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Debt traps in Africa

By Ichiro Suzuki

The West has been warning developing countries to be aware of potential pitfalls of excessive borrowing from China through their aggressive push of the Belt & Road Initiatives. Yunnan Chen, PhD candidate at Johns-Hopkins School of Advanced International Studies (SAIS) offers some interesting insights on how much the BRI’s supposed African beneficiaries are owed to China. The burdens these heavily indebted poor countries (HIPC) have accumulated against China since 2000 is listed below. In proportion to the size of the economy, these debt burdens are:

Angola 18% of GDP, Ethiopia 16%, Kenya 7%, Sudan 6%, Cameroon 10%, Nigeria 9% and Ghana 7%.

To all of these HIPCs, these burdens look onerous for two reasons. One, these debts are not in their own currencies. Two, China is not the only creditor to them. They certainly owe to multi-lateral institutions such as the World Bank and the IMF, and developed countries. These HIPCs accumulated Chinese debt between 2000 and 2015, right after the debt relief by the Paris Club countries. It looks as soon as their developed countries debt was forgiven, the HIPCs began to borrow fiercely from China under the name of infrastructure development. When China’s insatiable appetite for natural resources drove commodities prices up, the HIPCs’ economies boomed as beneficiaries of higher prices. That made Africa look taking off at last, for a time. The global financial crisis in 2008-09 brought an end to the early 21st century commodities boom, and that brought to light the HIPCs’ sorry states of finances. As Mark Twain famously said, “History does not repeat itself but it rhymes.”

Ms. Chen gives some description of the Ethiopian - Djibouti standard gauge railway, implying that infrastructure investments are not always financially feasible despite the necessity on the surface.

It cost $4.5 billion, out of which $4.0 billion from China Export-Import Bank

It runs only twice daily.

Without fences on the railways, trains are often interrupted by herds of cattles.

Most exporters use road transport due to flexibility and reliability.

Few passenger-based rail systems are profitable.

China’s state insurer Sinosure publicly commits $1 billion loss to write off.

Western banks, primarily those in the U.K. and the U.S. have a two hundred year history of rescheduling loans to developing countries or have them defaulted by the borrowers. As Ethiopia is gaining some concessions from China over their borrowing, it looks China has joined the club as well as finding the cost of an aggressive aid-driven diplomacy. African’s HIPCs must be relieved to find China is not seizing their assets for their failure to pay back as scheduled.

About the author: Ichiro Suzuki is a retired banking executive with global investment experience.


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