End of the line? | World Finance

In 2019, Kenya’s President Uhuru Kenyatta was at pains trying to defend accusations that the country had built a standard gauge railway (SGR) to ‘nowhere.’ This was during the commissioning of phase 2A of the SGR project that abruptly terminates in the thorny shrubs of Naivasha, some 120km from the capital Nairobi. To the Kenyan leader, those critical to the project were ‘visionless.’

Four years after its commissioning, the 140km line from Nairobi to Suswa that cost $1.2bn has remained largely idle. In fact, infrastructure along the 20km stretch from Suswa to Duka Moja (One Shop) where it ends, is fast rotting away because both the freight and passenger service trains terminate their journey at Suswa. Kenya’s railway to ‘nowhere’ was built by Chinese loans. It forms part of the SGR from Mombasa to Nairobi, constructed at a cost of $2.7bn. The total cost of the entire project from Mombasa to Naivasha was a staggering $3.9bn.

Today, Kenya is struggling to service the loan for a project that is far from breaking even and continues to return massive losses. High operational costs and dwindling revenues saw the SGR post a loss of $205.4m in the 2020–21 financial year. Notably, China refused to grant Kenya an additional loan of $3.8bn for phase 2B to extend the line from Naivasha to Kisumu. This is despite the fact that for the entire project to be economically viable, it needs to extend to Kisumu, and further to Malaba and connect with the Ugandan SGR.

Track laying machine at the construction site of the standard gauge railway in Kenya

In many ways, Kenya’s SGR is a depiction of China’s adventures in Africa. The Asian giant has had a roller-coaster ride in the continent over the past two decades. Over the period, the overriding theme of China’s engagements and partnership with Africa has been infrastructure financing through debt. World Bank data show that in the period from 2010 to 2020, China’s lending to Sub-Saharan Africa more than quadrupled from $40bn to $170bn. The result has been China’s imprints being engraved not just in railways but across highways, ports, airports, energy and ICT projects in all corners of the continent.

“Africa has benefited immensely from the strategic partnership with China,” says Prof David Monyae, Director of Centre for Africa-China Studies (CACS) at the University of Johannesburg, South Africa. He adds that by adopting a ‘non-interference policy’ in its engagements with Africa, China has helped the continent achieve exponential socio-economic transformation. “Bretton Woods institutions lending came with conditions and caused havoc in the 1980s and 1990s. The continent got a befitting partner in China,” he avers.

Strategic shift
Apart from China slashing its commitments, the first time it is happening since 2006, China is also changing its modus operandi. Most notably, the country intends to stop government-to-government lending. This has been the hallmark of China’s engagements in Africa and has endeared it to the continent’s heads of states, particularly autocratic regimes.

Chinese loans are tied to natural resources as collateral in at least eight countries

By cutting the cord with governments, Beijing wants to end the culture of opaqueness that has traditionally characterised its deals with African governments. No doubt the secrecy in the agreements, specifically in mega and cash-intensive infrastructure projects, has fuelled corruption and lack of transparency in the continent. “In most of its interactions, China lacks transparency,” states David Shinn, former US ambassador to Ethiopia and Burkina Faso and a lecturer at the Elliott School of International Affairs at George Washington University. He adds that secrecy is one of the most significant flaws in China’s system of governance.

While outlining the new path of financial commitments in December last year, China’s President Xi Jinping was clear where Beijing’s money will go over the next three years. First, the Asian dragon will encourage its businesses to invest $10bn in the continent. China will also provide credit facilities of $10bn to Africa lenders to support small and medium enterprises. Another $10bn will be directed towards trade finance to support African exports. Lastly, $10bn would be channeled to Africa via China’s share of the International Monetary Fund’s (IMF) special drawing rights.

Chinese Ambassador to Kenya, Wu Peng, at the official launch of the standard gauge railway

Of critical importance, and something that is going to reverberate loudly and uneasily in Africa, is the fact that henceforth, China is going to discontinue ‘handouts’ in terms of grants and interest-free loans. Worse still, no money has been allotted for development financing. This is tragic for Africa considering about 65 percent of China’s lending was going to infrastructure. The significant shift from China’s traditional lending practices comes at the worst moment for Africa. The continent is grappling with a mammoth $100bn annual infrastructure financing gap according to the African Development Bank (AfDB). The amount could hit $170bn by 2025. With economies of most countries ravaged by the impacts of the COVID-19 pandemic, and government coffers squeezed by debt, the window for mobilising development funds has become thinner.

The need for China to rethink its strategic focus on Africa has been inevitable. Apart from global geopolitics, the dynamics in Africa have significantly changed. Top on the list of the changing dynamics is the alarming level of debt that Africa is shouldering, a problem largely caused by Beijing. According to the World Bank International Debt Statistics 2022 report, Sub-Saharan Africa total external debt stood at $702bn in 2020. This is a staggering increase from $305bn in 2010. China accounts for about 20 percent of the continent’s total external debt.

Unbearable debt
Across the continent, the burden of debt is colossal. It is even more unbearable for individual countries (see Fig 1). Though Africa’s top economies like Nigeria and South Africa that have seen their external debt stock balloon from $18.8bn to $70.3bn and $108.4bn to $170.7bn in a span of a decade respectively are relatively able to service their obligations, the situation is tougher for other countries. Kenya and Ethiopia whose stock has increased from $8.8bn to $38.1bn and $7.2bn to $30.3bn respectively are among nations pleading for debt relief, waiver and restructuring.

 

Ethiopia has borrowed $13.7bn from China in about two decades while Kenya currently owes Beijing $6.9bn. Zambia, whose stock has swelled to $30bn from $4.2bn in a decade, has defaulted on its sovereign debts. The country owes China $5bn. “As Africa’s largest bilateral creditor, risks of defaults are posing major challenges to Chinese lending,” notes Abhijit Mukhopadhyay, a Senior Fellow at the India-based Observer Research Foundation. He adds that with Zambia’s default, and the rising chorus of debt waiver and restructuring, Beijing is feeling it is time to count its losses and reduce its exposure. In essence, China acknowledges the serious debt issues in some African countries is not just forcing rescheduling but is also raising the possibility of non-payment.

This is a reality that is unravelling horribly for China. For the better part of the past two decades, Africa has witnessed a prolonged period of political stability. The result has been impressive socio-economic growth to a point where the continent was seen as the last frontier for growth. Over the period from 2000 to 2016, Africa was the world’s second fastest-growing region, experiencing average annual gross domestic product (GDP) growth of 4.6 percent. Growth accelerated to 4.8 percent between 2017 to 2019 before plunging and contracting by 2.1 percent in 2020 due to the pandemic. Recovery is projected to be modest at around 3.4 percent.

Africa might not record a return of stellar growth in the coming years. While many factors are conspiring against the continent, an old ghost is again rearing its head. The continent is witnessing a resurgence of contagious waves of conflicts and coups, which are a major concern for China. Due to its ‘non-interference policy,’ China continues to act aloof amid the rising instability. Irrespective of the strategy, Beijing is alert to the fact that every eruption has a direct impact on its strategic interests in the continent. “Chinese financing will continue to flow into Africa, the question is the scale,” reckons Yun Sun, Director of the China Programme at the US-based Stimson Centre.

Angola’s President Joao Lourenco (L) shakes hands with China’s President Xi Jinping

 

A case in point is Ethiopia, a big Chinese debtor. Until the outbreak of conflict in 2020, Ethiopia was among Africa’s shining stars, not only in terms of political stability but also in socio-economic transformation, posting an average growth of 10 percent for a decade. Conflict in the northern region of Tigray has set the country on a path of uncertainty.

For China, this does not augur well first in terms of debt servicing and second in terms of Beijing’s massive interests in the country. Currently, there are about 400 Chinese construction and manufacturing projects, valued at over $4bn, in Ethiopia. China has also helped Ethiopia invest in numerous industrial parks that are at the heart of the country’s blossoming manufacturing and agricultural sectors. Government data show that in 2020, Ethiopia raked in $610m from the 13 operational parks that have created job opportunities for more than 89,000 Ethiopians.

Importance of bauxite
In West Africa and the Sahel region, the hotspot for coups, China has reasons to be anxious. Cumulatively, the West Africa region received $18.2bn in Chinese loans from 2000 to 2017 according to the Organisation for Economic Co-operation and Development data. Since 2019, the region has witnessed six coups. Four in Guinea, Burkina Faso and Mali, of which two were successful, plus two more in Guinea-Bissau and Niger that failed. Though Chinese interests in a country like Burkina Faso are marginal due to the latter’s dalliance with Taiwan, the situation is different in Guinea. Guinea is home to the world’s largest reserves of bauxite, with China as the main export market. In 2020, the Asian giant imported 53 million tons of bauxite from the country, accounting for 47 percent of all its bauxite imports. This earned Guinea $2.5bn. Notably, the coup in Guinea has had material impacts on bauxite prices and supplies.

Bauxite factory of Guinea’s largest mining firm, CBG

Being a shrewd negotiator, and always privy to the fact that Africa is a volatile and unpredictable continent, China has often ensured it safeguards its investments. This explains why Beijing has been brutal in adopting a resource-secured lending model. In essence, Chinese loans are tied to natural resources as collateral in at least eight countries. These are Angola, Equatorial Guinea, Republic of Congo, Guinea, Ghana, Sudan, Democratic Republic of Congo (DRC) and Zimbabwe. Resource-tied lending might pass as insignificant as it accounts for only eight percent of all Chinese loans in Africa. However, it has direct impacts on sovereignty.

Angola is the most notable case. The country, Africa’s second biggest oil producer and whose public debt stands at $67.5bn, is China’s largest borrower on the continent. It owes more than $20bn to various Chinese entities. To service the massive debts, Angola entered into deals with China to repay the loans by shipping its main natural resource, oil, to China at market rates at the time of shipment.

The era of easy Chinese money for big infrastructure projects in Africa is certainly over, and perhaps for good

The arrangement worked well for Angola when oil prices were high. However, the collapse of crude prices from 2015 through 2020 saw the country struggle to repay the loans. Today, the country is on its knees pleading with China for payment relief and is also exploring refinancing alternatives through multilateral and commercial lenders. “In these countries, a portion of earnings from some natural resource exports are committed to repayment of designated loans,” explains Deborah Brautigam, Director of the China Africa Research Initiative (CARI) at Johns Hopkins University’s School of Advanced International Studies (SAIS). She adds that under the arrangement, China gets paid before anyone else. “Other lenders might rightly hesitate to lend into a situation where much of the foreign exchange is already pre-committed to earlier lenders,” she avers.

Seizing assets?
The strategy of tying loans to resources is one key reason why Beijing is often accused of debt trap diplomacy in Africa. The other major reason is China’s lending with hopes of seizing a strategic national asset in case of a default. This has been the popular consensus in countries like Kenya and Uganda, among others. In Kenya, the belief has been that China has the right to seize the Mombasa Port if the country defaults on the SGR loan. The same can be said in Uganda where China Eximbank provided the $200m loan for the Entebbe International Airport upgrading and expansion project. “I do believe that Chinese debt trap diplomacy is real because China doesn’t want to take the risk of defaults,” reckons Robert Atkinson, President of the US-based Information Technology and Innovation Foundation.

An oil tanker berthed at Kipevu oil terminal, Kenya

In Kenya, CARI has moved to debunk the myth that Mombasa Port was used as collateral for the SGR loan. In April, the think tank released a working paper that shows the port was actually not used for the SGR loan. The paper contends that although Kenya’s government has not released the actual loan documents, evidence points to the fact that Mombasa Port was not used as collateral. “Further, there is no question of the port ever being ‘seized’ by China Eximbank should Kenya default on the SGR loans,” states the CARI report.

Beijing wants to end the culture of opaqueness that has traditionally characterised its deals with African governments

In Uganda, US-based research group AidData also established that Entebbe Airport is not a source of collateral. However, the terms of the loan are stringent and mainly favour Eximbank. “The idea that Chinese banks deliberately lend for loss-making projects so that they can seize collateral is widespread. Yet every time a serious researcher investigates these cases, they fail to find evidence to support these fears,” observes Brautigam.
The era of easy Chinese money for big infrastructure projects in Africa is certainly over, and perhaps for good. Joshua Meservey, a Research Fellow for Africa at the US-based Heritage Foundation thinks that while China will still fund some projects, it will be more judicious in ensuring viability. “There could be a silver lining to China pulling back on its lending,” he says, adding that this will encourage the building of only necessary infrastructures that have been rigorously vetted. “It will also avoid the building of some of the Chinese infrastructure that are of dubious economic value or which were built at inflated costs or using opaque tendering,” he notes.

Spending priorities
Under the current realities, China has no options but to be judicious. Apart from the developments in Africa, China is also grappling with internal upheavals back home. The Asian dragon’s spectacular GDP growth of yesteryears is no more, with the country entering a path of slow growth.
The situation is being exacerbated by COVID-19, with every new wave taking a toll on the economy. According to the IMF, the Chinese economy is forecast to grow at 4.4 percent this year, down from 8.1 percent last year. The slowing economy, coupled with President Xi’s agenda for China’s ‘Common Prosperity’ that demands more domestic expenditure, means that Beijing has to be more inward-looking in terms of its spending priorities. “China is at a point where it can no longer afford to spend as much money in Africa,” notes Atkinson.

Significant influence
Cutting infrastructure spending in Africa, however, does not mean China is willing or ready to loosen its tight grip of cooperation with the continent. Beijing is still determined to exert significant influence through China-Africa trade, Chinese investments and military cooperation, among many other areas. China-Africa trade, for instance, is roaring. Last year, China not only maintained its position as Africa’s largest trading partner (see Fig 2) but also saw trade relations hit an all-time high. China customs agency data show the value of trade between China and Africa in 2021 stood at $254bn compared to $208.7bn in 2020, representing a 35 percent increase. South Africa, Nigeria, Angola, Egypt and DRC were China’s top five largest trading partners, accounting for more than half of all China-Africa trade in 2021.

 

Africa’s share of trade with China is quite minimal at 3.8 percent, compared to other regions like Asia at 46.9 percent, Europe at 18.1 percent and North America at 12.9 percent. However, the fact that the balance of trade is in favour of Beijing makes the Asia giant want to maintain its grip on the continent. Last year, China exported goods worth $148bn to Africa, up 29.9 percent from 2020. During the year, the value of Africa’s exports stood at $106bn, a 43.7 percent increase. “China understands that Africa is an important market for its exports and a source for raw materials,” explains Prof Monyae. He adds that for this reason, China feels obligated to safeguard its interests in the continent.

Kenyan President Uhuru Kenyatta

On this, China has no guarantee. Beijing’s decision to cut financial commitments for Africa is bound to accelerate the geopolitical shifts that are already happening as other countries target to increase their strategic presence in the continent. In recent years, countries like the US, UK, France, Germany, Japan, Russia, South Korea, India and Turkey have all enhanced their overtures to Africa. For most of the new suitors, loading Africa with more debt is not their intention. Rather, they see opportunities in increasing trade and foreign direct investments. “A few countries may step up their engagement modestly but I don’t see Africa today as the new battlefront for geopolitical supremacy,” says Shinn.

Private capital
China’s cut is also certain to instigate an influx of private capital into Africa. Currently, a majority of development financial institutions and global multi-lenders including the IMF, the World Bank and AfDB already have deep exposure. This opens doors for private capital to come and fill the void in infrastructure financing. The IMF, in a paper titled Private Finance for Development, reckons the private sector has the ability to inject an additional annual financing equivalent to three percent of Africa’s GDP for physical and social infrastructure by the end of the decade. This represents about $50bn per year. While this is an achievable goal, African governments have a big role to play in terms of policies and identifying priority and bankable projects.

“There is a lot of private capital in the world looking for infrastructure investments. What Africa needs is some truly credit-worthy projects that produce economic benefits in excess of their costs,” states Atkinson.

In retrospect, Africa must accept the days of Chinese-financed megaprojects are over. By cutting financial commitments to the continent, China has already acknowledged this new reality.