Impact of Chinese Loans on the Nigerian Economy (concluded)

In 2020, Nigeria’s lopsided relationship with China in respect to loans attracted the attention of Nigeria’s National Assembly wing to conflicting reports. The NASS summoned the Ministers of Transportation, Finance, Budget & National Planning and their Communication and Digital Economy counterpart. The Ministers were required to explain certain clauses in the bilateral agreement between Nigeria and the Export-import Bank of China with regard to a loan of $400 million for Nigeria’s National Information and Communication Technology, ICT, infrastructure back-bone phase II project. Invariably, the NASS had raised eye brows about a clause of the agreement, which waives Nigeria’s sovereign immunity if it defaults in repayment.

The problematic clause in Article 8 (1) states as follows:The borrower hereby irrevocably waves any immunity on the ground of sovereignty or otherwise for itself or its property in connection with any arbitration proceedings pursuant to Article 8 (5) thereto, except for military assets and diplomatic assets.

The NASS has the right to know the nature of bilateral agreement between Nigeria and China, calling for an audit of all loan agreements. Other equally bad loan agreement includes:International Arbitration in pannel with Sunrise Power & Transmission Company over the Mambilla Hydro-power plant.20The Ajaokuta Steel Company Limited was designed to stimulate industrial growth, was held down for years because of prolonged litigation issues.Even in the political circle, key stakeholders have expressed serious concerns about the non-sustainability of Chinese loans.

During the 2019 Presidential Campaigns, the former Vice President of Nigeria Atiku Abubakar pointed out that Nigeria faces the challenge of Zambia with respect to Chinese loans. Zambia borrowed $5.5billion from China but because of the nature inability to repay, there were social upheavals, killings, protest and disruptions. China has therefore called on multilateral development banks to offer debt relief to Zambia.22It does appear that Nigeria has been trapped in the loans of China Braham Chellaney (2017),23 coined the term “debt-trap” diplomacy. Debt-trap diplomacy describes a financial relationship whereby a money lending nation grants loans to another for the purpose of increasing the lenders economic and political influence. Such loans are extended to the Less Developed Nations, LDNs with the preponderant intention of extracting political concessions, where the debtor nation is unable to meet repayment obligations.A major characteristic of debt-trap diplomacy is the secrecy under which the terms of loan agreements are kept. It is sad commentary that all Chinese loans to Nigeria are given under such conditions. China deploys her loans to advance her political and geo-strategic interest.

Since President Xi Jinping took office in 2012, Africa has been an experimental theatre of China’s debt-trap diplomacy.The World Bank avers that 97 countries across Africa, South-East, Asia, Central-Asia and the Pacific are under the grip of China’s debt-trap. They wreck havoc under the One-Belt and Road Scheme. Akpaninyie (2019)24 calls it crony diplomacy. The submission that Nigeria is a victim of China’s crony diplomacy may not be false after all.Nigeria started to borrow from China in 2015, the nation has continued to borrow more and more, sliding down the sleepy slope. This has been demonstrated in the debt-overhang theory. The debt-overhang theory posits that huge borrowing results in high level debt-traps and slows down economic growth.

The theory holds that when a country owes so much debt beyond its capacity to repay, it will inadvertently discourage foreign investors. This is because government has the tendency of increasing tax for the productive sectors of the economy. Public debt act as tax on future output and this reduces savings and frightens investors.Invariably, Nigeria’s huge Public debt profile is capable of discouraging investors, especially with the non-commercialization of the projects. Again even when money is generated through production, a substantial chunk of the states resources is set aside for debt servicing. Debt repayment not only reduces fiscal discipline. It also weakens access to credit, crowds-out economic growth and deters potential investors.

By extension therefore, the high debt burden of Nigeria drags down the economy and harms investment.Coccia (2017)26 corroborates the view that the resources used to service massive debt are a gargantuan drain on the budget, and this culminates in the distortion of government policies.A cogent reason to believe that the debt accumulating from China are impacting negatively on the Nigerian economy, is the debt crowding hypothesis, which suggest that higher debt servicing complicates a nations budget deficit. Nigeria owes about ₦77 trillion and the nation’s economy is bleeding because debt servicing reduces public savings and pushes up interest rate. The reality is that when government increases its loans profile to fund higher spending, it crowds out private sector investment. For some years now, Nigeria is engaged in deficit financing, this lowers disposable income and the capacity of businesses to make profits Gordon Cosimo (2018).

There is a consensus among most classical economists that public debt is damaging the economic growth.In Nigeria, a huge proportion of money is earmarked for debt servicing. As at September 2022, the Debt Management Office, DMO disclosed that Nigeria had spent ₦3.04 trillion on servicing domestic debts in nine (9) months. This represents an increase of 23.4% from 2021. The DMO figures revealed that the Federal Government debt servicing payments with Multilateral, Bilateral, Eurobond and Diaspora Bond also increased by 23.14% during the period under consideration.28The Federal Government spent ₦5.24 trillion on debt servicing as at November, 2022. In 2023, Nigeria owes ₦77 trillion, which implies that every Nigerian owes ₦384.869.29 Already, the sum of ₦6.31 trillion has been embarked for debt-servicing and this amounts to 30.8% of the ₦20 trillion estimated budget for the year 2023.The World Bank lead Economist, Alex Sienaert presented a paper titled “Nigeria Public Finance Review” Fiscal Adjustment for Better and Sustainable Development Results”. In the paper he projected that by the end of 2023, Nigeria debt servicing will gulp 100.2% of Federal Government Revenue. According to him, Nigeria’s debt remains sustainable, although the economy is vulnerable. Alex warned: Borrowing more is not the solution; debt costs are rising rapidly, squeezing non-interest spending. Debt servicing has surged over the past decades and is expected to continue increasing over the medium term, crowding-out productive spending.

When a nation is caught in a trap of debt burden, the results are clear: debt servicing, budget deficit, and high tax which would lead to low foreign investment, if the projects are not commercialized to generate revenue, it results in the provision of infrastructure, poor funding of health, education, and other social services. Other negative statistics include stagflation, low GDP, high unemployment rate, high corruption perception index and high cost of borrowing. There are detrimental to the health of the economy. This has been Nigeria’s trajectory.Whereas, Nigeria has the advantage of building infrastructure from Chinese loans, technocrat Chijioke Ekechukwu, an economist and former Director-General, Abuja Chamber of Commerce and Industry expressed pessimism about China loans. In his view, most of the projects tied to Chinese loans are handled by Chinese Companies. The implication is that the loans, interest and profit will be repatriated to Beijing. Frank Dagunro (2023) submits that China loans are healthy to Nigeria if well managed. The President, Manufacturers Association of Nigeria, MAN, believes that re-negotiating the loans will reduce the interest of such loans. However he expressed optimism that the loans will improve the productive sector of the economy. His major fear is that given the notorious Nigerian characters, the loans may be eaten-up by corruption.

President Xi jinping had assured Nigeria that China would do everything to assist in the development of the nation’s infrastructure, and it is up to Nigerians not to waste the money on vanity projects.Economist has warned that over-borrowing from China would adversely affect the political and economic sovereignty of Nigeria. It is true that China’s investment in agriculture, light industry, machinery, infrastructure, construction, ICT and tourism will add value to the Nigeria Economy, there is a need to strengthen the proposed Nigeria-China Growth. Development and progress strategy, GIST, geared towards advancing the bilateral relations between the two countries.Rislamudeen Mohammed, Managing Director of Safmur Investment Ltd admits that the loans are designed to close the infrastructure gap in Nigeria, but what is dizzying is that our debt revenue ratio is not encouraging. The loans should have a multiplier effect on job creation, poverty reduction and provision of infrastructure rather than pursue vanity projects that can hardly be commercialized.After the fratricidal civil war in 1970, Nigeria embarked on a policy of reconstruction, without borrowing money. With the Chinese loans, most indebted nations are losing their valuable national assets. It was against this background that Malaysia cancelled China financed projects with more than $120 billion, asserting that Malaysia cannot come under the burden of unsustainable debt. China gives Nigeria loans on one hand and nominates her companies as contractors to execute them. It is like a Greek Gift-giving with one and taking it with the other hand. The technological transfer promise has not been fulfilled. Rather, domestic industries in Nigeria have been weakened, having lost their competitive edge too cheap, Chinese manufactured goods.Conclusion and RecommendationThe China-Nigerian diplomatic relations is about 51 years old and counting.

As part of China’s BRI initiative, the relationship has blossomed such that China has taken over the development of virtually all sector of the Nigerian economy. What appears to have complicated the relationship are the huge loans China has given Nigeria, granted that China’s investment in Nigeria is phenomenal, Nigeria now ranks 6th on the list of debt-trapped African Nations. It is tempting to agree that China’s debt-trap diplomacy poses a serious threat to Nigeria’s economy and sovereignty. It is undeniable that Nigeria needs to revamp her ailing infrastructure to stimulate economic growth but the unsustainable loans may be strategic plan to trap African’s most populous nation on a long-term debt commitment.

It is hereby recommended that in forging ahead with this inadequate relationship, Nigeria can emulate the China character of fiscal discipline and purposeful leadership to manage resources in a sustainable manner. Nigeria and China can also reinforce bilateral cooperation and people-to-people diplomacy. Fiscal policy discipline should include reducing the cost of governance. The deregulation of downstream sector and removal of subsidy on petroleum products will help some money. Cutting the cost of governance also includes cutting down government political appointees and other layers of inefficiency will be appropriate measures.With the China loans, Nigeria can improve her business environment and leverages infrastructure and agricultural production.

China’s predatory economic expansion and aggressive pursuit of her geo-strategic interest should be moderated by disclosing terms of the loans. Our leadership must commit China to find project that can stimulate economic growth along the pathway to industrialization. If Nigeria insist on transparency and prudence and China monitors the deployment of loans and stop funding vanity projects, the fundamental pillars of Sino-Nigerian diplomatic relations will be strengthened for the mutual benefit of both giants of the two continents.

concluded.
Idumange is an expert in Sino-Nigerian Diplomacy.