China’s loans to Africa pose growth and debt risks – Quartz Africa
China’s loans to African states have been caught between local realities and debt concerns. In the five years from 2012 to 2017, Chinese loans to countries in sub-Saharan Africa jumped to more than $ 10 billion a year, from less than $ 1 billion in 2001, according to credit analysts at Moody’s.
Over the past two decades, China has pledged billions of dollars to countries in the form of loans, grants and development finance. Thanks to its “Belt and Road” initiative, agreements with the African Union, and at the forum on Sino-African cooperation, the Chinese have extended their “win-win” economic policy by investing in rail, motorway and port projects in addition to industrialization.
African nations in urgent need to strengthen their infrastructure, economic growth and global competitiveness have increasingly turned to China for loans. Still, the borrowing frenzy has come under intense scrutiny in recent years, with critics noting that they could encourage addiction, trap nations in debt and push debt limits to unsustainable levels.
The implications of these lending practices magnify the credit risks facing African states, according to Moody’s. Unless the investments financed by China generate substantial economic gains by increasing debt servicing capacity, the loans will have important implications for growth, debt sustainability and affordability. With an already growing debt problem and low foreign exchange reserves, some of these African countries could be exposed to fiscal and external vulnerabilities.
And when that happens, China’s willingness – or not – to renegotiate loans, and the transparency and consistency of that process could influence sovereign credit profiles. “The lack of predictability of the conditions attached to these restructurings means that the credit implications are less clear,” the report said.
This warning does not bode well for African governments, which are already fight rumors that they are about to hand over state property to Beijing. Since Chinese loans come with fewer conditions, experts fear governments may subject taxpayers with unnecessary debts in the name of development. Another aggravating problem is that China is not a member of the Paris Club, the multilateral group of official sovereign creditors.
From Kenya to Zambia, and Djibouti, there are worrying signs that Chinese control over domestic resources is imminent, especially as it grows as the only major bilateral creditor. In October, the new government of Sierra Leone canceled a deal to build an airport funded by China, citing the “non-economic” nature of the project.
The nature of debt and how it is secured against a specific amount of a natural resource has also been highlighted. Angola, for example, services its debt to China by shipping specific quantities of oil; a change in market prices could strain its ability to repay debt.
In recent years, countries from Cameroon to Tanzania, Ethiopia and Botswana have all sought deals to have their debts restructured or removed– to varying degrees of success. But that doesn’t diminish from the fact that Beijing has taken land in Tajikistan and one port in Sri Lanka in exchange for the abandonment of the outstanding debt. And “Even if debt restructuring eases the immediate pressure on liquidity, the loss of income from natural resources or other assets is negative for credit,” Moody’s noted.