can and ought to be an important African partner in this project.