Chinese Loans: A Low Conditionality Trap?
Written by Andrew Allen
Chinese low conditionality approach to infrastructure loans in Africa has been billed as a great opportunity for developing nations in the region to achieve economic development and growth that would otherwise not be possible. However, despite representing what one Ugandan economist described as an “unrivalled willingness to avail unconditional capital to Africa”, China’s extensive penetration in Africa by way of development-oriented loans comes with a significant amount of risk, both for the host nations as well as the United States and the West (Madowo, 2018).
By providing a relatively easy and condition-less source of capital, Chinese loans allow African nations to take on more debt than they otherwise would. For example, Djibouti’s debt-to-GDP ratio increased from 50 to 85% between 2014 and 2016, thanks in large part to Chinese loans (Harris, 2018). In the short term, this might be beneficial for infrastructure projects, but it could prove to be unsustainable, and ultimately harmful to debtor economies. In April 2018, the International Monetary Fund (IMF) declared that six sub-Saharan nations were in debt distress at the end of 2017: Chad, Eritrea, Mozambique, the Republic of the Congo, South Sudan, and Zimbabwe (Kpodo, 2018). In addition, the IMF raised its evaluation of Zambia and Ethiopia’s respective debt situations from moderate to “high risk of distress”. Such high levels of debt-related risk, of which Chinese lending plays a large role, threatens the capacity of these nations to be self-sufficient and effective in governance.
With the frenetic increase in the pace of African debt, an important question arises: what happens if a nation defaults on Chinese loans? The East Asian giant is notoriously nontransparent in its political and economic dealings; however, the experiences of debtor nations in other regions provides a possible insight into the fate of sub-Saharan African nations that default on Chinese development loans. In 2011, China dismissed an unknown portion of Tajikistan’s overall debt in exchange for over 1,000 kilometers of disputed territory. Then, in 2017, Sri Lanka become unable or unwilling to repay an $8-billion-dollar loan for the construction of the Hambanota Port (Hurley, Morris, and Portelance, 2018). As payment for the debt, China took over a 99-year management lease on the port.
China’s apparent willingness to use an inability to pay debt as a justification for territorial acquisition bears obvious implications for African sovereignty. However, the United States has a stake in the issue as well. For example, Djibouti, whose GDP-to-debt ration skyrocketed thanks to Chinese investments, is home to the “most significant American military base in Africa” (Harris, 2018). Conceivably, Djibouti’s inability to repay Chinese loans could lead to a Chinese takeover of the port that resupplies the American base, thus providing the East Asian nation with leverage over the U.S military’s regional activities. Because it possesses several defense, investment, and natural resource interests in sub-Saharan Africa, the United States shares a certain degree of the risk carried by African nations indebted to China.
Harris, Grant T. 2018. “How Chinese Loans to Africa Threaten U.S. National Security.” Time. Time. August 30. http://time.com/5381467/china-africa-debt-us-security/.
John Hurley, Scott Morris, and Gailyn Portelance. 2018. “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for Global Development. https://www.cgdev.org/publication/examining-debt-implications-belt-and-roadinitiative-policy-perspective
Kpodo, Kwasi. 2018. “IMF Warns of Rising African Debt despite Faster Economic Growth.” Reuters. Thomson Reuters. May 8. https://www.reuters.com/article/us-africa-imf/imf-warns-of-rising-african-debt-despite-faster-economic-growth-idUSKBN1I9114.
Madowo, Larry. 2018. “Should Africa Be Wary of Chinese Debt?” BBC News. BBC. September 3. https://www.bbc.com/news/world-africa-45368092.