Deep Dive: Africa's Chinese Debt🌍💰

[Issue #9] China committed $170 billion in loans to Africa over two decades. While it provided capital for modernization, there exists concerns about debt sustainability and economic dependency!👇

Oct 17, 2023

Reading time: About 5 minutes

China has become a major lender to Africa in recent years, providing billions of dollars in loans to support infrastructure projects, economic development, and other initiatives. While this investment has been welcomed by many African countries, it has also raised concerns about debt sustainability and the potential for China to gain too much influence in the region.

Powering Africa’s Growth

As of 2022, China is Africa's largest bilateral creditor, accounting for over 15% of the continent's external debt. This debt is concentrated in a few countries, including Angola, Ethiopia, Kenya, and Nigeria. The majority of Chinese loans to Africa are used to finance infrastructure projects, such as roads, railways, and power plants.

Here are some examples of Chinese debt-financed projects in Africa:

The Addis Ababa-Djibouti Railway is a 752-kilometer railway line that connects Ethiopia to Djibouti on the Red Sea coast. The railway was built by Chinese companies and financed by loans from the Chinese government. It is now one of the busiest trade routes in Africa.
The Mombasa-Nairobi Standard Gauge Railway is a 466-kilometer railway line that connects Kenya's two largest cities. The railway was also built by Chinese companies and financed by loans from the Chinese government. It has helped to reduce travel time between Mombasa and Nairobi by half.
The Karuma Hydropower Project in Uganda is a 600-megawatt hydroelectric dam that is currently under construction. The project is being financed by loans from the Chinese government and is expected to be completed in 2023. When it is finished, it will be the largest power plant in Uganda and will help to reduce the country's reliance on imported energy.
The Djibouti International Free Trade Zone is a 48.2-square-kilometer free trade zone that is being developed by Chinese companies. The free trade zone is expected to attract foreign investment and create jobs in Djibouti.

Although these investments (and many more) are focused on accelerating growth in Africa, they are also aimed at gaining a significant influence and leverage in the continent.

Rising influence of China in Africa

China's engagement with Africa is not a recent development; it has deep historical roots dating back to the 1950s when China supported African countries in their struggles for independence and decolonization. However, it's the 21st century that has witnessed an exponential increase in China's involvement. The Forum on China-Africa Cooperation (FOCAC), established in 2000, has become a pivotal platform for diplomatic, economic, and trade cooperation between China and African nations.

Economic Ties

Infrastructure Development: China's investments in African infrastructure are substantial. The Belt and Road Initiative (BRI) has extended its reach into Africa, funding and constructing roads, railways, ports, and energy facilities. This infrastructure development has facilitated trade and connectivity in the region, boosting African economic growth.
Trade Relations: China has become Africa's largest trading partner, with a mutually beneficial exchange of resources and goods. Chinese imports of African commodities, such as oil, minerals, and agricultural products, have driven economic growth in many African nations.

Investment and Financing

China has provided substantial investment and financing for African projects. This includes low-interest loans, grants, and lines of credit, often with more favorable terms than those offered by Western counterparts. China's investments span various sectors, including energy, manufacturing, telecommunications, and agriculture (see the graphic above).

Geopolitical Implications

China's rising influence in Africa has geopolitical implications, influencing international power dynamics:

Counterbalancing Western Influence: China's engagement in Africa is seen as a counterbalance to Western influence, providing African nations with alternative partners for trade and development.
Natural Resource Acquisition: China's pursuit of Africa's natural resources secures its access to vital commodities, decreasing reliance on other resource-rich regions and enhancing its energy security.
United Nations Influence: China's partnerships in Africa influence its stance on global issues. For example, in 2022, many African countries voted against a resolution at the UN Human Rights Council that called for a debate on the alleged human rights abuses in Xinjiang.

While every country should follow it’s own diplomatic stance and cater to the needs of it own population, it is not always black-and-white! Especially when the debt owed becomes unsustainable and gets turned into leverage.

Debt Sustainability Concerns

One of the main concerns is that, in recent times, the terms of Chinese loans are often less favorable, especially when there are defaults. Chinese loans typically have shorter repayment periods and higher interest rates. This can make it difficult for African countries to repay their debts, especially if their economies are struggling.

Another concern is that Chinese loans are often used to finance projects that are not financially viable. This means that the projects may not generate enough revenue to cover the cost of the loans, which can lead to debt distress.

For example, in 2020, Zambia became the first country to default on its debt to China. The loan was used to finance the construction of a new airport, but the airport has been struggling to generate enough revenue to cover its operating costs.

The COVID-19 pandemic and the war in Ukraine have further exacerbated Africa's debt problems. These events have caused economic growth in Africa to slow down, making it more difficult for countries to repay their debts.

As always, there are two sides to this too -

On one side, those who defend China's lending practices argue that it is necessary for Africa's development. They point to the fact that China has helped to finance a number of important projects in Africa, such as roads, bridges, and power plants. They also argue that China's loans are often more affordable than those offered by other lenders.

On the other side, critics argue that China's lending is creating a debt trap for African countries. They point to the fact that many African countries are already struggling to repay their debt, and that China's loans are only making the problem worse. They also argue that China is using its loans to gain political and economic influence in Africa.

The issue is a complex one, but I would love to know your thoughts on this :)