Loans

Is Africa’s largest creditor worried about its loans?

Is Africa’s largest creditor worried about its loans?
Written by Publishing Team

While several African countries showed horizons Through organic economic growth, others are experiencing huge debt burdens. Many Africans were alarmed when several media outlets reported that China, Africa’s largest creditor, had seized Uganda’s assets for failing to repay its loans. Although both parties later exposed The allegations, however, did not ease the growing concerns about these debts.

China has become Africa’s largest creditor by doubling or even tripling its financing pledges to Africa during previous meetings of the Forum on China-Africa Cooperation (FOCAC). However, in 2018, China maintained its pledge at $60 billion for the first time. This year, for the first time, the Asian giant cut investment pledges from $60 billion to $40 billion at the recently concluded Ministerial-level Forum on China-Africa Cooperation meetings held in Dakar, Senegal. It is easy to justify that this sharp decline is due to the poor economic performance of China in the wake of the epidemic with the growth of GDP in China. 2.3 percent in 2020, Down from 6.0 percent in pre-pandemic 2019, but that doesn’t tell the whole story.

As Africa’s largest creditor, defaults and default risk of African countries pose a great risk to China. For example, the International Monetary Fund recently said that the economic outlook for sub-Saharan Africa is “highly uncertain”. Zambia, the first African country in the Covid era to default on its sovereign debt in 2020, owes China $6.6 billion. Given the region’s poor economic outlook, as African leaders called for debt renegotiation during the conference, Beijing’s decision to tighten its fiscal constraints is understandable.

High dependency and low productivity

Although the Chairperson of the African Union Commission Moussa Faki Mahamat welcomed Xi Jinping’s announcement of debt cancellation in 2021, he stated that the funding gap of about $290 billion for the continent is a cause for concern. He called on China to “intensify its efforts to redouble measures aimed at relieving this burden on national economies, some of which are already severely affected by threats to peace and security.”

African leaders have called for more confidence in recent years in an effort to mitigate the decline in Chinese investment. Senegalese President Macky Sall urged “Chinese companies to adopt a more confident and optimistic vision of investing in Africa.” These appeals depict these countries as relying heavily on these incentives. However, debt collection must meet corresponding productivity levels.

Since 2010, Chinese financial institutions have funded an average of 70 projects in Africa each year with an average value of $180 million. Infrastructure financing to ensure resources has focused on minerals and hydrocarbon-rich African countries, including Zambia (copper), Kenya, Nigeria, Ghana, Angola, Algeria, Mozambique, Egypt and Sudan (oil and gas), South Africa and Tanzania (gold).

But many of these countries are still struggling with productivity. For example, Nigeria has problems It generates revenue and is poor on budget. Hence, the most populous African country spends most of its revenue servicing the interest accrued on loans in 2020.

As a result, the debt was causing a repayment crisis. China owns about 72 percent of Kenya’s external debt, which is $50 billion. Over the next few years, Kenya will have to pay $60 billion to China’s Exim Bank alone. According to Kenya’s Auditor General, the country could lose the port of Mombasa if it defaults on the loan.

In 2015, Reuters reported widespread dissatisfaction in Angola with oil payments for loans from China, leaving Angola with little or no crude to export. Between 2010 and 2015, Nigeria’s debt to China grew by 136 percent from $1.4 billion to $3.3 billion. The country had to spend $195 million in 2020 in debt repayment to China.

In Djibouti, China provided nearly $1.4 billion in funds which is equivalent to 75 percent of the country’s GDP. At least 18 African countries have renegotiated their debts, while 12 other countries are in talks with China to curb nearly $28 billion in loans. In Nigeria, lawmakers at the federal level have called for an investigation into the country’s lending practices and a review of the “sovereign guarantee clause” in loan agreements with China.

Nigeria has to repay $400 million for a loan provided by China for the “Phase Two of Nigeria’s National ICT Infrastructure Project,” which was signed in 2018. The Ugandan government also had to delay the construction of the Kampala-Entebbe highway after the political phase . The opposition has raised concerns about a growing debt trap.

“The fact that China remains committed to African projects means that it sees potential,” policy analyst Ovejoy Ijigo told Ventures Africa. But there are reasons for concern. One of them is that the epidemic has hit everyone’s economy. Many of these debtor countries to China are still struggling to recover. It is also important to consider the feasibility of the projects for which these countries borrow. Political instability and insecurity in regions such as northern Nigeria could be another cause for concern. What is the guarantee that a railway that is being built with borrowed money will not be blown up by terrorists? He said.

However, China appears to be making a paradigm shift. through a White papers Published a few days before the conference, China’s State Council Information Office confirmed Beijing’s new vision. “China is promoting a new development model with domestic economy and international participation providing mutual reinforcement, the first being the mainstay. China’s development will create more opportunities for Africa’s development,” he said.

Written by Oluwatosin Ogunjuyigbe

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