Nigeria And China's Debt-Trap Diplomacy

Across time and space, developing nations have resorted to borrowing from global financial institutions such as the IMF with strict conditions of repayment. Such nations justify borrowing for a variety of reasons.Borrowing is often done with a view to accelerating capital spending designed to stabilize the economy especially when there is budget deficit.Economists opine that borrowing from foreign financial institutions attracts lower interest rates and a longer moratorium or repayment periods than domestic loans.Loans are one of the cheapest ways of generating money to fund investments in the annual budget.

Foreign loans help nations in maintaining economic and financial liquidity. (Greece deployed external loans to leverage economic recovery).Developing nations facing budget deficits, with low Gross Domestic Product can deploy foreign loans to stimulate economic growth.Developing countries also secure loans to meet their development goals and to attract Foreign Direct Investment, FDI and finance economic growth.Foreign loans enable countries to diversify their investment in exports and imports.

The Federal Government of Nigeria believes that China loans are a sure way of diversifying the sources of borrowed funds. The DMO explained that the loans are used to finance specific capital projects. Whereas the DMO emphasizes efficiency and prudence in the expenditure of loans, the exponential rise of Chinese loans has evoked fears that borrowing from the China Exim bank may put Nigerians critical assets at risk in the event of default in repayment.However, the DMO dismissed such insinuations of a possible takeover of the economy by China, asserting that the possibility of failure did not exist.

The DMO also assured that Nigeria’s public debt was being managed under statutory provisions and international best practices. President Buhari justifies the Chinese loans in these words.We take that (loans) where it is necessary. I told you now of something, what it used to be between Lagos and Ibadan alone, not to talk of the rest of the country. So the Chinese are welcome, anybody that is prepared to come and help us and our infrastructure to do the roads, the rail and paper will be welcomed.Whereas some of the loans are project-tied others are concessionaries, attracting lower interest rate and income-contingent in nature.

As at March, 2020, the total borrowing from China stood at $3.121. The loan is concessional in nature with 2,50% interest per annum. The tenor of the loan is 20 years with a grace period (moratorium) of 7 years, whereas the interest rate is low, the long tenor of the repayment of the loan is easier. The $3.121 billion was deployed to fund eleven CID projects which include:

1. Nigerian Railway Modernization Project (Idu-Kaduna section),
2. Abuja Light Rail project.
3. Nigerian Four Airport Terminals Expansion project (Abuja, Kano, Lagos and Port Harcourt
4. Nigerian Railway Modernization Project – Ibadan Section and
5. Rehabilitation and upgrading of Abuja-Keffi-Markurdi Road Project.

This is In addition to boosting the transport infrastructure of the nation. The implementation of these projects created jobs and positively impacted directly and indirectly on service providers. Stakeholders in Nigeria aver that the improvement of transport infrastructure is value added to Nigeria’s economic growth and development.Nigeria has been sourcing for loans from the IMF since the late 1980’s.

However, the argument is that the loans emanating from the Washington Consensus are usually long term loans resulting from social chaos, guided by a promise of transparency and good governance. For instance, under the Babangida regime in 1985, the military leader said Nigeria needed an IMF loan of ₦$2.4 billion. This was occasioned by a sharp drop in the price of crude oil5. The argument then was to invest huge sums of money in Agriculture in pursuit of self-sufficiency in food production.

Three conditions were given for the loan. They include: the removal of subsidy on petroleum products, scrapping of multiple exchange rates and downsizing of its civil service.On the contrary, the loans emanating from the Beijing Flagship are short-term in nature. The conditions are often opaque. Recipient nations are allowed to develop their own growth strategy. In the opinion of Brahma Chellaney6 China is a predatory lending nation, bankrupting lending countries in pursuit of dept-trap diplomacy.

Analysts believe that Chinese loans have provided an alternative, a new option for low-income countries.In Africa, the ten frontline borrowing nations are as follows:

• Angola $42,638 billions
• Ethiopia $13,698 billion
• Zambia $10,065 billion
• Kenya $9,272 billion
• Egypt $7,872 billion
• Nigeria $7,266 billion
• Cameroon $6,192 billion
• South Africa $5,489 billion
• CD Republic $5,387 billion
• Ghana $5,264 billion (2000-2019, Chinese Financiers)

Some development experts hold the view that Chinese loans are project-tied hence the possibility of mismanaging them is remote. However, borrowers are compelled to create special accounts with cash balance that China can seize in case of default. So many recipients of Chinese loans are facing repayment crisis. With the “default clause”, it appears borrowers cannot walk away. Most debtor countries are renegotiating the “hidden” terms of the loans. One thing is clear: China is embarking on a policy of commercial penetration and strategic leveraging in Africa, taking active role in assisting strained economies and financing much-needed infrastructural projects in transport, power, ICT, road and petroleum/mineral resources.

Chinese loans are regarded in some quarters as a huge threat to Africa’s sovereignty and economic viability. African countries seem obsessed with Chinese loans because of the desperate need for critical infrastructure, to re-engineer economic growth. Stones and Chazan (2020) argue that Chinese loans could on the long-run encourage enslavement. This is the perspective of Former US President Barack Obama who described Chinese loans as “the methamphetamines of infrastructure finance, highly addictive, readily available and with negative effects that far outweigh any temporary high8.China has been criticized for embarking on variety of projects, with a weak nexus to economic growth and low potentials for commercialization.

In spite of the perceived dis-benefits of Chinese loans, African leaders appreciate the role of China in promoting economic growth in their countries. They argue that China’s infrastructure model has fewer strings attached to their loans. French, 20219 contends that neither the United States nor the rich Western countries have proposed any alternative to compete with China’s loan regime. The absence of any competing alternative makes the highly subsidized China loans desirable and attractive. After all, China loans are not attached to any rigorous conditionality, Kwasi, 2019. It is difficult to confirm or disconfirm the merits and demerits of Chinese loans.

to be contd.
Idumange is an expert in Sino-Nigerian Diplomacy.