Africa must reconsider its borrowing model

If we don’t cut down on China’s freebies, we risk having the dragon of the East becomes the new king of the jungle

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BY ANTONY MUTUNGA

Through the years China, has built increasingly strong economic ties with Africa. Trade between the two has increased from Sh78.4 billion ($765 million) in 1978 to Sh17.4 trillion ($170 billion) in 2017. This relationship has seen China shift from a small investor to become the largest economic partner to Africa.

Additionally, China has also increased its financial assistance to the continent, helping in its development projects. In fact according to the China Africa Research Initiative, from 2000 to 2017 China extended loans worth Sh14.6 trillion ($143 billion) to African governments and their state owned enterprises.

This increased lending from China has the potential to help sub-Sahara Africa expand its economic growth; but it also has dire consequences. For instance, according to Moody’s Investors Services’ report, while China’s lending supports growth, exacerbates fiscal and external pressures in Sub-Saharan Africa, the increased lending amplifies the credit risks for countries in the region which already have high debt burden and deteriorating external positions. This could cause the countries to increase their debt burdens and weaken affordability.

“Unless African investment financed by Chinese loans generates substantial economic gains that boost debt servicing capacity of Sub-Saharan African governments, the credit implications of such lending include higher debt burdens, weaker debt affordability and weaker external positions,” notes David Rogovic, Moody’s Assistant Vice President.

In the last several years, Chinese loans to Africa have seen an increase of almost $10 billion every year, where the lion’s share has gone towards infrastructure projects in the transport, communication and power sectors. Countries which have gained the most from this increase in lending include Angola, Ethiopia and Kenya.

But with growing debt problems and low foreign exchange reserves, most of the countries in the sub-Saharan region are now exposed to fiscal and external vulnerabilities. This puts them at greater risk because if they continue borrowing, the lack of transparency involved in the conditions set to the Chinese loans and the lack of governance and reform requirements as usually required by the multilateral group of official creditors will limit the promised benefits.

Countries that are at the most risk, according to Moody’s, include Angola, Zambia and the Republic of the Congo because they are the most indebted to Chinese creditors. Additionally, including Angola and Zambia, Nigeria and Ghana are also at risk as all the four countries are currently making interest payments that absorb more than 20 percent of their revenue.

When these countries need to borrow more, they will indeed be provided with liquidity relief by China but this might come with higher resource concessions, which according to the global credit agency will reduce future export earnings. It means that China might put up conditions that may see them seize assets belonging to these countries.

For example, China has already taken up some land in Tajikistan as well as the Hambantota Port in Sri Lanka. In order to acquire the relief, these countries were given conditions where they had to cede control of some of their natural resources to China. It is this scenario that informs Moody’s analysis. Despite helping alleviate the liquidity pressure on these economies, the loss of natural resources, revenue or assets is credit negative.

On the other hand, many African countries believe they can negotiate with China to restructure their debt or have it written off. This can be accredited to the fact that China has agreed to do so for a number of African countries in past, such as Ethiopia and Botswana.

Ethiopia was the first country in the continent to have its Sh410 billion ($4 billion) loan for the railway that links its capital Addis Ababa with its neighbour, Djibouti restructured. The loan which was to be paid over 10years was extended to 30years. For Botswana on the other hand, China agreed to extend its loan repayment period for rail and road infrastructure and write off some of it. According to President Mokgweetsi Masisi of Botswana, China agreed a debt and interest cancellation of Sh738 million ($7.2 million).

Despite these seemingly magnanimous actions, China has already started showing signs that they are in control of some of the resources in the African countries. For instance, in Zambia, china proposed to take control of Kenneth Kaunda International Airport should Zambia Government fail to pay back its huge foreign debt on time. In addition, China already owns 60 percent of the Zambian National Broadcasting Corporation.

Africa needs to reconsider its borrowing appetite before it’s too late. Despite the fact that China’s loans are partially helping to develop the continent, the more we borrow the more we sink in debt. It’s time we cut down on ‘financial assistance’ before the dragon of the East becomes the new king of the jungle.

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