Loans benefit Africa without onerous conditions

By Liu Qinghai Source:Global Times Published: 2018/3/25 22:36:53

Illustration: Luo Xuan/GT

Chinese loans to Africa have been growing in recent decades, and they become a focus especially after Rex Tillerson, former US secretary of state, said during a trip to Africa that the loans increase the continent's indebtedness.

The reality, nonetheless, is that Chinese loans are a very small part of Africa's total external debt.

Since their first sovereign bond was issued in 2006, spiraling debt levels have risked returning African countries to the debt-ridden days of the 1980s, though the continent's total debt-to-GDP ratio actually fell to less than 30 percent in 2008 thanks to debt forgiveness, booming commodity prices and fast-growing GDP.

By the end of 2016, total African external debt was $6.22 trillion, according to World Bank international debt statistics, which are compiled from officially recognized sources.

Chinese loans to Africa were a very small part of the total. From 2000-15, the Chinese government, banks and contractors extended $94.4 billion in loans to African governments and state-owned enterprises, according to the China-Africa Research Initiative at Johns Hopkins' School of Advanced International Studies (SAIS-CARI) data.

We estimate that total Chinese loans to Africa were about $114.4 billion for 2000-16. Obviously, compared with Africa's total external debt, Chinese loans only accounted for about 1.8 percent.

Chinese loans help to reduce Africa's debt burden.

First, most Chinese loans to Africa were extended for infrastructure, which is a necessary prerequisite for African development. According to SAIS-CARI data, sectors receiving Chinese loans in Africa from 2000-14 were as follows: transport (28 percent); energy (20 percent); mining (10 percent); communications (8 percent), and other sectors (34 percent).

In 2015, the top three sectors financed by Chinese loans were transportation totaling $4.6 billion, power $4.5 billion and industry $700 million. Mining didn't get any Chinese loan financing. The top sectors financed by China EximBank, the largest Chinese provider of African loans, were transportation at $27.9 billion, energy and mining at $18 billion, water and sanitation at $3.4 billion, and communications at $3.3 billion from 2000-15.

Second, Chinese loans to Africa are mostly concessional loans that carry very low rates. For example, among the total $60 billion of China's pledges to Africa at the 6th Forum on China Africa Cooperation (FOCAC) in 2015, there was $35 billion in a basket of concessional foreign aid loans, preferential loans, and non-preferential export buyers' credits.

There was also $5 billion in grants and interest-free loans, $10 billion for the China-Africa Development Fund and Special Loan for African Small-Medium Enterprise Development, and $10 billion for the China-Africa Production Capacity Cooperation Fund.  

Third, because of improved technology, efficient cost structures and speedy delivery, Chinese construction companies are very competitive and can save money when it comes to infrastructure spending for African countries.

In some cases, Chinese companies have lowered the prices for existing products and services by up to 40 percent, according to the McKinsey Report in October 2017. African government officials overseeing infrastructure development for their countries often cite Chinese enterprises' efficient cost structures and speed as major benefits.

Chinese loans also increase African GDP in many ways.

First is by improving African infrastructure. No country can develop without having a strong infrastructure. Realizing this, most Chinese loans to Africa are extended for infrastructure. Considering that infrastructure construction has a multiplier effect, these projects will indirectly expand the GDP of African countries significantly.

Second is by promoting African industrialization and diversifying the continent's economies. Most African countries are still single-resource commodity economies, and that poses great economic challenges when commodity prices are low. It suggests that Chinese loans are helpful to diversify African economies and promote their growth.

The third way is by introducing new products or technology. According to the McKinsey Report, half of the Chinese companies in Africa have introduced a new product or service to the local market, and one-third have introduced a new technology. African countries can also benefit from Chinese projects through learning by doing. Such technologies and products are very important to African industrialization and sustainable economic development.

The fourth way is by creating jobs. Infrastructure and industry are the top sectors financed by Chinese loans, and these sectors tend to be labor-intensive. The percentage of local employment of Chinese companies in Africa is generally higher than 80 percent.

Some other points deserve attention.

First, loans from China can prevent corruption more effectively. In Angola, for example, China's $2 billion and $2.4 billion EximBank credit lines in 2007 were tied to infrastructure investments. Chinese teams were already in the country building roads, rehabilitating railways and building schools. Thirty percent of the contracts under the loans were set aside for Angolan companies, and Angola pays for this infrastructure with oil.

Second, China has been proactive on Africa's debt burden and regularly cancels some of those loans without the long dance of negotiations and questionable conditions as required by the World Bank and IMF.

Third, in many cases, Chinese-financed large infrastructure projects are combined with industrial projects, which help translate each side's advantages into more tangible outcomes of cooperation and provides a solid basis to achieve sustainable economic growth.

In a nutshell, Chinese loans not only don't increase African indebtedness at a given level of infrastructure, they also help reduce these countries' debt burdens and improve their solvency.

The author is head of the Center for African Economic Studies at the Institute of African Studies at Zhejiang Normal University and visiting scholar of the China-Africa Research Initiative at Johns Hopkins' School of Advanced International Studies.


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