• Thursday, July 18, 2024
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Chinese loans plunge more African countries into financial crises — Report 

Is Africa prepared to confront geopolitical contests spilling into the seas?

Massive loans from China, engineered to fast-track economic growth across countries like Ghana, Guinea, Ethiopia, and a cluster of 13 Heavily Indebted Poor Countries (HIPCs), have unfortunately plunged these nations into a deeper financial crisis.

A recent report submitted to the US Congress by the US-China Economic and Security Review Commission unearths the stark realities of these indebted nations.

The report spotlights Ghana as the most indebted among these nations, with an eye-watering debt to China amounting to $31.1 billion. Guinea, another West African nation, trails closely with a substantial debt of $21.9 billion.

The financial ties between China and countries like Ethiopia, Tanzania, the Democratic Republic of the Congo, Mozambique, and others paint a worrying picture, totaling $14.8 billion, $12.6 billion, $12.1 billion, $11.4 billion, and $7.9 billion, respectively. The extent of these debts today is staggering, especially when compared to figures from 2010.

What’s even more concerning is the significant shift highlighted in the report: “a staggering 60 percent of China’s debtor nations were grappling with financial challenges in 2022, a huge and significant leap from the mere 5 percent recorded back in 2010.”

This spike in financial strain among these debtor nations triggers echoes of historical debt crises, akin to the crises experienced in the 1970s and the late 1990s and early 2000s.

In those eras, the global community rallied behind initiatives like the Highly Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) to alleviate the burdens weighing on heavily indebted countries.

This parallel between historical crises and the current surge in financial distress due to debts owed to China raises profound concerns.

The alarming escalation of financial strain within these nations underscores the urgent need for a closer examination of these debt structures and the repercussions they have wrought upon the economic landscape of these countries.

Read also: China could influence Nigeria’s govt with its loans, says U.S

Ghana’s loan situation with China explained

A thorough examination of Ghana’s loans, topping $55 billion by September 2022, according to a BBC report, emphasises the significant influence of China’s loans.

Valued at $31 billion, these loans represent more than 75 percent of Ghana’s entire debt, intensifying the country’s financial crisis and emphasising the need for prudent loan management.

The BBC report stated, “Ghana is currently going through its worst economic crisis in a generation. Last year, the inflation rate hit a record high of 54 percent and is still running at more than 40 percent. Multiple credit rating agencies have downgraded the nation, preventing it from borrowing money internationally.

“By September 2022, Ghana’s total debt had surged to $55 billion. This meant the government needed in excess of 70 percent of its income to service the debt, something it was unable to do. It subsequently defaulted on much of its debt payments.”

A 2021 report by the Hong Kong Trade Development Council shed light on the familiar challenges faced by heavily indebted African nations like Ghana, reminiscent of the economic crises in the 1980s and 1990s.

Although debt relief programmes like the HIPC initiative provided respite, the pursuit of modernization and industrialization led to renewed borrowing for infrastructure projects without effective fiscal management.

China’s loan initiatives, a part of its global economic strategy, enabled the construction of significant infrastructure in Ghana, notably worth $2 billion in rail, road, and bridge networks.

In return, Ghana agreed to allocate 5 percent of its bauxite reserves to China, aiming for economic growth without stringent monitoring akin to that of Western lenders.

However, the COVID-19 pandemic’s impact, compounded by plummeting oil prices in 2021, severely affected Ghana’s economic progress, significantly hindering its ability to service its debts.

Read also: China to waive some Africa loans, offer $10bn in IMF Funds

chart of heavily indebted countries to china

Ethiopia’s debt crises and link to China

Ethiopia’s ambition to surge ahead of other developing nations led to substantial debt, surpassing the $14 billion owed to China.

Similar to Ghana and other African nations, the hunger for affordable loans from the second most powerful global entity led to financial turmoil due to challenges in servicing interest payments.

Official data from Ethiopia’s government reveals an external debt of $28.2 billion, with half of it owed to China.

This debt primarily funded infrastructure projects like the $86 million ring road, Gotera Intersection ($12.7 million), Ethiopia’s inaugural six-lane highway ($800 million), and the Ethio-Djibouti Railway line ($4 billion). Unfortunately, these initiatives fell short of the country’s economic projections.

This inadequacy is evident in the staggering unemployment rate, which affects 3.96 million people, or 66.28 percent of the population, ranking among the world’s highest.

Amid the COVID-19 pandemic, meeting interest payments on Chinese loans became challenging, triggering a financial crisis in the country.

Commenting on the report from the US-China Economic and Security Review Commission that exposed the debt commitment of these African countries to China, Theo Acheampong, an economist and political risk analyst, tweeted, “Very interesting visual. I thought Ethiopia would have taken more Chinese loans than Ghana. The data comes from the US-China Economic and Security Review Commission. According to the Commission, 60 percent of China’s debtor nations were in financial distress in 2022, up from 5 percent in 2010.

“But how is this any different from the debt distress of the 1970s, late 90s, and early 2000s, which led to the likes of HIPC and MDRI? Same game, just different players!”

Loans aim to transition entities from unfavourable positions to more favourable ones. Chinese loans, often linked to a country’s natural resources, were anticipated to facilitate this shift but, regrettably, did not yield the desired outcome.