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African Debt Trap by China

Updated: Sep 22, 2021

China is on its way to becoming the next superpower. It has come a long way from the country that was famous just for its cheap labour and manufacturing abilities. It is now a developed country and just like other developed countries it is looking for investing in emerging markets. China is lending out loans with high-interest rates and shady terms to many developing countries, most of which are African countries. All the African countries except Eswatini (Swaziland) are deeply indebted to the state-owned banks of China. These loans are given with the motive of economic development of both the lender, i.e., China and the borrowing countries, but many countries often find themselves in a debt trap and fear losing their sovereignty to China.

How did it start?

This is not the first time that China is expanding its economic interests outside its territory. It has expanded its trade through the silk road initiative centuries ago, which was started around the 1st century BCE and continued for many centuries. It was built to have an economic, political, and religious exchange of ideas for the benefit of the world economy. Now, China has changed a lot from what it was before. This new initiative started by Xi Jinping was sold to the world with a similar idea of uniting and helping various nations. China wanted to invest in emerging nations of Africa by lending them loans for infrastructure projects like roads, bridges, railways, and government buildings. Generally, when loans are given to a country, the terms of those loans are made public, but China did not want to disclose its terms. It is surprising that the leaders of these countries were not sceptical about the secretive nature of these terms by China. The loans given were utilized to build infrastructures that were made by Chinese contractors who employed Chinese supervisors and exploited African workers. Once the project is complete, it is often managed by the Chinese. This was seen in the railway project of Kenya, where everything was managed by China and Kenya was left with a huge loan and a railway system. This was followed by various free gifts from China like the building of African Union Headquarters (which was discovered to be bugged) and parliaments of many countries like Zimbabwe and Congo. These gifts are a demonstration of China’s power and a way for it to spy like a pro.

Different Projects

  • Road belt initiatives

The Belt and Road Initiative, suggestive of the Silk Road, is an enormous infrastructure project that would extend from East Asia to Europe, fundamentally growing China's economic and political impact. It is seen as a hostile task, but it is a defensive endeavour by China to protect its international exchange.

With the majority of 60 beneficiary nations added to China's Road Initiative (BRI) situated in Africa, it's difficult to not commend the Chinese for their ability to cultivate the development projects. Notwithstanding, China's financing of its BRI projects across Africa for the most part involves advances to governments that are both extraordinarily high and adapted by signatories' obligations to not totally reveal their terms.

The BRI is China’s vehicle by which it exports the abundant workers of the Communist Party’s lumbering state-owned projects. It is also what empowers Beijing to access the raw materials abroad to help the Chinese economy.

It is bad enough that China is lending organisations which are government-owned but moreover, they do not reveal the terms of their loaning to African countries and they don’t seem to have a problem with this.

  • Nigeria

While the pandemic is set to make millions of “new poor” in middle-income countries, Nigeria is especially pregnable because of its uncertain pre-pandemic economic condition.

Its prime revenue source, oil proceeds, have long been undermined by declining production levels and cut in oil prices. Nigeria facing a bleak economic condition due to the COVID-19 pandemic, it is longing to look for more external funding.

Nigeria has increasingly counted on loans for huge infrastructure development projects and particularly on Chinese financial and technical support to establish its transport network. China has offered loans for eleven progressing large-scale infrastructural projects, increasing Nigeria's debt to China at $3.1 billion as of March 31, against the total $5.575 loan agreements with China EXIM Bank.

In the interim, Nigeria has acquired 17 Chinese loans to fund various categories of capital infrastructural projects, and Nigeria will still be indebted to the Chinese government till 2038.

  • Zambia

Zambia turned out to be the first coronavirus-era debt that defaulted in the African Nation. It has acquired heavy debts from China in recent times to support some major infrastructure projects.

China has provided a huge sum of money as advances for infrastructure projects to the sub-Saharan African Nations for its sweeping Belt and Road initiative with Zambia being one of its eminent debt holders. Currently, China possesses 33% of Zambia's national debt. It has put resources in the mining, industrial sectors, and agriculture.

Since last year, Zambia’s economy is staggering under immense pressure from its impotence to pay for imports and defaulting on development project financing. Zambia's debt extent was considered infeasible even before the covid-19 pandemic as the country began making defaults on loans in 2019 itself. Last year, China EXIM Bank warned that Chinese contractors would defer work on different projects in Zambia if arrears were not paid.

Chinese companies are playing tough, refusing to rebuild existing obligations, and are establishing control of the Zambian mining assets as security for the loans. Zambia has now applied for obligation alleviation under another common framework by the meeting of 20 significant economies.

Current Scenario

Most of the current obligations of the African countries are not going to be profitable for China but it is keen on helping them as these loans will equip China with control over certain projects if the terms of credit are not met by the borrowing country. Chinese development and Engineering crafts persons have accomplished an important position in the African market and governing intense projects which the domestic contractors could not do.

China's loans include affairs that are strongly focused on the capital’s strategic interests and increase the risk of numerous countries plunging into a financial disaster.

African nations are starting to closely examine the cost-benefit analysis of Chinese funding and the terms attached to such funds. The IMF continuously wants African countries to believe that loaning by China is dangerous. It stresses that the Chinese make some instability or vulnerabilities.

By- Madhav Arora & Gauri Khanna


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