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Debt Crisis: A Looming Trap for African Countries by China?
Debt Crisis: A Looming Trap for African Countries by China?
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By - Kiraithe Daniel Mutemi

Posted - 15-07-2019

Debt instruments are inevitable when it comes to financing projects. Although individuals and governments widely use debts, a debt crisis may occur where due diligence is not carried on by the borrower resulting in failure to honor the obligation of the facility. A debt crisis is the inability of a borrower to honor the debt obligation as agreed. When a country enters into a debt crisis, it erodes the investor confidence and repayment capability. These implications are not only felt by the country in the crisis but also the neighbors and partners. The regional and world economy can be shaken by debt crisis if not well managed. However, these effects vary depending on the country’s economic size.

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In 2011, the Eurozone debt crisis, one of the worst economic threats hit the region’s economy hard. Although the impact was felt from 2009, things reached excruciating levels in 2012. Greece became unable to manage her public debt, and the imminent default of her credit obligations was a threat to the region’s economy. Portugal, Spain, Ireland, and Italy also joined Greece in the struggle to honor their debts commitment partially as a result of the weak euro currency they were using. Bailout calls by Germany and France to European central bank and international monetary fund (IMF) bore some fruits, but the euro was severely affected.

According to an analysis report by Africa’s Pulse, volume 19 (2019), Sub-Saharan African nations recorded a significant increase in Public and publicly guaranteed (PPG) external debts from 2008 to 2018. Additionally, the structure of liabilities is changing with private creditors playing a more significant role than before. Analysts attribute this shift to the global financial crisis of 2008 and the 2011 euro sovereign debt crisis.

Reports of cases of Sri Lanka and Djibouti ceding strategic assets to China for failure to honor their debts obligation sent an economic shock-wave not only to Africa but to the entire world. The IMF recently noted Africa was headed the wrong way in terms of the debt crisis possibilities. There has been an increase in the number of Countries surpassing a debt-to-GDP ratio of 50 percent. Although over 17 countries are on this list in Africa, it does not mean they are facing any debt crisis now. However, they are at high risk of debt distress, a warning that is being taken seriously by the citizens. African external debt owed to China by the governments accounts to about 20 percent of the total continent debt that stands close to USD 420 billion. A further 35 percent is from multilateral financial institutions, and 33 percent comes from private creditors.

African countries have been borrowing heavily from the Chinese government recently than before. Although there are initiatives by the borrowing government to seek credit from China, there has been a deliberate effort by the Chinese government to make attractive her loan deals. For example, Beijing played host to over 50 African heads of states. In the 2018 Summit of the Forum on China Africa Cooperation (FOCAC), China pledged USD 30 billion to African nations in the form of loans in the forum that was snubbed by Dr. John Pombe Magufuli of Tanzania. This meeting is what many people keen on the matter called an avenue of ‘luring’ them to take expensive Chinese loans. How expensive are Chinese loans? Are they traps or necessary instruments of financing national development agenda for borrowing countries?

There has been undying debate by citizens and economists on the sustainability of the Chinese credit facilities advanced to some African countries including Kenya, South Africa, and Nigeria among other active borrowers looking at the east for credit. There is no doubt China has invested heavily in many African mega infrastructural projects. Why are murmurs growing louder despite tangible projects witnessed financed by such loans?

Well, the problem might not be the loans but the terms of the facilities. Transport projects financed by the Chinese loans such as Kenya standard gauge railway (SGR) from Mombasa to Nairobi are reported to making huge losses forcing the borrowing governments to seek more loans to offset the existing one. The projects, therefore, can’t sustain themselves and pay back the principal and the interest without default. The ballooning loan amounts further complicate the equation since the real economic gains spurred by the existence of the projects are not felt on the ground by the ordinary citizen as expected.

Although China has aggressively penetrated the African economies through credit facilities, trade, and export, some countries are resisting Chinese loans and goods. Dr. Magufuli, the Tanzanian president, recently called those accepting Chinese loans as ‘insane’ citing final high cost and harsh conditions that would be equivalent to selling the country to China. But it is not the loans only that are receiving negative perception in African. Her diaspora citizens have gradually found themselves rubbing locals the wrong way by involving themselves in unlicensed and small business activities in a foreign land. In Kenya, there has been an outcry by local traders in Nairobi that Chinese nationals are doing all the jobs including hawking and roasting maize by the roadside. A Kenya member of parliament was arrested in June this year for allegedly making xenophobic remarks against Chinese and foreigners from the east African countries doing small businesses in Kenya.

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Chinese loans and deals are suspected of corruption and opaque terms, but that remains an allegation for now. However, some of the highest ranked countries in corruption index tops on the list of close Chinese borrowers in Africa. Nigeria, South Africa, and Kenya are some of the significant African economies associated with huge Chinese debts. Whether it is a debt trap or debt diplomacy as some people call it, the debt utilization can make or break the African economy. The sovereignty of the countries also is at stake if they have to cede any asset like land or airport to pay debts. Perhaps it is time to reexamine the details of the contracts signed by these governments and Beijing to avoid cases of debt obligation failures.

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masterJacob Gitonga Recent comment authors
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Jacob Gitonga
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Jacob Gitonga

Well articulated article, balanced in expression.I wish to submit my appreciation to the writer and the publisher for creating platforms to highlight affairs that are of relevance to African public

master
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Thank you very much