Japan takes on China with cheaper loans plan for Africa

The move would help create an alternative to the high-cost lending by China to African countries since it launched its Belt and Road Infrastructure programme in 2013, which has been a partial cause for African debt servicing costs to balloon.

In 2013, China overtook Japan to be Kenya’s top foreign lender on the back of infrastructure loans, including the billions used to build the Thika superhighway.

Kenya’s stock of Chinese debt rose to Sh696.2 billion at the end of March compared to Japan’s Sh165.7 billion, offering Beijing leverage in influencing policy.

Through its development financing arm, the Japan International Cooperation Agency (JICA), Tokyo has unveiled an Africa-focused strategy that marks a significant pivot in its overseas development agenda.

As African governments shop for cheap loans to ease their debt loads, Japan has offered to revamp its Official Development Assistance (ODA) to the continent, a reprieve to countries like Kenya that have been categorised by the International Monetary Fund (IMF) as being in high debt distress.

“Converting high cost of debt into concessional debt (low interest debt) is really important to stabilise the African continent,” Naoki Ando, the senior vice-president for JICA, was quoted saying by the Financial Times.

The shift in Japan’s Africa strategy came ahead of the ninth Tokyo International Conference on African Development (Ticad), which ran from August 22 to 25.

Ticad, which was first held in 1993, was initially aimed at currying favour with African leaders to get Japan a seat on the UN Security Council, political scientists have argued. 

The conference was reshaped under late Prime Minister Shinzo Abe from a focus on development to promoting investment by Japanese companies seeking to tap into Africa’s rapidly growing population.

President William Ruto led the Kenyan delegation to the conference at a time when Japanese investments in Kenya had also slowed.

“We underscore the newly expanded scheme of JICA that will facilitate a catalytic role of ODA for more resource mobilisation and investment opportunities in Africa and beyond, including those by the Japanese private sector in Africa,” said the TICAD 9 Yokohama Declaration signed by African heads of state and governments as well as Japanese officials. 

China has become Kenya’s biggest bilateral lender after Nairobi took a spate of loans to finance infrastructure construction projects, including a modern railway line from the port of Mombasa to Naivasha.

This came as Kenya tapped a string of costly Eurobonds, which in part has led to the mounting public debt and repayments that now consume half of taxes.

Lending from Japan has been muted for over a decade as Tokyo has focused on Southeast Asian countries like Cambodia, Indonesia, Thailand, and Vietnam.

Treasury data shows that the stock of Japanese loans has remained unchanged since 2012 at Sh166 billion, while that of China has increased nearly 12 times to Sh700 billion over the same period.

Most of the loans to Kenya from the China Exim Bank, including those for the standard gauge railway (SGR), carried commercial terms as they were priced at 3.6 percent above the Libor. This meant the country paid interest rates of around six percent. 

The LIBOR has since been replaced by the Secured Overnight Financing Rate (SOFR).

On its part, the most expensive loan from Japan has carried an interest rate of 3.5 percent and below. 

Japan is now looking at Africa, arguing that many of the Southeast Asian countries have since become self-reliant, giving Tokyo the space to redirect resources, mostly concessional loans, towards the continent.

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Japan’s foreign ministry was recently quoted by the Financial Times saying that “if current major ODA loan recipients such as Association of South East Asia Nations (ASEAN) countries and India graduate from ODA, it would be possible that Africa becomes the next major recipient of ODA loans.”

Japan is now proposing an alternative financing model, one it reckons is designed to be more sustainable than Beijing’s by extending cheaper loans to Africa.

Unlike Chinese loans, which are often criticised for being opaque, expensive, and laden with short repayment schedules, Japan promises to provide financing with low interest rates, longer grace periods, extended repayment tenors, and a larger grant component.

For countries like Kenya, where debt servicing has become a fiscal challenge, such terms could provide breathing space.

Kenya has long been one of the largest recipients of Japanese financing in Africa. Over the years, Tokyo has funded multi-billion shilling projects across energy, transport, and trade facilitation.

Notable Japanese projects include the Mombasa Gate Bridge Construction Project valued at about Sh43 billion. The bridge is designed to ease traffic congestion in the coastal city and improve access to the port.

There is also the 140-megawatt Olkaria V Geothermal Development Project, which cost Sh41.1 billion.

Japan, through JICA, is also building the Mombasa Special Economic Zone Development Project, which is estimated at Sh33.4 billion.

The battle for influence in Africa is only the latest chapter in a long rivalry between the two Asian giants.

Post-Second World War, Japan rose rapidly from the ruins to become an economic powerhouse. In the 1960s and 1970s, the country posted double-digit growth rates in what became known as the “Japanese economic miracle.”

Powered by innovations in consumer electronics, automobiles, and manufacturing efficiency, Japan stunned the world and, at one point, gave Washington policymakers sleepless nights as they worried about being overtaken.

China’s rise would come later. Following economic reforms initiated in 1978, the country grew at an average of 10 percent annually for three decades. Its huge population and industrial prowess transformed it into the “factory of the world.”

In 2011, China overtook Japan as the second-largest economy after the United States, a symbolic moment that reflected the shifting balance of power in Asia and globally.

Now, both nations are projecting their influence abroad, with Africa as one of the main battlegrounds.

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