China loan binge starts to bite; the US, EU hope to gain from fallout
What you need to know:
- Uganda joins a growing list of African countries that have binged on Chinese debt only to realise later that they cannot sustain repayment without further borrowing or convincing the lenders to restructure the loans.
China’s ambitious Silk Road project, from which African states have gained immensely by obtaining commercial loans for infrastructure development, has returned to haunt some of the beneficiaries who are now facing debt distress, exacerbated by the coronavirus pandemic.
Uganda, for instance, was this week fighting off allegations that its international airport, Entebbe, risked being taken over by Beijing over a $200 million loan taken six years ago in what is being seen as “toxic” clauses in the contract.
While both Kampala and Beijing have said there is no cause for alarm, this has got other debt-distressed African states perusing the fine print in their loan contracts as they prepare to head for Dakar, Senegal, where the 2021 Forum on China-Africa Co-operation (FOCAC) summit will be held on November 29-30, amid biting economic and social challenges fuelled by the Covid-19 crisis.
Uganda joins a growing list of African countries that have binged on Chinese debt only to realise later that they cannot sustain repayment without further borrowing or convincing the lenders to restructure the loans.
Asset seizure paralysis
In Kenya, the Uganda contract news was received with a sense of déjà vu. Earlier this year, National Treasury Cabinet Secretary Ukur Yatani denied that Nairobi had mortgaged Mombasa port to get the loan for the standard gauge railway and assured the nation that Beijing will not seize the port should the country default on the $3.2 billion SGR loan.
“Kenya did not offer the strategic national asset as collateral for the $3.2 billion loan sourced from the Export Import Bank of China (Exim China) to finance the SGR project. As such, Mombasa port has no adverse exposure to any lender or category of lenders through existing loan agreements with the government,” Mr Yatani said.
This is what Uganda had to do this week. Vianney Luggya, the Uganda Civil Aviation Authority spokesperson, said there no need to worry, as the government cannot give away a national asset such as an international airport.
“In any case we are still within our grace period of seven years, which ends in December 2022,” he added.
It also reminded observers of Zambia’s case, where debt to Chinese public and private lenders is $6.6 billion, almost double the amount disclosed by the previous government, amid claims that it could lose its port over the debt.
This week Wu Jianghao, Chinese Assistant Minister of Foreign Affairs, said the talk about China’s debt trap in Africa is propaganda.
“Why is money offered by Western countries to developing countries considered ‘assistance for development’ while the money offered by China is labelled as ‘debt trap’? This view is not logic or correct!” he tweeted.
Wu Peng, Director-General in the Department of African Affairs in China’s Ministry of Foreign Affairs, also said there was no cause for alarm.
“Which of the Chinese projects in Africa have been confiscated in Africa? None. The hype surrounding Chinese ‘debt trap’ in Africa has no factual basis and is being pushed on malicious grounds,” he said.
The People’s Bank of China is having to juggle multiple economic risks, pulling policy in different directions. Growth is heading for lows not seen since 1990 — if last year’s pandemic year is excluded — factory-gate inflation is soaring, while the currency is rallying on the back of record trade surpluses.
On top of that, the US and Europe’s imminent scaling back of pandemic stimulus is squeezing China’s room to loosen policy.
Seeing Beijing slowing on lending to Africa and the increasing revelations of “bad” contracts held by some loanees, which could result in the loss of sovereign assets, America and the European Union have ramped up a commercial diplomatic charm offensive, offering Africa deals with proposed “50-50” benefits.
But China is reciprocating in kind. In a White Paper published by Beijing’s State Council Information Office on November 26, China is pledging to strengthen co-operation with the continent to create “partnership of equals.”
This is billed to build from President Xi Jinping’s Africa policy, based on “sincerity, real results, amity and good faith” in pursuing shared interests while remaining apolitical.
“China will continue its support for African countries’ efforts to resolve their continent’s issues in their own way, and make a greater contribution to peace and security in Africa. China will continue its firm support for efforts to explore development paths suited to their national conditions,” the paper said.
This seems to be a reaction to the US offensive in which its topmost Secretary Anthony Blinken two weeks ago made a counter offer to the Chinese deals.
Mr Blinken’s Africa visit incidentally ended in Dakar, Senegal, the venue of the 2021 FOCAC. He had earlier been to Nairobi and Abuja. As part of the Joe Biden regime’s commitment to revitalising global partnerships and alliances, the Whitehouse announced that it will convene leaders from across Africa for the second US–Africa Leaders’ Summit next year.
The US says that the US-Africa Summit will continue efforts to strengthen ties with African partners “based on principles of mutual respect and shared interests and values.”
Mr Blinken said that Washington understands that many countries across the continent are wary of the strings that come with more engagement, and fear that in a world of sharper rivalries among major powers, countries will be forced to choose.
“So, I want to be clear: the United States doesn’t want to limit your partnerships with other countries. We want to make your partnerships with us even stronger. We don’t want to make you choose. We want to give you choices,” he said in Abuja.
“Too many times, the countries of Africa have been treated as junior partners — or worse — rather than equal ones. Too often, we ask our partners to help uphold and defend an international system that they don’t feel fully reflects their needs and aspirations.”
As if taking cue, the UK on Friday announced that British International Investment (formerly CDC) would scale up its investments in Africa starting January 2022, targeting to invest $13.3 billion on the continent by 2026.
“British International Investment will make investments that support the aspirations of entrepreneurs and businesses in a responsible and transparent manner. We will be a trusted partner to some of the countries across our markets that want to create sustainable and prosperous futures for their people. We will deliver on the UK’s promise to support emerging economies to combat the climate emergency and track the impact of each investment to ensure every penny is used productively,” said Nick O’Donohoe, CDC chief executive.
A day before, European Investment Bank (EIB) President Werner Hoyer and Vice President Thomas Östros formally opened the EIB’s new Nairobi hub, signalling the European Union’s intention to go big on the continent.
The EIB is the world’s largest international public bank, and the Nairobi hub is meant to enhance high-impact investments across the region.
In September, the Bank’s shareholders — the 27 EU member states — approved plans to strengthen its global development engagement. The EIB also agreed its first-ever targeted support to unlock investment in fragile regions to overcome challenges linked to climate change, poverty, and instability.
The $182.7 million initiative with the Comesa Trade and Development Bank will finance projects across East and Southern Africa. In 2020, the EIB provided more than $5.6 billion of new financing to support more than $13.45 billion of transformational private and public investment across Africa.
The new funding avenues for Africa come as Chinese financial assistance continues to wane. Accentuated by the Covid-19 crisis, the tide has turned, and African countries are seeking debt relief and cancellation from Beijing.
Some risk auction of state assets to repay the loans. This week, it emerged that Uganda is facing loss of its Entebbe International airport, while Kenya, Ethiopia and Zambia still struggle under a burden of Chinese debt, with some seeking for new repayment plans. Beijing has not said anything about debt relief.
In Uganda, a 2015, loan from Exim Bank of China of $325 million for the expansion of Entebbe International Airport has turned sour after it emerged that Uganda could have signed off its key infrastructure to Beijing, that has since seen Kampala send a delegation to Beijing to renegotiate.
Uganda Planning Minister Amos Lugoloobi admitted that the loan was poorly negotiated and signed but that the ministry has put in place measures, including setting up an entire department to ensure loans are closely monitored so that the country does not slip into debt distress.
“We have restricted borrowing to only critical projects, and we ensure our loan ratio does not go beyond 50 percent of the GDP,” he said.
This is not an isolated case. Three years ago, Ethiopia became the first country on the continent to have its Chinese debt restructured as several other countries were waiting for loan concessions.
Then, China agreed to restructure some of its loans, including the one for the $4 billion railway linking its capital Addis Ababa with Djibouti.
Prime Minister Abiy Ahmed said the loans would be restructured, with a further 20-year extension, which will see its annual repayments come down to an affordable level. It is understood that Djibouti could also be on the way to enjoying reprieve, given that its debts from Beijing are already choking it.
In Kenya, Beijing has more than tripled its share of debt in less than a decade, claiming up to 70 per cent of the national debt.
The leading bilateral lender tag shifted from Japan to China between 2011 and 2020, according to Central Bank Governor Dr Patrick Njoroge.
In July, Kenya resumed repayment of Beijing’s debt, with $711 million after a six-month debt suspension lapsed.
The UN Economic Commission for Africa has highlighted Angola and the Congo Republic as particularly at risk of default on loans mostly sourced from China. Other highly indebted countries are Ghana, Cameroon and Mauritania, but these face less exposure.
The US has floated energy, health, and infrastructure as some of the areas it is willing to work with Africa, while Beijing sees roads, railways and energy as the key areas it wants to partner in.
Since 2015, the China-Africa collaboration has made good progress, with the trade value between the two rising to $192 billion in 2019, compared with $185 billion in 2018. But, with the change in fortunes, the engagement is now in reverse gear.
According to Green BRI, a China-based think tank, investments in the 138 countries targeted by BRI dropped to 54 percent from 2019 to $47 billion in 2020, the lowest since the initiative was unveiled eight years ago.
Africa has also seen Chinese bank financing for infrastructure projects fall to $3.3 billion in 2020, from a high of $11 billion in 2017, according to a report by international law firm Baker McKenzie.
China has been known to use the FOCAC to pledge financial and other assistance to the continent, and with countries’ economies hit by the shock of the pandemic, and a majority struggling to repay their debts, all eyes will be on Beijing to see what it has to offer this year, between more loans and the much sought-after debt relief.
At the 2018 summit in Beijing, President Xi pledged $60 billion in grants and loans.
China’s Foreign Ministry spokesperson Zhao Lijian said at a press conference on Thursday that. China keeps an open attitude when it comes to cooperation between various parties of the international community with Africa.
“We support the international community in galvanising efforts to promote Africa’s development. Relevant countries should view China-Africa cooperation in an objective and just light, listen to the voice of our African friends, and take more concrete actions to the benefit of Africa,” Zhao said.
Mr Zhao said that China has been Africa’s largest trading partner for 12 years in a row, adding that since the founding of FOCAC, Chinese companies have built or upgraded more than 10,000 km of railway and nearly 100,000 km of highway across Africa.
“This has boosted local development and improved people’s living standards. Besides, African countries all spoken highly of China-Africa investment and financing cooperation, which always respects the will of the African side, proceeds from Africa’s actual needs, and follows the philosophy of intensive and sustainable development,” he said.
He added that African leaders and foreign ministers are actively signing up for next weeks, a strong testament to the African side’s recognition of and support for China-Africa cooperation.
*Written by Allan Olingo