Loans for infrastructure

These projects involve huge financial lending to countries to build or re-build their infrastructure to promote sustainable growth and development. They have also received acceptance and gained currency globally, demonstrating a vote of confidence in China’s new global development agenda. Sadly, critics of this development strategy continue to pour cold water on it, choosing to rename the strategy “debt trap diplomacy” or “debt colonialism” by China to colonize smaller countries by lending them huge amounts of money that they cannot repay with the sole purpose of dominating the world.

“Debt colonialism” fallacy

The “debt colonialism” fallacy has been backed by claims that China is leveraging massive loans it holds over small states globally to snatch assets and increase its military footprint either as a superpower or superpower-to-be. In supporting the BRI program, China has issued loans to countries that include Montenegro, Pakistan, Maldives, Laos and Sri Lanka, according to data from the Washington-based Center for Global Development.

In Africa, countries like Ethiopia, Uganda, Tanzania, Rwanda and Burundi also borrowed money from China. These loans have been largely used to build infrastructure in transport, communications, manufacturing and energy sectors in their economies. Reports circulating in local and international press fueled by opponents of the BRI, who are against infrastructural development in developing countries, indicate that at least eight countries are in danger of falling into so-called China’s “debt trap.” These countries include Sri Lanka, Zambia, Djibouti and Pakistan, among others. But what critics of the BRI that involves lending money for key infrastructural development have failed to understand is that China offers the best loan terms, including an ample grace period for projects to be completed before the loans start accruing interests and repayments are made.

Even the immediate former U.S. Secretary of State Rex Tillerson, while castigating the Chinese loan policy to developing countries, acknowledged that, “Chinese investment does have the potential to address Africa’s infrastructure gap.” What this means is that Chinese loans are not supply-driven, but demand-driven, to countries that have identified key projects to drive their growth yet have cash shortages for such huge capital-intensive projects.

Another misconception about the Chinese loans is that it’s the largest component in the debt matrix of the borrowing countries. In Africa, Chinese loans still remain a small part of the total external debt owed by African countries. According to the China-africa Research Initiative at John Hopkins’ School of Advanced International Studies, Chinese loans to Africa were estimated at $114.4 billion between 2000 and 2016, representing 1.8 percent of Africa’s total debt. This is insignificant and contrary to the impression created that China is choking developing countries with debt.

What Chinese loans have done is to diversify these countries’ loan portfolios to avert any risk associated with overreliance on one borrower, while at the same time trying to reduce Africa’s debt burden. Another key benefit of Chinese loans is that the loans are purely earmarked for infrastructure development like building of gas and oil pipelines, shipping lanes, railways, roads, ports and economic corridors, among others. This kind of infrastructure is a necessary prerequisite for development, especially in Africa. It’s the foundation on which sustainable economic growth and development is built.

The African Economic Outlook 2018 report published by the African Development Bank Group indicates that for Africa to achieve the projected 4.1 percent GDP growth in 2019, there is need for infrastructure investment in the range of $130 billion$170 billion a year. This is one of the compelling reasons why Africa needs Chinese funding for its economic prosperity. Another advantage of Chinese loans to developing countries is that they are mostly concessional loans that carry low-interest rates and favorable repayment plans.

At the Johannesburg Summit of the Forum on China-africa Cooperation (FOCAC) held in South Africa in December 2015, China pledged $60 billion to assist Africa to build its infrastructure, of which $35 billion was concessional foreign aid loans, preferential loans and non-preferential export buyers’ credits. Chinese loans offer developing countries a good platform for technological transfer and promote efficiency. Chinese loans are stimulants of GDP growth and China-financed large projects are combined with industrial projects, which assist in translating each party’s advantages into more tangible outcomes of cooperation, thereby offering solid ground to realize sustainable economic growth.

At the FOCAC Beijing Summit held in September 2018, China again extended $60 billion to support China-africa cooperation. This included $15 billion in the form of grants, interest-free loans and concessional loans, $20 billion worth of credit lines, the setting up of a $10 billion special fund for development financing and a $5 billion special fund for financing imports from Africa.

As the blossoming China-africa relations continue to attract divergent global debates, mainly from Africa’s old donors like the West, it should be noted that China has offered debt relief and grants to many developing countries globally. Empirical evidence reveals that China’s financial support has a positive impact on debt tolerance as it stimulates exports, expands infrastructure investment and increases countries’ gross national product. Developing countries, particularly those in Africa, must learn that China is a solid development partner with their interests at heart and that it’s incumbent upon them to ensure that the loans are utilized transparently and accountably to promote prosperity in Africa and beyond.

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niyanshuo@chinafrica.cn