CHINA DEBT TRAP DIPLOMACY: WHY NIGERIA SHOULD BE WARY OF CHINESE LOANS
By Wole Akinseloyin
WHY CHINA GIVES EASY LOANS
Chinese debt-trap diplomacy is like the gunboat diplomacy the Imperial powers used in the 18th and early 19th century to make unequal treaties, get concessions from a weaker country by stationing their naval ship at the shores of that country. Even if that country wanted to object, knowing that super firepower is just nearby would make them change their minds.
China employs the same tactic now only that they use sovereign debt to achieve the same aim. They entrapped developing nations with so much debt on projects that are not sustainable to repay the debts and then take over strategic assets or resources.
This is not the only reason but also to gain political influence. In the past, many countries in Africa had diplomatic relations with Taiwan, but in 2020 only Eswatini now has diplomatic ties with Taiwan in Africa. It is also an easy loan for developing countries.
There are no conditions like the ones given by multilateral organizations, about human rights, environment, fiscal prudence, anti-corruption crusade, or reforms that often come with IMF, World Bank, and other loans.
Brahma Chellaney, a Bernard Schwartz Book Award winner in an article for Project Syndicate, said “Unlike IMF and World Bank lending, Chinese loans are collateralized by strategically important natural assets with high long-term value (even if they lack short-term commercial viability)”
Just like Brahma said, the report of the Auditor General of Kenya says, “The terms of a $2.3 billion loan for Kenya Railways Corporation (KRC) specify that the ports assets are collateral, and Kenya’s sovereign immunity does not protect them due to a waiver in the contract.”
China, with over 1 billion citizens, needs commodities and resources to meet the nation’s teeming population’s needs. There is also overcapacity in China and unemployment/underemployment, as China’s infrastructural growth and urban employment has plataued.
PROBLEMS WITH CHINESE LOANS
There are significant problems with their engagement with poorer nations; for example, China’s funded projects are not open bidding projects and are very expensive. For instance, Zambia paid $360,000 per km for the road financed by China, which is more than double the average cost of most African countries.
Most of these contracts are opaque, with some of the nations unaware of the agreement’s whole clauses, and to make things worse in many instances; arbitration is in China, not an independent arbitration most contracts have.
Even with billions of dollars of infrastructural spending, the economy the impact on the economy is nill or minimal as the money with the money moving from the Export-Import Bank of China or whatever institution that is funding the project to the company in China doing the construction. Every material comes from China, personnel, and even labourers, just like many drivers from China for Madaraka Express in Kenya. Many of the projects are not sustainable and cannot generate the revenue needed to repay the debts.
CHINA’S MODE OF OPERATION
There are so many examples of these that should give us a pause of what can potentially happen. Here are some of those projects, Hambantota Port, Sri Lanka, which was financed by China in a region where there is no business. Sri Lanka had problems servicing their sovereign debts and had a balance of payment crisis.
With no idea of what to do with the enormous deficit and repayment of loans, Sri Lanka leased 70 percent of the strategic port to China Merchants Port Holdings Company Ltd for 99 years just for $1.12 billion, mostly for their balance of payments. Before China took control of the port, the accumulated losses came up to about $300 million.
The port cannot generate enough revenue to service the debts, which is still about $100 million every year. Right beside the port in Hambantota, China helped fund what is known as the world’s emptiest international airport, Mattala Rajapaksa International Airport (MRIA), a white elephant project for about $205 million. This airport has no traffic and was running at a considerable loss, yet the debt would still have to be serviced.
To avoid another takeover by China, India, for strategic security reasons, decided to lease the airport for like 40 years for about $300 million. However, unfortunately, the deal fell through a couple of months ago.
Gwadar port in Pakistan is part of the ambitious $62 billion China-Pakistan Economic Corridor (CPEC), which is part of the Belt and Road Initiative (BRI).
China spent about $250 million to build this port, which is just a white elephant project like most of its projects, with little revenue to justify massive investments. Even if the project succeeds, China will be the beneficiary as 91% of the revenues go to China for the 40 years while Pakistan only pockets 9%.
Djibouti is a small country of 23,200 square km, strategically located on a narrow strait controlling access to the Red sea, one of the busiest shipping lanes with access to the Indian ocean. Djibouti’s indebtedness to China is about 70% of its GDP, while its total debt is now over 100%.
China is funding about $12 billion projects in Djibouti, including a 48 sq km free trade zone, seaports, airports. China-funded the $4 billion, 756 km railway connecting Djibouti to Addis Ababa in Ethiopia. That money is Djibouti’s part of the project.
Doraleh port in Djibouti was issued a 30-year concession to DP World, a Dubai company, to manage the port. However, due to some conflicts and perhaps the influence of China, Djibouti expropriated the port, nationalized it, and then sold 23.5 per cent of the port to China Merchants Ports Holdings, now managing the port with huge investments.
DP World has won multiple arbitrations against Djibouti with Djibouti liable to over half a billion dollars. Experts are warning that Djibouti is too exposed to China and might not be able to service the debts, which may cause them to surrender the strategic port.
China used debt to squeeze a tiny neighboring country Tajikistan to cede the disputed territory of 1,1158sq km to China to write off some undisclosed debt in 2011. As if that was not enough, China now wants the entire Pamir region accounting for 45% of the nation. Dushanbe paid off some debts to china by ceding mining rights to China.
China-funded about $1 billion highway in Montenegro dubbed the road to nowhere. Montenegro does not have the population to make the highway economically viable, and they do not have the money. 22,000 to 25,000 vehicles a day are what they need for this 165km road to sustainable, but less than 6000 vehicles ply the route on a busy part a day. The Export-import Bank of China funded 85 percent of the first part of the project, and 70 percent of the workers are Chinese workers. China will still run it under a concession for 30 years.
This highway meant to link to Belgrade in Serbia has caused the Montenegro government to raise taxes, freeze wages, and got rid of some benefits, and even with those harsh actions, debt would still be 80 percent of GDP.
Let us watch what is happening in Kenya concerning the Madaraka Express in that country. This project began in 2014, linking Mombassa to Nairobi with both passenger and cargo rail. The 472km line promised to be a game-changer like every of Chinese projects. This project was about $3.6 billion, funded by China EXIM bank 90% with Kenya Railway 10%.
The railway line was extended from Nairobi to Naivasha for another $1.5 billion. For the Naivasha part to make sense as the industrial park planned for Naivasha is nonexistent that could make the railway viable, they needed to extend it to the border town of Malaba in Uganda, which would cost another $3.7 billion.
In this third phase, China has refused to fund it, so the $1.5 billion spent to Naivasha makes no sense. In 2018, Madaraka Express generated $57m while operating cost was $120m, then in 2019, it generated $126m while operating expense was $170m. Despite all these losses and high indebtedness, Kenya handed the railway operations to Africa Star Railway Operation Company Ltd, a subsidiary of China Road and Bridge Corporation.
Even though Madaraka Express is running at a loss, Kenya Railways is owing Africa Star Railway Operation Company Ltd, operating the Express a whopping $380 million apart from the $940 million installment due, prompting lawmakers to ask for renegotiation. Unfortunately, a default may see Mombassa port gone like Hambantota port in Sri Lanka even though the Court of Appeal has ruled that these loans are illegal.
Lastly, in Nigeria, Olorunsogo and Omotoso plants have been ceded to China. Omotoso plant, funded by both China Engineering Machinery Corporation (CMEC) 65% and PHCH 35%. EXIM Bank China provided a loan of $115m. By September 2012, the government was already indebted to CMEC to the tune of $104m. The plant could not generate enough revenues to pay for itself. The pant was ceded to CMEC through a debt-equity swap in March 2013.
The same thing happened a year after at Olorunsogo as the plant got ceded to SEPCO Electric Power Construction and Engineering company through a debt-equity swap.
OTHERS HAVE CANCELLED OR SCALED DOWN
Nigerian government should look for an alternative or scale things down. The former Prime Minister of Malaysia, Mahathir bin Mohamad traveled to China shortly after his inauguration and canceled a $20 billion Chinese funded project as something Malaysia could not afford. “I believe China itself does not want to see Malaysia become a bankrupt country” – Mahathir Mohamad.
Naypyidaw scaled down a Chinese funded deep-water port from $7.3 billion to $1.3 billion so that Myanmar does not fall into a debt trap. Pakistan canceled a $2 billion coal power plant and scaling back rail projects through Chinese loans from $8.2 billion to $6.2 billion.
Magufuli of Tanzania had to renegotiate the Bagamoyo port project. He said only mad people could accept Chinese terms, called their loan term exploitative and awkward. Freetown canceled a $400m stadium project by China because they found out it was not economical. Nepal scrapped a $2.5 billion contract for a hydroelectricity project, accusing while Myanmar halted a $3.6 billion Chinese-backed dam.
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