9 September 2017

Ethiopia: If Chinese Generosity Seems Too Good to Be True

Photo: Herr Bert/Flickr
(File photo).
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Deputy Minister Xu Lyuping of the International Department of the Communist Party of China (CPC) arrived in Addis Abeba, just last month, to hold talks with Demeke Mekonnen, deputy prime minister of Ethiopia. The aim was to strengthen party-to-party ties between the CPC and the Ethiopian People's Revolutionary Democratic Front (EPRDF), for which Demeke serves as deputy chairperson.

The visit does not come out of mere diplomacy but a deep interest and relationship between the two countries that has manifested since the early 2000s. It is a sort of cosy relationship which prompted The Economist, that icon of the global liberal voice, to describe the EPRDF as "a good student of the CPC". It, in fact, brings billions of dollars annually in bilateral trade and an annual third of all the debt disbursed to Ethiopia from official creditors.

The Sino-Ethiopia relationship is bilateral in the sense that the countries trade between themselves, but not necessarily fairly. An economic woe expressed by most countries around the world, China has come on the international scene both as a blessing and as a curse. Yes, China contributes to about a quarter of total foreign direct investment (FDI) in Ethiopia and buys 240 million dollars worth of goods. But, it comes with a price tag of a 3.8 billion dollars in export bills.

For Ethiopia, China is largely measured in terms of the goods that have flooded the country and, of course, development in infrastructure. This past fiscal year alone, China disbursed over half a billion dollars for Ethiopia - an unsurprising amount given the various pledges throughout the years. And as of 2015 - according to China Africa Research Initiative at Johns Hopkins School of Advanced International Studies - Ethiopia has accepted over 13 billion dollars in loans from China since a decade and a half ago. Contrast this to the less than three billion dollars fund put aside for global aid by the communist state, in 2015.

China has been equally engaged in other African countries, with President Xi Jinping pledging 60 billion dollars to help the continent stir growth. No doubt all this has cemented China's influence in Africa. A trend apparently not just between the governments, but also the people.

Afrobarometer carries out opinion polls measuring attitudes in Africa; it collected data from 36 countries in 2016 and found out that 63pc of Africans have a positive view of China. Although Ethiopia was not included in the poll, anecdotal evidence suggests that feelings among Ethiopians toward China is mixed at best.

But African government's close relationship with China does not arise from the nation's popularity with Africans, but the other way around. In Ethiopia, China has become a primary source of development, especially as an alternative to the West, with the ease and size of its financing.

Getting loans from Western countries and multilateral institutions is tricky. First are the conditionalities, usually by financial institutions demanding economic reforms and donor countries in their commitment to see transparency and accountability among recipient countries. The International Monetary Fund (IMF), for instance, may require countries to privatise some sectors of the economy or even to adopt an austerity policy. Its officials justify these requirements, called structural adjustments, claiming it needs the loans to be paid back on time so that they will be made available for other countries.

Governments in recipient countries, understandably, are not pleased with this. They believe the preconditions undermine the respective governments and do not take into consideration the internal dynamics of society and politics.

Besides, the process of applying for loans, and getting one, is complex and multifaceted. It is a process by which the purpose of the loan, the viability of its return and credit worthiness are analysed. As if this is not enough to discourage recipient countries, there is also high-interests rate on loans from most of the commercial lenders and a short grace period.

The Chinese have made borrowing easy. The type of loans Ethiopia accepts from the Chinese government, usually for infrastructure development financing, are mostly concessional, as opposed to commercial; they have either longer grace period, lower interest rates or both. They also come with less stringent preconditions, owing it to China's policy of non-interference. To those making decisions in Beijing, business is strictly business - almost too good to be true.

And it is. China wants to project its influence in its region, and if possible, the whole world. Just as the United States (US) and the European Union (EU) often do, the communist nation wants more friends sharing the same values and political culture, and thus allies, around the world. This influence is already evident with Ethiopia, as witnessed from the nation's choice to identify with China over resolutions at the United Nations.

Take for instance the move to prevent the Human Rights Commission censorship of China (thwarted by Ethiopia and other pro-Chinese countries) or a similar position over Tibet and Taiwan. These were both unorthodox moves by a country whose general foreign policy has been one of remaining neutral. Development assistance often follows on the back of loyalty, AidData, which keeps a database on official aid flows, has found out.

As a result, there are those with a dissenting voice who justifiably claim China presents a risk to policy sovereignty, maybe not at an alarming level, but enough to deserve more scrutiny.

Another adverse effect of Chinese over-dependency is the after effect. China's impressive Tiger economy is indeed slowing. The nation will not serve as a source of financing for Ethiopia for far too long. The rate and capacity of loans will slow down and shrink in size eventually.

The latest growth outlook on Chinese should warrant alarm among macroeconomic policymakers in Ethiopia and other African countries that depend on China to steer their growth. China's central bank recently introduced effective lending rates are projected to increase, making borrowing expensive, according to FocusEconomics, an organisation that analyses and conduct forecasts for 125 countries, including Ethiopia. It is wise to foresee and prepare, for a tightening of the purse on China's side.

And as such, slowing financial relationships with creditors like the Paris Club, whose share of disbursements in the past budget year was less than one percent, will feel more painful.

While the need to look for alternatives is evident, there is the prevailing view that China casts too thick and wide a shadow for Ethiopia to resist. It has become an economic powerhouse, much like the US, the second cog over which global trade is propped up. Just as trade is unthinkable without China, it would be even more unrealistic to ask for development with zero loans from the country.

Nonetheless, although the nation will have to continue doing business with China, if the aim is to grow and prosper in the current global order, Ethiopia desperately needs a new debt management policy. The country needs foreign resources to develop, which for the time being cannot realistically be satisfied by earnings from taxes, exports or revenues from state owned enterprises. These have to be diversified.

Most of China's loans go into financing infrastructure development, a part of the economy the private sector could be a great ally. The model of public-private partnership (PPP) is still highly unexplored. If not that, then novel avenues like the Eurobond are advantageous to diversifying resources away from China, even if issuing bonds is expensive.

The close relationship with China could be more aptly utilised too. If such a cosy relationship holds true just as well behind closed doors, high spending Chinese visitor could become inbound tourists for Ethiopia, thereby bolstering the tourism industry. The goodwill between the two countries could also be used to encourage the Chinese to invest in more diverse sectors.

Reforms such as this may not completely fix resource dependence on China, though. Austerity measures are perhaps needed. The recent cut imposed on expenditures by federal agencies such as the use of extravagant vehicles for ministers and procurement of calendars and postcards are positive beginnings. But the gist of the problem has been the inability to prioritise spendings. Of the proposed 320.8 billion Br for the new fiscal year, a substantial portion will be transferred to regional states. Many of them are known to spend their budget on ideologically motivated festivities and infrastructures related to them only hoping returns of goods in the abstract.

While infrastructure development, as sponsored by China, is crucial for the country, it should also not desaturate investment and policy focus in other sectors. The administration should be active in propping up the nation's own companies - reforming trade practices so that local exporters could compete in the global arena. Such improvements upon allocation of resources can serve as a cushion for it is unlikely that China will forever grow or keep doling out massive loans.

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