China’s Debt-Trap Diplomacy in Africa.
In 2018, China overtook the US as Africa’s most influential economic partner and largest foreign direct investor (Farooq et al., 2019). The economic superpower has significantly enhanced its linkages with African countries across multiple dimensions – in trade and investment, infrastructure financ- ing and foreign aid. China invested a whopping US$23 billion in infrastructure projects in Africa between 2007-2020. This exceeded the total amount contributed by the other top eight lenders – including the World Bank, the African Development Bank, and the US and European banks – by more than US$8 billion (Adeniyi, 2020). This article examines the contrasting views put forth by academia and geopolitical analysts on the impact of Chinese infrastructure investments on African economies. On the one hand, proponents argue that the provision of concession loans by China will help to tackle the continent’s burgeoning infrastructure deficit. On the other hand, detractors have cautioned against the massive Chinese infrastructure investments in Africa and criticised it as part of China’s ‘dept-trap diplomacy’ aimed at ensnaring poor, developing countries in unsustainable debts. This article explores China’s foreign policy and its use of ‘economic statecraft’ to pursue its strategic ends. It then delves into the arguments for and against Chinese-backed infrastructure investments in Africa. Lastly, it concludes by assessing the significance of Chinese development finance and debt for African economies.
China’s role as a key development financier gained prominence in 2013, when Chinese President Xi Jinping unveiled the Belt and Road (BRI) initiative. As a global, trillion-dollar infrastructure investment and development project, the BRI initiative aims to revitalise the Silk Road that connected the major land powers of Eurasia, China, Russia and Continental Europe in historical times (Pantucci & Lain, 2017). Since then, Chinese-financed infrastructure worth US$847 billion has been implemented in 165 countries worldwide (Vaidyanathan, 2022). These include a US$1 billion Belt and Road Africa Infrastructure Development Fund (BRI AIDF). Supporters of the BRI initiative argue that China’s investments and provision of concessional loans will solve the continent’s burgeoning infrastructure deficit, which is one of the key impediments to its continued economic growth. According to data from the African Development Bank, African countries are coming up US$68-$108 billion short of the US$170 billion required annually to meet their infrastructure needs (AfDB, 2018). With an estimated 31% of construction projects in Africa valued at over US$50 million being Chinese-funded and with 67% of these projects being concentrated in the transport and energy sector, China’s economic diplomacy has been well-received by receiving African nations keen on addressing their infrastructural gaps (Calabrese, 2021).
US governments and other Western leaders have, however, criticised Chinese investments as a form of ‘economic statecraft’ by Beijing to advance its foreign policy objectives. Emerging as a concept from the theories of structural power, the term ‘economic statecraft’ was first conceived by David Baldwin (1985) as the strategic use of monetary, regulatory, and financial tools by nations to achieve their geopolitical aims.
60
Table 1: Comparison of Financing from China and the World Bank
China’s Debt-Trap Diplomacy in Africa
The term ‘debt-trap diplomacy’ was subsequently coined by Indian geostrategist Brahma Chellaney (2017), who contended that the BRI initiative serves as a modus operandi for China to further its geopolitical aims by saddling developing nations with unsustainable debts and holding them financially hostage. The initial Chinese investment and subsequent transfer of Sri Lanka’s Hambantota port to the Chinese was instrumental for China to gain a geopolitically important foothold right in its Indian arch rival’s doorstep in the Indian Ocean – is a case in point. The opaque nature of the BRI initiative, with a lack of clarity over the size and terms of these Chinese loans, has fuelled concerns among Western scholars of China’s debt-trap diplomacy and its ambitions to reshape the global order (Ahuja, 2022).
Geopolitical analysts have highlighted several features of China’s debt-diplomacy approach that led to receiving nations being forced to accept various economic or political concessions due to their inability to repay their existing loans.
Firstly, Chinese loans are less favourable for borrowing countries compared to loans offered by international financial institutions, with higher interest rates, shorter maturities, and shorter grace periods (World Bank, 2022). Table 1 shows that the average interest rate on Chinese government loans is 4.14%, which is nearly twice as high as the average interest rate on loans offered by the World Bank (2.10%). Moreover, Chinese government loan maturities (16.6 years) are, on average, shorter than those of World Bank loans (17.9 years). The average grace period from Chinese government financing institutions (4.8 years) is also shorter than the average grace period on a World Bank loan (7.7 years). The terms of Chinese loans increase the likelihood of a debt crisis in recipient countries. This may explain why African countries are often unable to repay their excessive debts and are left indebted to Beijing.
Source: World Bank
61
Jasrene Hor
Secondly, there is a lack of transparency surrounding Chinese loans to developing nations. This is unlike loans offered by international financial institutions, such as the World Bank and the International Monetary Fund (IMF), which are accountable to all member states and must provide financial aid and loans on transparent terms and conditions. On the contrary, Chinese loans – whether commercial or concessional – are provided by Chinese banks, which are not accountable to any third party and are often offered on vague terms and conditions (Cormier, 2022).
Lastly, Beijing has adopted the approach of debt restructuring to handle borrowing countries’ debt distress, which fails to tackle the root cause but rather exacerbates the cost for indebted nations (Wang and Li, 2016). For instance, in the case of Venezuela, Chinese loans were tied to a prescribed volume of oil exports and additional exports were to be made to Chinese state-owned enterprises (SOEs) when market prices fell below the predetermined price set by Beijing. As a result of an unexpected drop in oil prices that left Venezuela unable to meet its export requirements in 2016 and 2018, Beijing extended the forbearance arrangements. This led to Venezuela incurring additional debt obligations. The unfair obligations of Chinese concession loans, coupled with its lack of transparency, have led to Western scholars criticising the BRI initiative as a geopolitical instrument adopted by Beijing to achieve its strategic interests.
An infamous example of China’s debt-trap diplomacy in Africa was its provision of unsustainable development loans to Sri Lanka in 2020. This occurred during the onslaught of the COVID-19 pandemic, which saw the island nation suffering its most severe economic crisis since independence in 1948 (Hillman and Sacks, 2021). Instead of working with the IMF to restructure its national debts, former Sri Lankan President Mahinda Rajapaksa opted for US$3 billion worth of concession loans from Beijing. This exacerbated the debt crisis for the beleaguered island nation. Faced with a mounting debt burden of US$51 billion (78 percent of the country’s GDP) and scant prospects of generating sufficient revenue to repay creditors, the Sri Lankan government had to cede control to the Chinese authorities over the country’s strategic Hambantota Port in a ‘debt-for-equity’ swap to alleviate the national debt burden. This coincided with the time that local communities and non-governmental organisations (NGOs) in Sri Lanka first voiced concerns over how the Chinese-led special economic zone (SEZ) mapped over their land would force them to relocate, in addition to imposing significant environmental costs in the area. The cautionary tale of Sri Lanka has raised alarm among developing countries involved in Chinese-funded infrastructure projects such as Djibouti and Kenya, with African governments criticising the use of ‘debt-for-equity’ arrangements as posing a fundamental threat to their nations’ sovereignty.
As a result, political leaders of debt-ridden African countries have paid closer attention to debt sustainability and their unhealthy reliance on Chinese infrastructure financing. Following the COVID-19 pandemic which saw countries worldwide implement massive stimulus packages that led to unsustainable debt levels, 18 of the 32 African countries – of which China is their biggest creditor – requested to renegotiate the terms of existing loans with Beijing while 12 of them sought to restructure their loans and repayments (Carmody and Wainwright, 2022). In addition, the failure of state governments to effectively assess or negotiate the terms of their loan agreements with China has received increased public scrutiny in recent years.
62
China’s Debt-Trap Diplomacy in Africa
For instance, the Kenyan government had to halt its plans to build a coal power plant on Lau Island, which was to be financed with a US$900 million loan from the Industrial and Commercial Bank of China, after local protests erupted over environmental and economic viability concerns (Githaiga et al., 2019). Similarly, in Nigeria, local protests erupted in April 2017 over the lack of compensation for buildings demolished for the construction of the Lagos–Ibadan Railway Line funded by a US$1.3 billion loan from the Export-Import Bank of China (Lisinge, 2020).
The outpouring of public dissatisfaction has led governments to become cognisant of public sentiments and the need to carry out environmental impact assessments of Chinese-funded investment projects. For example, the Zambian government revoked a Chinese company’s licence to operate coal mines in 2018 following investigations that revealed poor regulatory and safety compliance (Zajontz, 2020). The Opposition Party in Zambia had also raised concerns over China’s debt trap diplomacy, as well as the Zambian government’s inability to service its existing debts owed to Chinese banks. Meanwhile, the Gabon government reversed its initial decision and withdrew the permit for a significant oil field from Addax, a subsidiary of China-owned Sinopec, citing environmental missteps and irregularities in paperwork (Mlambo, 2022). The cancellation and postponement of major Chinese-funded projects in Africa have shed light on the growing concerns among local governments of a rising debt trap and the detrimental environmental impacts of Chinese investments.
To conclude, an assessment of Chinese-funded infrastructure developments in Africa reveals increas- ing scepticism of Beijing’s claims that its investments are in line with its leadership’s oft-repeated “win-win model of cooperation”. The growing concerns among several host African countries, that China is using its overseas infrastructure investments to advance its geopolitical and geostrategic objectives, have led to instances of protests and cancellation of Chinese projects. Nevertheless, it is undeniable that Chinese-financed infrastructure projects in Africa have helped to boost connectivity, address the burgeoning infrastructure shortages, and propel the continent's economic growth. The lack of alternative funding sources and the short-sighted views of political leaders often lead to African countries succumbing to China’s debt-trap diplomacy. Thus, these nations often incur excessive debts from China and are forced to accept economic or political concessions at unsustainable debt levels. By providing an alternative to Chinese-funded investments, multilateral banks and financial institutions such as the IMF play a significant role in improving the debt sustainability of African countries. This will mitigate the risk of recipient countries having to forfeit strategic assets in return for debt forgiveness. Without the IMF, African countries facing financial distress will have limited options for support apart from China and will fall deeper into China’s debt-trap diplomacy.
