Last week during the Forum on China-Africa Co-operation (FOCAC), China pledged $60 billion in financing for projects in Africa in the next three years, stirring a huge debate about the medium-term debt sustainability outlook of African economies
Now, the concern about China weaponizing loans through a debt-trap diplomacy is actually not misplaced. The model China has used over time has been contracting and not investing, where China EXIM bank and private banks finance State-owned companies to deliver infrastructure projects then African countries pay back in form of commercial and concessional loans.
Since they never invest in these projects, they are never concerned about thorough scrutiny of the commercial viability of these infrastructure projects. And this has been the major downside effect of China’s infrastructure-driven economic model in Africa - the rise of white elephant projects - more than half of Chinese infrastructure projects in developing economies even outside Africa are underperforming.
When a country accumulates huge debts to finance projects that underperform, they always end up in a debt distress because economic growth return expected from these projects are low whilst interests on the loans extended to the projects are high.
It’s for this reason that the European Union passed the Maastricht Treaty in 1992 demanding member countries to keep a fiscal deficit of less than thre per cent whilst public debt-to-GDP at 60 per cent as a criterion assessment of debt sustainability
But the good news is that China seems to be gradually moving away from contracting model. In the $60 billion pledge, $10 billion will come through Chinese private investment. This is the first time that Chinese government has brought in private sector to access the Belt and Road initiative financial commitment
So, the indication is that China will be mixing contracting with investment model through public-private partnerships in delivering infrastructure projects meaning African governments will not bear the full burden of the debt when delivering infrastructure projects but will share that financing responsibility with Chinese private sector firms.
This means thorough commercial viability will be prioritised by Chinese firms to avoid white elephant projects since they are investors in the projects.
Onto the unfortunate development out of the FOCAC forum is that one of the biggest concerns for African countries with China is the big trade deficit. This was the sole reason Kenya rejected an EAC-China free trade agreement arguing that the arrangement will only make the deficit worse.
So, one would have expected that African countries going into FOCAC would have bargained for a duty-free market for its agricultural goods because there is a high demand for more agricultural products in China and Africa has 60 per cent of the worlds remaining arable cropland but only four per cent of African exports to China are agricultural products.
For instance, Kenya’s exports to China account for less than two per cent of its total domestic exports. Kenya is the world’s fourth biggest exporter of cut flowers but its main export commodities to China are raw hides and skins (which it’s the biggest exporter to China in the world), scrap metals and sisal.
So anyone would have expected the Kenyan delegation to prioritize negotiating for a long-term duty-free access for Kenyan cut flowers. One of the reasons for this paltry performance is high taxes that make African agricultural products uncompetitive in the Chinese market.
It’s quite surprising that African countries never raised this up as a subject of discussion during FOCAC. The only agricultural deal we have seen out of FOCAC is Beijing seeking soybeans imports, this is after it hit US beans with an additional 25 per cent tariff and its looking for an alternative source and not because African countries negotiated for it.
A duty-free access for majority of agricultural products would have given African farmers the confidence to invest in improving yields and spur creation of agricultural value chains linking farmers to storage, processing and logistics facilities.