China Creates Debt Trap for Developing Nations

 China’s influence in Africa has grown by leaps and bounds.  In recent years, African central bank officials increasingly have even been discussing using the Chinese yuan as part of African foreign reserves, which would elevate the Chinese currency to one of the world’s major reserve currencies. In fact, many African nations have signed up to join China’s internationally-funded bank, which offers loans to emerging economies with fewer requirements than other international banks.

However, a current study by AidData, a U.S.-based research organization, finds that China’s massive “Belt and Road” global infrastructure funding strategy is based on a “secretive overseas development finance program” that has saddled dozens of developing countries with nearly $400 billion worth of “hidden debt.”  The study says Belt and Road is based on loans that often feature heavily conditioned liabilities that go undisclosed to borrowing nations in Africa, Southeast Asia and other corners of the world.

Mozambique’s executive branch had initially hidden the amount of its debt to China, even from its national legislature, until it finally came to light in 2016.  According to the latest figures presented by Adriano Maleiane, Mozambique's minister of economy and finance, in parliament last November, debt owed to China totals around $2 billion, or 16% of Mozambique's total public debt of around $12.37 billion.

The AidData report confirms earlier reporting on such matters.  Chinese commercial loans are usually negotiated and concluded in secret. According to the September 2018 report by the Center for International Private Enterprise Protecting Democracies from a Flood of Corrosive Capital, China often attaches conditions on commercial loans that conflict with local laws in recipient countries.  “The terms of loans from China are rarely available to the public, especially while the terms are being negotiated.  This precludes any external checks and balances to hold the recipient government accountable.

Nairobi News on May 2^nd of this year, listed the top 10 African nations indebted to China:

1. Angola - It is the most indebted African country, as per the African insider, with an estimated debt of $25 billion (about Sh2.5 trillion). The Southern African nation has appeared to struggle to pay off this debt, with reports most of the sales from its oil are channeled towards repayment.

2. Ethiopia - The Eastern Africa country comes in a distant second on this list, with a reported $13.5 billion debt. Most of this debt was used to fund infrastructure projects.

3. Kenya - Kenya is third, with about $7.9 billion (about Sh800 billion). Most of these lessons were accessed during President Uhuru Kenyatta's regime amid reports a huge chunk of it was lost to corruption. Further reports suggest the country, considered an economic giant in East Africa has in recent times struggled to pay off these debts.

4. Republic of Congo - Next is the Republic of Congo with a $7.5 billion (Sh750 billion) bill. It is reported that corruption has played a major role in the escalation of the debt to such egregious levels.

5. Sudan - Makes the list in fifth place. The conflict-torn country has an estimated debt of over $6.4 billion (Sh640 billion).

6. Zambia - Just like Kenya, China has sponsored a lot of projects in the landlocked country, which has left it with a whopping $6.5 billion (Sh650 billion).

7. Cameroon - The West African nation's $5.5 billion (Sh550 billion) bill places it 7th on the list. It was, however, recently revealed that China was in talks to cancel part of this debt.

8. Nigeria - Nigeria owes China $4.8 billion (Sh480 billion) with the ties between the two countries so deep that the African nation has accepted the Chinese Yuan as a reserve currency.

9. Ghana - Its debt to China sits at $3.5 billion (about Sh350 billion).

10. The Democratic Republic of Congo - Completes the top-ten list of countries that owe China at $3.4 billion (Sh340 billion). China has reportedly asked for precious natural resources and minerals in exchange for the cash.

A decline in the global demand for commodities, for example if China, a major buyer of African minerals output, were to enter a recession, would make it difficult for African nations to continue debt payments.  So, China could still be a winner in such a circumstance by calling in African debt and gaining the rights to African mineral resources, something France had tried and failed to accomplish in the past.

An estimated 97 percent of the world’s platinum is from Africa, as well as 90 percent of the cobalt, 80 percent of the chromium, 64 percent of the manganese, half the world’s gold reserves and as much as a third of all uranium. In recent years, the mineral coltan (columbite-tantalite), largely coming from Africa, has enabled the development of computers, cell phones and other electronic devices. We would be hard-pressed to construct jet aircraft, automobile catalytic converters or iPhones without the minerals found in Africa, and in some cases, almost nowhere else in the world.

Indeed, what would happen if China called in its African loans and gained control of much of Africa’s resources?  For example, it has been revealed that China’s 15-year loan to Vanuatu at 2.5% interest with the government-owned China ExIm Bank can be called in fully in the event of non-payment.  It is not known due to lack of Chinese transparency how many other such loans have these provisions.

China, which has increasingly attempted to lock up much of the supply of strategic minerals from African countries, is now the leading producer of what are known as rare earth elements or rare earth metals. These are 17 chemical elements in the periodic table, which are used in various technological devices, such as superconductors, electronic polishers, refining catalysts and hybrid car components, not to mention renewable energy equipment. As time goes on, these minerals will increase in importance in the 21st century economy.

Lest anyone believe that China won’t use such tactics, they only need to look at the examples of Tajikistan and Sri Lanka. In Tajikistan, China wrote off an undisclosed amount of debt in exchange for about 1,158 square kilometers of disputed territory, although the Tajiks claimed to have delivered only 5.5% of the land promised.  Sri Lanka was unwilling or unable to service an $8 billion loan at 6% interest, so the country agreed to a debt-for-equity swap accompanied by a 99-year lease for managing its port.

The Washington Times reported in 2018 about the spread of unease over Belt and Road loans in several nations, including Malaysia, Pakistan, the Maldives and Sri Lanka. Malaysian Prime Minister Mahathir Mohamad then revealed that his government was canceling more than $20 billion in Chinese-funded projects because, as he said, “We do not want a new version of colonialism.”

African reliance on Chinese loans has experts concerned about more debt defaults after Zambia became the first African country to formally default on its debt to China in November 2020, opting out of a $42.5 million Eurobond repayment.

ZESCO Limited, previously known as Zambia Electricity Supply Corporation, is a parastatal company under the Companies Act. The company is wholly owned by the Government of the Republic of Zambia.  Zambia's largest power company producing about 80% of the electricity consumed in the country. ZESCO represents Zambia in the Southern African Power Pool.  Since Zambia’s loan default, the company has been in takeover talks with China.  The state-owned TV and radio news channel ZNBC is already Chinese-owned.

According to African Liberty, a project of the Cato Institute and IMANI Africa, only one country in the continent wants none of the Chinese support and has refused to adhere to the terms of China to benefit from the development drive. This country is eSwatini, the only absolute monarchy in the world, formerly known as Swaziland.

Until recently, eSwatini, Sao Tome and Principe and Burkina Faso were the only African countries that recognized China’s estranged ally, Taiwan, and were punished with aid restrictions, African Liberty reported. China succeeded in ensuring the closure of all Taiwanese embassies in all African countries they had succeeded in wooing.

African Liberty reported that Sao Tome and Principe and Burkina Faso fell for the millions of dollars China was offering while eSwatini preferred to hold on to Taiwan, which is considered to be a breakaway region by China. The Taiwanese government provides eSwatini with aid and economic assistance.  But how long will the lone African holdout to Chinese largesse resist Chinese money? 

It also must be asked how long China can provide millions in loans to African countries.  China doesn’t have an inexhaustible amount of funds; it has to borrow money to lend, and African projects often come with impediments such as corruption scandals, environmental hazards, labor violations and public protests.  A Chinese company abandoned a power project in Namibia several years ago due to technical difficulties. 

If a government took over in any of these African countries that abrogated Chinese loan conditions, what would China do?  It professes not to interfere in internal African matters, but what if African laws were invoked to undo these possibly fraudulent, illegal deals?

New African governments, elected with more concern for the welfare of their citizens, might just find ways to get out from under Chinese economic control.  That would make the global economic picture quite different from today.