Is Chinese aid to Africa a debt trap?

By Mwayi Peter

On Friday November 26, a tweet from the Chinese Embassy in Kampala, attributed to Wu Peng the Director General Department of African Affairs at the Ministry of Foreign Affairs in China, expresses disappointment towards media in Uganda who Friday morning published a story indicating that Entebbe International Airport was surrendered to China by the Government of Uganda.

“Which of the Chinese projects in Africa have been confiscated in Africa NONE! The hype surrounding Chinese ‘debt trap’ in Africa have no factual basis and is being pushed on malicious grounds,” Wu Peng stated.

According to the story which ran with the headlines; How Uganda coughed up Entebbe airport to China, Uganda took a $325 million (Ush1.1 trillion) loan from Exim Bank of China to refurbish its international airport.

The media reports pointed to clauses in the loan agreement which are termed unfriendly. One clause reportedly gives Exim Bank the sole authority to approve withdraws of funds from the Uganda Civil Aviation Authority accounts. The story goes on to indicate that the bank also has the power to approve annual and monthly operating budgets, which it could reject, and the rights to inspect the government and UCCA books of accounts.

The China International Economic and Trade Arbitration Commission (CIETAC) in Beijing also had the mandate to resolve disputes. It further supposes that the Chinese could take over government assets should Uganda fail to pay, a supposition that Attorney General Kiryowa Kiwanuka rubbishes in the same story.  “When you borrow money, your obligation is to pay. If you do not pay, the other party can take you to court, in which case this would be CIETAC,” he is quoted as saying, adding; “Let everyone do their part. The airport makes money and will meet its obligations.”

African countries have been criticized for embracing Chinese President Xi Jinping’s Belt and Road Initiative (BRI). The peak of this criticism came as African leaders assembled in Beijing to dine with Chinese leader XI under the Forum on China-Africa Cooperation (FOCAC). Many came out to call the Chinese aid to Africa as the new form of colonialism.

However, the leaders themselves have defended the relationship. Rwandan President Paul Kagame, said at the FOCAC Summit on September 3, 2018 that China’s engagement in Africa has been “deeply transformational both internally and with respect to Africa’s global position.”

In his speech at the opening ceremony of the FOCAC, Kagame said China sees a stronger Africa as an opportunity rather than a problem.

FOCAC, established 18 years ago on the basis of equality, respect and a commitment to mutual “well-being,” has grown into a powerful engine of cooperation fully aligned with Africa’s Agenda 2063 and sustainable development goals, he said.

To support President Kagame’s argument, pundits have argued that the fears about China’s intentions for investing around the world have overshadowed discussions of its economic benefits.

Matt Ferchen in an article published on www.carnegietsinghua.org, argues that while concerns about China’s debt-trap diplomacy have become more widespread in recent months, few, if any, of the claims include a clear-cut case proving that Chinese firms, banks, or foreign policy officials came into such deals with a long-term, strategic plan to attain economic assets or political leverage via unsustainable loan deals.

“Moreover, claims about China’s debt-trap diplomacy unquestioningly assume that China’s own economic and geostrategic interests are maximized when its lending partners are in distress. Such assumptions need to be more carefully examined,” he argues.

Perhaps what scares the critics about the BRI, especially from the west is, as Paul Haenle says in an article ‘More than a Belt, More than a Road’ argues; “the BRI increases China’s economic leverage as a creditor and promotes the internationalization of its currency in cross-border trade and the financing of projects.”

 Haenle defends the BRI saying the improved infrastructure will lead to expanded supply chains and increased productivity in those countries that have adopted the BRI. What he advises is that the countries must engage the initiative in productive ways.

He states that countries should also demand transparency and access to BRI projects during procurement and bidding, which he says will help them get rid of the fear that the projects only employ Chinese nationals in foreign countries.

 “Countries and companies should be focused on ensuring projects are sustainable, economically viable, and align with environmental, human rights, and labor standards to increase the likelihood that opportunities do emerge later on,” Haenle writes.

He adds: “They should push for greater transparency and access to BRI projects, especially during the procurement and bidding process as new projects are being formulated. The IMF’s recent announcement to open a joint training center to build capacity for officials involved along the BRI is a good example of constructive engagement.”

Can countries get out of Chinese Aid?

Malaysian Prime Minister Mahathir Mohammad, following a visit to China announced the cancellation of several multibillion-dollar China-financed projects in Malaysia. The argument was that the projects were not needed and were instead burdening the developing country with an unsustainable amount of debt.   

On Tuesday September 18, 2018, at the end of his visit to China, Mahathir told Malaysian journalists that both Chinese President Xi and Premier Li Keqiang understood the reasons behind the cancellation of the investments which China had earlier defended as bringing tangible benefits to both sides.

Malaysia will still have to pay penalties to extract itself from the projects comprising a $20 billion East Coast Rail Link and two energy pipelines worth $2.3 billion according to Mahathir

 The projects are part of President Xi’s Belt BRI to build ports, railways and other trade-related infrastructure across Asia, often built by Chinese contractors and financed by loans from Chinese state banks.

BRI projects in several countries including Thailand and Sri Lanka have been criticized for being wasteful, too costly, giving too little work to local companies or possibly facilitating graft.

 In December 2017, Sri Lanka’s new government, having struggled to make payments on a debt, were pressured to hand over Hambantota Port and 15,000 acres of land around it for 99 years to the Chinese. The transfer gave China control of territory just a few hundred miles off the shores of a rival, India, and a strategic foothold along a critical commercial and military waterway.

The case, pundits say is one of the most vivid examples of China’s ambitious use of loans and aid to gain influence around the world. The Sri Lanka- China debt deal intensified accusations about President Xi’s BRI, with arguments that the program amounts to a debt trap for vulnerable countries around the world.

It was during Sri Lanka’s brutal 26-year civil war with ethnic Tamil separatists that China became indispensable. Mr. Rajapaksa, who was elected in 2005, presided over the last years of the war, when Sri Lanka became increasingly isolated by accusations of human rights abuses. Under him, Sri Lanka relied heavily on China for economic support, military equipment and political cover at the United Nations to block potential sanctions.

The war ended in 2009, and as the country emerged from the chaos, Mr. Rajapaksa and his family consolidated their hold. At the height of Mr. Rajapaksa’s tenure, the president and his three brothers controlled many government ministries and around 80 percent of total government spending. Governments like China negotiated directly with them.

So when the president began calling for a vast new port development project at Hambantota, his sleepy home district, the few roadblocks in its way proved ineffective. “From the start, officials questioned the wisdom of a second major port, in a country with a population of 22 million, when the main port in the capital was thriving and had room to expand. Feasibility studies commissioned by the government had starkly concluded that a port at Hambantota was not economically viable,” the New York Times reported.

 Is Uganda doing due diligence in embracing China aid?

During his State of the Nation address on June 5, President Yoweri Museveni took personal responsibility for the delays in the launch of the Standard Gauge Railway project. He stated then that he was still not happy with the high cost of $2.3 billion that has been presented by the project team.

This raised even more uncertainty to the project. Indications were that President Museveni was looking at FOCAC in September to sign the deal with the China Exim Bank.

The East African newspaper reported that confusion over why the President chose to delay the signing affected funding, with the Ministry of Finance allocating only Ush50 billion ($13 million) for the SGR project in this year’s budget, because they believed the project was still far from being launched.

Perhaps Mr Museveni uncovering a bribery scam in the SGR as reported recently, is indication of due diligence being carried out. It was reported in the Independent Magazine that the President has called on the Chinese contactors to reduce the cost of construction before he can sign the deal.

According to the reports, back and forth negotiations are still ongoing and were expected to be concluded at FOCAC whereas no deal was signed even then.