11 March 2018

East Africa: If Beijing Sneezes, East Africa Will Catch a Bad Cold


East Africa has been flagged as one of the regions that could experience shocks in the event the Chinese economy suffers a meltdown, given the states' heavy borrowing from the Asian giant.

New data from the Centre for Global Development, an international think tank, shows that Djibouti, Kenya and Ethiopia could be economically vulnerable, with Djibouti at extreme risk, if the Chinese economy were to experience shocks.

China's financial reach is evident in the region as countries continue to take up loans to finance roads, railways, airports and other mega infrastructure projects, making it an increasingly important financial influence on the world stage.

As part of the Belt and Road Initiative, 68 countries, a majority in Africa, owe China. Beijing is planning $8 trillion in deals that could leave some of these countries vulnerable.

Already, Kenya has indicated this as a risk in the prospectus of its recent $2 billion Eurobond, saying that China being its largest creditor, any adverse effects on its economy could impact Nairobi's future borrowing ability.

"As at June 30, 2017, outstanding bilateral external debt due to China (excluding Chinese commercial banks) amounted to $4.6 billion, making China Kenya's largest creditor," the Treasury said in the document.

"Kenya's reliance on China for such a significant portion of its bilateral external debt and a key financing source to various infrastructure projects means that any disruption to China's economic stability could have an adverse effect on Kenya's ability to increase bilateral borrowings from the country in the future."

In 2017, various ministries and corporations in Kenya, such as the Ministry of Energy and Kenya Power and Lighting Co Ltd, took out loans from the Exim Bank of China amounting to $1.2 billion and $537.58 million respectively. The debt matures between 2030 and 2040. The loans, the government said, were used to fund certain infrastructure and electricity projects.

A debt report released in December 2017 shows that Beijing gobbled up nearly half of the funds Kenya spent on external debt repayments in the three months ended September 2017.

Nairobi spent $122.7 million to service loans from China in the first quarter of the 2017/18 financial year, accounting for 48.26 per cent of what it used to service foreign debt. This was 70.69 per cent of the $179.9 million total repayments to bilateral creditors.

The repayments to China were second to International Development Association, the country's largest multilateral lender, at $39.06 million.

The Centre for Global Development report has evaluated the current and future debt levels of the 68 countries hosting the China-funded projects and found that 23, including Kenya, are at the risk of debt distress. In eight of those countries, future Chinese financing will significantly add to the risk of debt distress.

"If the China Belt and Road Initiative follows Chinese practices for infrastructure financing -- which often entail lending to sovereign borrowers -- then BRI raises the risk of debt distress in some borrower countries," said John Hurley, a visiting fellow at the CGD and a co-author of the report.

According to the report, China's record in managing debt distress on the part of its borrowers has been problematic and, unlike the world's other leading government creditors like the World Bank and IMF, Beijing has not signed binding rules to avoid unsustainable lending and address debt problems when they arise.

"Our research makes it clear that China needs to adopt standards and improve its debt practices," said Scott Morris, senior fellow at the CGD and a co-author of the paper.

China's share of debt in Djibouti, the site of its only overseas military base, will rise from 85 per cent to 91 per cent of GDP as a result of infrastructure funding.

Visiting US Secretary of State Rex Tillerson said on Thursday that African countries should be careful not to forfeit their sovereignty when they accept loans from China, the continent's biggest trading partner.

"We are not attempting to keep Chinese dollars from Africa," Tillerson told a news conference in Addis Ababa. "It is important that African countries carefully consider the terms of those agreements and not forfeit their sovereignty."

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