The good and bad from China-africa fo­rum

Business Daily (Kenya) - - IDEAS & DEBATE - TONY WATIMA is an econ­o­mist

Last week dur­ing the Fo­rum on China-africa Co-op­er­a­tion (FOCAC), China pledged $60 bil­lion in nanc­ing for projects in Africa in the next three years, stir­ring a huge de­bate about the medium-term debt sus­tain­abil­ity out­look of African economies Now, the con­cern about China weaponiz­ing loans through a debt-trap diplo­macy is ac­tu­ally not mis­placed. The model China has used over time has been con­tract­ing and not in­vest­ing, where China EXIM bank and pri­vate banks nance State-owned com­pa­nies to de­liver in­fra­struc­ture projects then African coun­tries pay back in form of com­mer­cial and con­ces­sional loans. Since they never in­vest in these projects, they are never con­cerned about thor­ough scrutiny of the com­mer­cial vi­a­bil­ity of these in­fra­struc­ture projects. And this has been the ma­jor down­side e ect of China’s in­fra­struc­ture-driven eco­nomic model in Africa - the rise of white ele­phant projects - more than half of Chi­nese in­fra­struc­ture projects in de­vel­op­ing economies even out­side Africa are un­der­per­form­ing. When a coun­try ac­cu­mu­lates huge debts to nance projects that un­der­per­form, they al­ways end up in a debt dis­tress be­cause eco­nomic growth re­turn ex­pected from these projects are low whilst in­ter­ests on the loans ex­tended to the projects are high. It’s for this rea­son that the Euro­pean Union passed the Maas­tricht Treaty in 1992 de­mand­ing mem­ber coun­tries to keep a scal de cit of less than thre per cent whilst pub­lic debt-to-gdp at 60 per cent as a cri­te­rion as­sess­ment of debt sus­tain­abil­ity But the good news is that China seems to be grad­u­ally mov­ing away from con­tract­ing model. In the $60 bil­lion pledge, $10 bil­lion will come through Chi­nese pri­vate in­vest­ment. This is the rst time that Chi­nese gov­ern­ment has brought in pri­vate sec­tor to ac­cess the Belt and Road ini­tia­tive nan­cial com­mit­ment So, the in­di­ca­tion is that China will be mix­ing con­tract­ing with in­vest­ment model through pub­lic- pri­vate part­ner­ships in de­liv­er­ing in­fra­struc­ture projects mean­ing african gov­ern­ments will not bear the full bur­den of the debt when de­liv­er­ing in­fra­struc­ture projects but will share that nanc­ing re­spon­si­bil­ity with Chi­nese pri­vate sec­tor rms. This means thor­ough com­mer­cial vi­a­bil­ity will be pri­ori­tised by Chi­nese rms to avoid white ele­phant projects since they are in­vestors in the projects. Onto the un­for­tu­nate de­vel­op­ment out of the­foc ac fo­rum is that one of the big­gest concerns for african coun­tries with China is the big trade de cit. This was the sole rea­son Kenya re­jected an EAC China free trade agree­ment ar­gu­ing that the ar­range­ment will only make the de cit worse. So, one would have ex­pected that African coun­tries go­ing into­foc ac would have bar­gained for a duty-free mar­ket for its agri­cul­tural goods be­cause there is a high de­mand for more agri­cul­tural prod­ucts in china and Africa has 60 per cent of the worlds re­main­ing arable crop­land but only four per cent of African ex­ports to China are agri­cul­tural prod­ucts. For in­stance, Kenya’s ex­ports to China ac­count for less than two per cent of its to­tal do­mes­tic ex­ports. Kenya is the world’s fourth big­gest ex­porterof­cut ow­ers­bu­tits­main ex­port com­modi­ties to China are raw hides and skins (which it’s the big­gest ex­porter to China in the world), scrap met­als and sisal. So any­one would have ex­pected the kenyan del­e­ga­tion to pri­or­i­tize ne­go­ti­at­ing for along-term duty-free ac­cess for Kenyan cut ow­ of the rea­sons for this pal­try per­for­mance is high taxes that make African agri­cul­tural prod­ucts un­com­pet­i­tivein the chi­nese mar­ket. It’s quite sur­pris­ing that African coun­tries never raised this up as a sub­ject of dis­cus­sion dur­ing­foc ac. The only agri­cul­tural deal we have seen out of FOCAC is Bei­jing seek­ing soy­beans im­ports, this is af­ter it hit US beans with an ad­di­tional 25 per cent tari and its look­ing for an al­ter­na­tive source and not be­cause African coun­tries ne­go­ti­ated for it. A duty-free ac­cess for ma­jor­ity of agri­cul­tural prod­ucts would have given African farm­ers the con­dence to in­vest in im­prov­ing yields and spur cre­ation of agri­cul­tural value chains link­ing farm­ers to stor­age, pro­cess­ing and lo­gis­tics fa­cil­i­ties.

One of the big­gest concerns for African coun­tries with China is the big trade de icit.”

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