China to cut back on African lending amid rising debt profile
Over the next 3 years, China would cut the headline amount of money it supplies to Africa by a third (1/3) to $40 billion with more emphasis on SMEs, green projects and private investment flows rather than large infrastructures which was the former norm.
This was stated by the Chinese President, Xi Jinping in a video speech last year while speaking to the triennial Forum of China-Africa Cooperation which was held in Senegal.
From almost nothing, Chinese Banks today make up about one-fifth of the total lending to Africa, concentrated in few strategic/ resource-rich countries, some of which include Nigeria, Angola, Djibouti, Ethiopia, Kenya, Zambia and Uganda.
Figures obtained from the China-Africa Research Initiative at Johns Hopkins University revealed that in 2016, annual lending by Chinese banks peaked at a whooping $29.5billion. It however fell to a modest $7.6 by the 3rd quarter of 2019.
Having dived head-long into one of the world’s poorest continents, Chinese lenders have grown more cautious as some nations have reached the limit of their borrowing capacity and the prospect of default looms large. The IMF lists more than 20 African countries as being in, or at high risk of debt distress.
Events from China’s debt repayment debacle with Uganda last year, served as an eye opener for many African countries. October 28th presented itself as a ‘not-so-great’ day for the Ugandan finance minister, Matai Kasaija as he was hauled into parliament and grilled over the $200 million Chinese loan which was channelled to the expansion of the Entebbe airport, which serves the capital Kampala. The minister apologized to the assembled lawmakers stating “We shouldn’t have accepted some of their clauses. However, we were warned to either take it or leave it.”
The crux of the issue was centered around a contract that was signed six years earlier with China Eximbank; one which some Ugandan lawmakers, officials and lawyers said undermined National sovereignty. A Ugandan report last year even suggested that Beijing could seize Entebbe airport (the country’s main international gateway); a claim that echoed accusations of Chinese “debt traps” and one forcefully denied by both governments.
In response, the country’s two main policy banks, China Eximbank and China Development Bank, have adopted increasingly hardline lending terms. Those conditions however, have begun proving themselves as pandemic-related economic hardship puts a strain on more indebted African countries.
At the heart of the Entebbe airport debacle are what some analysts have termed ‘toxic clauses’ in the loan contract which required Uganda’s Civil Aviation Authority to channel subsequent revenues into special escrow accounts and submit budgets to China Eximbank for approval. In a nutshell, it means that the entire contract is governed by Chinese law and if disputes arise, they must be settled by arbitration in Beijing.
Joel Ssenyonyi, head, parliamentary public accounts committee reacted to the clause saying “Given the experience of Zambia with their airport and national broadcaster after a Chinese loan and Kenya with their port, it’s only reasonable that Ugandans be worried.”
His comment reflects sentiment for most parts of the continent that China will eventually exert a price for what has (until now at least)been seen as easy lending.
While some analysts draw a parallel with western financial institutions, including IMF and World Bank, which lent generously to African governments in the post-independence period only to impose harsh structural adjustment programmes on them from the 1980s after governments struggled to repay, others are of the opinion that some of the concerns over the contract clauses are over blown.
Bradley Parks, the research unit director at William & Mary University dismissed the myth of China’s supposed intention to entrap borrowers in order to gain control of ports and airports saying “We did not find much evidence of physical infrastructure assets being put up as collateral in their books.”
“However, some of the other legal conditions that rang alarm bells (like the trademark clauses employed in their books), may be a cause for legitimate concern,” Parks added.
Although details of the Entebbe airport contract have not been made public, two other China Eximbank loan agreements for infrastructure projects signed with the Ugandan government just months before the airport deal contained escrow account provisions.
In both cases, all project revenues were to be funneled into a debt repayment reserve account; in effect giving Chinese lenders first dibs on revenue if a borrower becomes distressed.
Nigeria seems to be exempted from this category as its loans from China account for only 3.94% of the country’s total debt of $79.303 billion, however, wisdom is profitable to direct. According to reports from the Debt Management Office (DMO) of the federation, as at March 31, 2020, the Total Borrowing by Nigeria from China stood at $3.121 billion. Similarly, in terms of external sources of funds, Loans from China accounted for 11.28% of the External Debt Stock of $27.67 billion at the same date.
Chinese banks have learnt many lessons over 2 decades of lending to African governments. In the 2000s, they experimented with financing infrastructure in resource rich countries, such as Angola and Republic of Congo, by securing loans against oil or mineral shipments or future-derived revenues.
Chinese policy banks’ penchant for revenue collection accounts is a version of the same model in countries such as Uganda, Kenya and Ethiopia that do not have the natural resources to back loan repayments.
Rising African debt and the economic fallout from the pandemic may force China’s banks to adjust their lending practices yet again. Bankers and lawyers however caution that a systemic crisis could overwhelm Chinese banks’ attempts to protect their interests through escrow accounts and exemption from global debt restructuring deals.