The Myth of the Chinese Debt Trap in Africa

Over the past two decades, China has built major infrastructure projects in almost every country in Africa. And this has made Western critics uncomfortable. China and Africa can forge an even stronger, comprehensive, strategic and cooperative partnership. A common description of China's lending practices is known as

debt

trap

diplomacy, a phrase that became popular after being used in government documents during the Trump administration. The so-called

debt

trap

is created when a country lends to poorer countries, intentionally burdening them with unsustainable debt, forcing them to hand over strategic assets or concede greater political influence. But so far, there is no evidence that such a debt trap has emerged in Africa.

Now, there is always a certain grain of truth, as with all stereotypes. But it breaks down very, very quickly after any kind of serious examination. The focus on debt trap diplomacy is part of broader Western anxieties toward China in Africa. We have already seen that Chinese investments and infrastructure projects have been linked to growing Chinese influence within the host country's ruling elite. That may end up becoming a sort of leverage point for China to pressure some of these countries or ruling elites to side with China on critical issues that are important to the United States or its allies.

But while the United States has focused its strategy in Africa on aid and social services, China has been building. African governments themselves said: "We are tired of aid and charity, we want to trade, we want to be treated as partners." The Chinese came and said, "Great. "We don't do aid or charity, we want to do business with you." Global Gateway will mobilize 300 billion euros by 2027. Now the United States and Europe are responding with their own infrastructure initiatives to counteract China, but African experts are skeptical. At the end of the day, China has been that guy around the corner with a bouquet of flowers for Africa, the United States, Europe and the United Kingdom, they have said time and again: "Be careful of the flowers you see outside the window, they have thorns." In Ghana, the transfer of power by the British government went smoothly and with dignity.

From the 1950s to the 1970s, the countries of the African continent won. .Independence from its European colonizers, American and European-led organizations such as the IMF and the World Bank funded much-needed infrastructure across the continent. But that slowly stopped. The United States and Europe moved a little bit away from infrastructure in the '60s and '70s. Something we did very, very well for a long time in the postwar period: we built huge amounts of infrastructure around the world. And one of the things you see in Africa is that a lot of the railways and roads and infrastructure were built during the colonial period.

And back then it was pretty solid. But it has been decrepit because the former colonial governments are not investing much money. Enter China. As early as the 1970s, Beijing began building the Tazara Railway, a link between the Zambian town of Kapiri Mposhi and the port of Dar es Salaam in Tanzania. At the time it was the longest railway in sub-Saharan Africa, allowing Zambia to transport copper, bypassing white-ruled Rhodesia and South Africa. It also gave China some much-needed political allies. Beijing said: "We have problems, you have problems, we will help you." And they embarked on this. And these are really some of the first seeds that China sowed in Africa that later came to clearly define the divide between West and East, as far as China's involvement in Africa is concerned.

In the early 2000s, as China sought to expand its markets and political influence abroad, its investments in Africa increased. The Chinese said, "Well, guess what? Now we're the best in the world at producing large-scale infrastructure, fast and cheap. And we have a surplus of capital, so we'll lend you the money, we have our big contracts." companies have all this skill and all this capacity to deliver quickly and cheaply." And in that sense, it was really an ideal match. They recognized what Africa's stage of development was. And they said, "You know what? 30 years ago, it was us.

We recognize a lot of what is happening here. "You don't have enough infrastructure, you have a large population that is growing rapidly." Let's also not underestimate that there is a shared history of anti-colonial struggle here. So if you check all those different boxes, Africa made a lot of sense for the Chinese to come in. Today, China It is involved in approximately 35 African countries and has made significant contributions to their infrastructure, including ports, railways and power plants. It is estimated that China has invested more than $340 billion in Africa. is investing around the world, it may not be that much.

But for Africa, it is a lot of money because of the huge infrastructure gap that Africa faces But there are notable differences between Chinese financing and the way the West historically lends at rates of. low interest and flexible terms. There must be more than millions of different types of loans available. But if you had an overview of the different types of loans that Chinese lenders involve, then you could classify them into three different types. The loans are divided into three categories. Zero-interest loans that are offered as assistance, concession loans that have a lower interest rate, often intended for large infrastructure projects, and, most commonly, commercial loans with higher interest rates, in line with those they would be obtained from a typical private bank.

One of the most interesting trends we see when researchers look at Chinese loans is that there is a tendency to lump all three together. Well, the first question you should ask yourself every time you see something like this is: are they comparing apples to oranges? Because if you're comparing commercial loans to something available from the World Bank or one of its different agencies, then you're not really comparing like-for-like. And the fact of the matter is this, and I hope borrowers are listening, 95%, if not 99%, of the loan agreement is in favor of the lenders, no matter who they deal with.

This is because when you sign the loan contract and receive the money, you will have the money in your hands and the only thing the bank will have is a piece of paper. That's why loan agreements are in your favor. In a report, which analyzed 100 Chinese contracts, it revealed that the loans are structured to give an advantage over other creditors and allow action to be taken if the borrower acts against the interests of a PRC entity. There are also unusual clauses that keep the agreements secret. When you look at multilateral lenders like the World Bank and the different agencies, their shareholders are countries and they are required to publish their loans and activities just to be transparent.

They have no choice. On the other hand, when you get to commercial banks you see a very different case. Banks often have a duty of confidentiality towards their clients. I think Chinese banks are no different. But the rush to lend by the Chinese has meant that some of their early investments were not as profitable as projected. So when China entered this field, the developing world greatly welcomed increased funding for infrastructure. However, in the rush to get projects up and running, put into practice, and begin construction, critical due diligence often fell by the wayside; Financial, social and environmental sustainability assessments were never done or were done haphazardly, or were simply not transparent or available to the populations.

What this ended up causing was states to take on projects that they initially thought were affordable, but unfortunately, have now become overwhelmed by debt. China is coming for its pound of meat to Uganda. In 2021, Entebbe International Airport in Uganda came under fire after local media reported that China would take over the airport. We call this debt trap. After closer examination of the contract, it was concluded that there was no debt trap. And both sides have denied that the airport is in danger of being taken over. I think there is an assumption that certain governments are not capable of taking care of themselves, or are not sophisticated enough or simply too corrupt to look out for their own interests.

I think, from my point of view and personal experience, that simply has not been true. Experts say borrowing countries should do more to ensure loans are more favorable to their interests. But the Chinese argue that the level of risk is higher in African countries and that greater payment guarantees are needed for loans that would otherwise not be available. Certainly, in my 20 years of experience, I have never seen a case where a Chinese bank simply said, "Look, don't read this, just sign on the dotted line." In fact, they will spend days and days sitting with us, going over every line of the document and making sure the other side understands, because they know that 10 years from now, if they don't explain this clearly, this is going to come back and haunt them.

Certainly there are problems with the way China finances projects, there are problems with transparency, but I don't think this is some kind of grand master plan from Beijing to put developing countries into debt and become even more indebted to Beijing. In Kenya and Nigeria, debts to Beijing are increasing. These include Kenya's $3.6 billion Mombasa to Nairobi railway, which reportedly lost $200 million in three years of operation. And a $1.3 billion loan from China Exim Bank, to finance Nigeria's largest infrastructure project, a 157-kilometer segment of the Lagos-Kano railway. The government itself cannot afford to finance these things. The private sector is not really stepping up, the West has no alternative program.

Therefore, China is the only place available and the loan conditions are reasonable. At the same time, there are members of the National Assembly, particularly from the main opposition party, who openly criticize the government for what they perceive as a lack of transparency around the management of China's loans. They often express this concern heard elsewhere in Africa, that China will try to seize Nigerian assets in the event of a default by the Nigerian government. But if we take a closer look at the total public debt of Kenya and Nigeria, it does not appear that China is in a position to use the debt it is owed as leverage.

In Kenya, Chinese loans represent about 10% of the country's total debt of $70 billion. And it is even less serious in Nigeria, where Chinese debts are only around 3-4%. Again, we have to focus on the data as it is, not on these narratives and fantasies that Kenya is going to be taken over by the Chinese. One country cannot control another simply by owning 4% to 10% of its debt. Only a handful of countries on the African continent owe significant debt to China. And most of them owe much more to private bond markets. Africa does not have a Chinese debt problem.

Angola accounts for about a third of all Chinese debt in Africa. If we take Angola out of the issue, we will have an even less serious problem in that regard. That is why it is very important that we limit this problem to what it is. But one bad deal is enough to affirm Western fears. In the Democratic Republic of the Congo, a controversial method of borrowing based on future revenues from natural resources has meant that some projects have fallen victim to corruption. The Congo has a very, very important mining industry. It is the largest producer of copper in Africa and by far the largest producer of cobalt in the world.

Cobalt is a key ingredient in rechargeable batteries that power electric vehicles. You hear politicians talking about Congo saying: "We are with cobalt like Saudi Arabia is with oil." However, at least so far, the benefits to government revenue and the population at large have been quite limited. In 2008, China and the Democratic Republic of the Congo agreed that Chinese companies would finance $3 billion worth of infrastructure and build a $3.2 billion copper and cobalt project, with tax-free profits repaying both investments. China, with the help of these mines, has come to dominate an industry that is at the center of future technologies.

And leaked documents reveal millions of dollars that flowed from Chinese entities, including the multibillion-dollar mining project, to the family and associates of Congo's then-president Joseph Kabila. If the Congo example is applied elsewhere, these companies operate with areal and deliberate lack of transparency. And if they find a willing partner in a government, as they did in Joseph Kabila's government, this lack of transparency can spread and really envelop the relationship between the state and these mining companies. There is actually a lot of anxiety in the West about China being involved somewhere, because it is a strong number two behind the United States.

And being a superpower and China having very strong ties with Africa, establishing many logistics supply chains in Africa, preparing to expand its trade and take it to the next level, it is worrying. Because whatever happens in Africa or Asia, it can ultimately affect the world order. There is a lot at stake. Ideology may also be at play. Countries receiving aid from American or European multilateral development banks often require values ​​that are in line with those of democratic nations. Anti-corruption, good governance, transparency, participation, inclusion, these are things that really matter. We should want projects that are beneficial to populations, that do not negatively affect them.

And while it may hinder the United States from lending to certain countries, I don't necessarily think that's a bad thing. When countries in Africa receive aid from China, they are expected to side with, or at least not engage with, China on key issues, including Taiwan and accusations of forced labor in Xinjiang. In these delicate red line issues, and Taiwan is certainly one of them, this is where the political relationship becomes more evident and much more important. Africa, more than almost any other region in the world, tends to vote as a bloc in major international organizations. And it tends to express itself as a group, if not as the entire continent.

And again, this is political symbolism that is becoming increasingly important to China in a region like Africa, which is so important to the Chinese, much more in many ways than resources, which again, are not as important to China. , simply because they can now purchase resources from any number of other places. But getting this kind of political support is very important in the current geopolitical environment. We want to demonstrate that a democratic and values-based approach can solve the most pressing challenges. While the United States and Europe have not attempted to match China's investment in the continent, they have begun working to offer alternatives.

The EU's Global Gateway aims to provide €300 billion globally between 2020 and 2027. And the United States' Build Back Better World, or B3W, aims to address the infrastructure needed in developing countries. Democracies are chaos. Things take time in democracies. So while authoritarian regimes like China's can speed up the process and get things done faster, that doesn't mean it's better quality. And I think that's where the United States and other countries and through the B3W initiative can really make a difference: by developing and building high-quality infrastructure. We believe in the nations of Africa, in the continental spirit of entrepreneurship and innovation.

However, skeptics of the US- and European-led projects say they specifically aim to attack Chinese influence, rather than working with African countries as trading partners. And they lack specific information that leaves many wondering whether or not they will result in meaningful action in Africa. When you talk to the Chinese, they will tell you: "We have come a long way with Africa both culturally and economically, we have had similar problems as Africa and we want to help them grow because they were in a position that we were in." ". In Africa, Africans will tell you: "We need the money.

We have a huge gap in infrastructure. And it doesn't matter if the money is blue or red, as long as it can do the job, we'll take it." "When we talk to some of the economists who follow China and African governments, they will tell us that these projects have generally brought benefits to Africa. How these projects have been done, the terms and how they have been achieved, is another story.