The African Debt Dilemma: Chinese Loans Loom Large

The African Debt Dilemma: Chinese Loans Loom Large The African Debt Dilemma: Chinese Loans Loom Large
A general view of the new Kipevu Oil Terminal at Mombasa Port in Mombasa on January 6, 2022.

African nations have found themselves grappling with a looming debt crisis, with Chinese loans at the forefront of the issue. This year, many African countries are coming face to face with the economic reckoning of their debts to China and other lenders.

The staggering debt burden on African nations has reached a critical point, as countries struggle to repay their loans amidst growing economic challenges. Nonkululeko Nyembezi, chair of South Africa’s Standard Bank, Africa’s largest bank by assets, highlighted the severity of the situation at the World Economic Forum in Davos, Switzerland. She emphasized that countries took on low-interest loans in abundance, and now have to navigate the complexities of supporting their economies.

The World Bank’s recent report reveals that as of the beginning of 2024, nine African countries are already in debt distress. An additional 15 countries are at high risk of distress, while 14 more are categorized as moderate risk. Ethiopia, Ghana, and Zambia have already defaulted on their debt payments, signaling the urgency of addressing the issue. Chad has also joined the list of nations seeking to restructure their debts.

Despite these challenges, Africa’s collective economic growth is projected to be at 4% in 2024, positioning it as the second-fastest-growing economic region in the world after Asia, according to the International Monetary Fund (IMF). However, this growth is overshadowed by the mounting debt crisis. Alex Vines, director of the Africa Programme at Chatham House in the United Kingdom, warns that rising interest rates tied to this debt are likely to push more countries into distress.

Debate surrounding African debt has become a pressing issue that cannot be overlooked in 2024. The ramifications of these debts have far-reaching effects on the African continent and its socio-economic development. As countries struggle to meet their repayment obligations, the availability of funds for essential public services such as healthcare, education, and infrastructure development is significantly compromised.

The African Debt Dilemma: Chinese Loans Loom Large
Workers on site at the Lamu Port, being built by the China Communications Construction Company.
Image: FILE

Chinese loans are a significant factor in Africa’s debt predicament. China has become a major player in funding infrastructure projects across the continent, extending loans to African nations for the development of roads, railways, ports, and other key sectors. While these loans have been crucial in the expansion of Africa’s infrastructure, concerns about their terms and conditions have been raised.

Critics argue that Chinese loans often come with stringent conditions, including collateral agreements and asset seizure clauses. Additionally, there are concerns that interest rates on these loans are higher compared to those offered by traditional lenders. As a result, African countries find themselves trapped in a debt cycle, struggling to repay while facing increased interest rates that further burden their economies.

Kenya’s debt to China, which amounts to over $6 billion, serves as a prime example of the difficult choices that countries face when grappling with their debt. The majority of Kenya’s debt to China was used to finance the construction of the Chinese-built Standard Gauge Railway (SGR) that stretches for 700 kilometers between Mombasa and Nairobi. Originally, Chinese designers assured Kenya that the railway would pay for itself, but this has not proven to be the case. As a result, the Kenyan government now finds itself responsible for the mounting debt.

In addition to the money owed to China, Kenya also has debts to the World Bank and other multilateral lenders. It is estimated that by 2024, Kenya’s total debt will equal 67% of its gross domestic product (GDP), a significant increase from a decade ago when the country first signed on to China’s Belt and Road Initiative and embarked on a borrowing spree for infrastructure projects.

Karuti Kanyinga, a research professor at the Institute for Development Studies at the University of Nairobi, has expressed concern over the sustainability of Kenya’s debt to China. Chinese loans tend to carry higher interest rates compared to loans from the World Bank or the International Monetary Fund (IMF), and they are less likely to be forgiven. Instead, these loans are often extended, leading to additional interest and making the loans even more expensive in the long run.

While the Chinese-built SGR railway has fallen short of expectations, the Kenyan government has had no choice but to foot the bill. In the most recent payment made to the Exim Bank of China at the beginning of Kenya’s budget year in mid-2023, the amount totaled $471 million. Due to rising interest rates, the interest alone exceeded $160 million, more than double the $77.6 million paid during the same period in 2022. This illustrates the growing financial burden that Kenya faces as a result of its debt and the challenges it must confront in managing its financial obligations.

Despite Kenya’s strained finances, President William Ruto recently sought additional financial assistance from China, requesting a loan of $1 billion. This move came as Kenya was struggling to repay its existing loans, and the new funds would be used to complete infrastructure projects that were left unfinished when China abruptly stopped lending to Kenya and other financially overstretched borrowers in early 2023.

The African Debt Dilemma: Chinese Loans Loom Large
A general view of the new Kipevu Oil Terminal at Mombasa Port in Mombasa on January 6, 2022.

The repayment of these debts has placed a significant burden on Kenya’s tax revenue, hindering the government’s ability to provide essential services such as education, electricity, and basic necessities like food and fuel. Additionally, the country’s foreign currency reserves, which are necessary to pay the interest on these loans, have been rapidly depleting. As a result, some countries are left with only a few months’ worth of reserves before they run out of money, further exacerbating the economic challenges they face.

One major obstacle to resolving African nations’ debt problems is China’s insistence on keeping the terms of its loans confidential. This lack of transparency hinders international lenders from fully understanding a country’s financial obligations and makes them reluctant to continue providing credit. Experts argue that without a clear understanding of a country’s debt situation, it becomes challenging to address and find sustainable solutions to the debt crisis.

Nevertheless, President Ruto took a step towards improving transparency by releasing part of the terms of Chinese loans, despite China’s objections. This move aimed to promote accountability and shed light on the country’s debt situation.

At the World Economic Forum, there were calls for greater transparency and reduced corruption to prevent future debt crises in Africa. Unfortunately, many African countries still struggle with corruption, with 90% of them scoring below average on Transparency International’s 2023 Corruption Perceptions Index. To attract funds from international lenders and maintain their trust, it is crucial for African nations to demonstrate responsible and accountable financial practices.

However, it is important to note that Chinese loans are not solely responsible for Africa’s debt dilemma. African countries have also borrowed from a range of other international lenders, including multilateral institutions such as the World Bank and the IMF. Furthermore, domestic factors, such as corruption and mismanagement of funds, have contributed to the debt crisis.

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