NEWS & ANALYSIS

China's loans to South Africa (III)

Charles Collocott examines the experiences of Zambia, Ethiopia and Kenya

CHINA’S LOANS TO SOUTH AFRICA - BRIEF III

The first brief was an overview of South Africa’s debt situation, how the loans from China fit into this, and why it is we need to look at the experiences other countries have had with Chinese debt; the second brief considered the experiences Sri Lanka, Pakistan and Argentina have had with Chinese debt; the fourth brief summarises the lessons learned from these experiences. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.

ZAMBIA

China’s loans to Zambia began the 1960s, when the white minority Rhodesian government cut off Zambia’s railway access for its copper to be transported to ports in South Africa. After failed attempts to secure funding from the West because of failed feasibility studies, the Zambian and Tanzanian governments commissioned China to assist fund and build TAZARA; a railway line from the Copper Belt in Zambia to Dar es Salaam in Tanzania.

At an initial cost of $570 million, TAZARA was at the time the single biggest overseas loan ever by the Chinese government.[1] The loan was interest free and not indexed to inflation.[2] Due to the limited amount of foreign currency the Chinese had available, it was agreed that 75% of the $560m was to come from the sale of Chinese goods in Tanzania and Zambia; that is, Tanzania and Zambia would import Chinese goods, and the proceeds from the sale of these goods would be put towards construction expenses. Additionally, mainly Chinese inputs and equipment would be used. Goods into the region from China rose from 0.9% of total imports in 1966, to 22.4% in 1970. The impact on the domestic manufacturers and economies of Zambia and Tanzania was disastrous and the terms of import had to be renegotiated.

During the 1980s and despite the earlier failed feasibility studies, the European Economic Community, several European states and the United States did an about turn and decided to get involved. The Western countries stated that this was to try and lessen the dependence of other Southern African countries on apartheid South Africa. Over the decade a cumulative $200 million in loans was extended to the parastatal.[3]

TAZARA unfortunately has been a financial failure due to substandard equipment, poor management, fluctuations in the copper price[4] and changes to the political-economy. With independence in Namibia and the end of apartheid in South Africa in the 90s, as well the end of the civil wars in Angola and Mozambique, Zambian producers had more transport options available and traffic on the railway line decreased to only 690 000 tons in 2009 from several millions in the 1970s.

In an attempt to revitalise TAZARA China cancelled its debt in 2011; and because it was interest free and not linked to inflation, the real value of the debt had in fact shrunk by over 80%. Then between 2010 and 2012 China extended an additional $81 million in interest free loans for equipment and training.[5] Despite this, and with no current debt figures publicly available, in 2018 TAZARA’s management highlighted the difficulties when reporting gross revenue at $21.32 million and running costs at $34 million.[6]

In recent times further loans and expertise have been extended by the Chinese to the Zambian government for the construction of a power plant, roads, stadiums and industrial parks. According to news reports the current extent of Zambia’s debt to China is not known with certainty, and there have also been reports that Zesco, Zambia’s state owned power company, has been used as security for the loans. Speaking at a recent seminar on Africa-Chinese relations hosted by the University of Johannesburg’s Confucius Institute, Mr. ChaimbaPhiri – MD of Heron Consulting which specialises in investment in Zambia – recalled having asked the Zambian Finance Minister, Mrs. Margaret Mwanakatwe, about reports of Zesco being used as security. Mrs. Mwanakatawe apparently told Mr. Phiri that Zesco was not used for this purpose, and the loans were instead insured through Sinosure – a Chinese state owned export and credit insurance company. A routine search of news reports on the subject however reveals strong speculation within the media that Zesco has been put forward as security.

Economists have expressed concern around the lack of political will shown by the Zambian government in managing its debt, which was expected to rise to 60% of GDP by the end of 2018, compared to 25.6% in 2014 – raising questions of government responsibility in borrowing and insufficient due diligence by lenders. As of June this year, Zambia’s external debt was close to a third of the total, which would see an increase the risk of default if the Zambian Kwacha was to weaken. In the press, Zambian officials dismiss the possibility of default, simply by saying that Zambia has never defaulted. This however is misleading if one considers that less than a decade ago, Zambia had its debt to the World Bank and IMF written off.[7]

KENYA

Centered on transport infrastructure, China has also provided extensive funding and expertise to Kenya in recent times. The largest of these projects has been the Standard Gauge Railway line (SGR) from the port city of Mombasa to Western Kenya. Initially SGR was to also reach Uganda and Rwanda, but Rwanda withdrew citing high costs, and Uganda withdrew due to security concerns, opting instead for a Tanzanian route; in 2008 protestors in Nairobi uprooted a section of the existing railway line and blocked roads, thereby making it impossible for Uganda to receive imports from Kenya, which crippled the economy.

When it comes to inputs for SGR, reports have it that the Kenyan government has negotiated better deals on behalf of Kenyans when compared to other countries. All cement for the SGR was supplied by Kenyan businesses; railway cars were made in Kenya; over 25 000 Kenyans were employed and trained; 33 crossing stations, as well as bridges and tunnels were added to reduce the impact on wildlife; and the National Land Commission doubled its budget for compensation. However, many of these measures still proved controversial, particularly land value estimates, working conditions for Kenyan employees, and the stretches of track in areas with high biodiversity.[8] And withcritics arguing that SGR has not resolved the corruption issues that made Kenya’s existing rail transport so inefficient, one wonders how Kenyan companies were prioritised with regards to supplying inputs.

So far, and even before the extension to Western Kenya, SGR has cost around $6 billion, equal to a third of Kenya’s foreign debt. It has been argued by Dr. W K Shiloha, author of Sino-Kenyan Co-operation: Whither the West?, that SGR is not economically viable and a better option would have been to upgrade existing archaic railway lines. According to Dr. Shiloha, this was not done because it would have encroached on the road transportation interests of politically connected individuals and their companies. He also points out that SGR will not improve carrying capacity or reduce costs, and will therefore not generate enough revenue to pay off the $4 billion spent for the line from Mombasa to Nairobi.

Both the IMF and World Bank have raised warnings about Kenya’s increasing debt appetite, stating that its repayment burden could affect growth. The Kenyan government has ignored these warnings and continued to borrow. In 2018 debt surpassed 50% of GDP, and over 40% of government revenue is required for debt repayment, which is said to cancel out expected economic benefits from SGR and other infrastructure investments.[9] In 2018 Chinese loans made up 11% of Kenya’s total debt.[10]

ETHIOPIA

For the past decade or so, Ethiopia has been a prominent African investment destination, particularly for China. In line with Ethiopia’s strategic development policies, $13 billion in loans from China have been directed towards transport infrastructure, industrial parks and power plants. This alongside a population of around 150 million, labour costs lower than China or even Vietnam, and an investor friendly policy stance,[11] has seen Ethiopia’s GDP grow at an average rate of over 11.55%[12] for the past 12 years.

Ethiopia may be seen as a positive case where the borrower and lender countries have recalibrated after considering costs and benefits of further loans. Recently China began scaling back is investment in Ethiopia, citing risks around Ethiopian foreign exchange shortages – due to imports vastly outstripping exports for the last 5 years or so – as well as high levels of government debt.

Also speaking at the seminar on Africa-Chinese relations hosted by the University of Johannesburg, Prof. MessayMutulega,[13] while lauding the economic benefits the Chinese loans (amongst investments from other countries), highlighted corruption as a major issue in Ethiopia generally. However, a slew of recent arrests of government officials for corruption is a step in the right direction for the reformist prime minister Abiy Ahmed, elected in April last year.[14]

Despite all the good news, earlier this year the IMF raised its rating of Ethiopia’s risk of debt distress to high, and in a sign that the government is facing difficulties paying back some of its debt as originally agreed, an announcement was made recently with regards to the restructuring of a $4 billion loan for the railway line between Addis Ababa to Djibouti, to be paid over 30 years instead of the initially agreed 10. Going forward the financial viability of the railway may rely on the success or failure of Djibouti’s improved port and free trade zone, both Chinese funded at $590 million[15] and $3.5 billion respectively.[16]

Ethiopia’s debt-to-GDP ratio currently stands at just under 60%, and due to the country having one of the fastest growing economies in the world, some academics believe its debt levels will remain safe for at least the next few years to come.[17] Assuming the $12.1 billion in loans extended in the last 10 years makes up the total Chinese loans, this would imply that Ethiopia’s debt to China is 26.1% of the country’s debt. [18]

Charles Collocott is a researcher at the Helen Suzman Foundation.

Footnotes:


[1]Yu, Donghai, Why the Chinese Sponsored the TAZARA: An Investigation about the People’s Republic of China’s African Policy in the Regional Context, 1955-1970 at 2-12.

[2]http://www.xinhuanet.com/english/2018-07/11/c_137315295.htm

[3]https://en.wikipedia.org/wiki/TAZARA_Railway#Foreign_Support_in_the_1980s

[4] Op cit note 1 at 17.

[5]https://en.wikipedia.org/wiki/TAZARA_Railway#Decline

[6]https://www.ippmedia.com/en/news/we-are-really-bad-shape-admits-tazara-management

[7]https://qz.com/africa/1391111/zambia-china-debt-crisis-tests-china-in-africa-relationship/

[8]https://www.chathamhouse.org/expert/comment/lessons-kenya-s-new-chinese-funded-railway

[9]Westen K ShilahoSino-Kenyan Co-operation: Whither the West? 2018, at 5-12.

[10]https://www.the-star.co.ke/news/2018/08/06/kenyas-public-debt-is-rising-to-dangerous-levels_c1798513

[11]https://www.moneyweb.co.za/news/africa/china-ethiopia-its-complicated/.

[12] World Bank.

[13] from the School of Development at the University of Addis Ababa.

[14]https://www.ft.com/content/33b29dd4-e98d-11e8-a34c-663b3f553b35

[15]https://www.scmp.com/news/china/diplomacy-defence/article/2087374/how-chinese-investment-boom-changing-face-djibouti

[16]https://allafrica.com/stories/201807050757.html

[17] John Hurley, Scott Morris, and GailynPortelance. 2018. “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for Global Development, at 13.

[18]https://www.moneyweb.co.za/news/africa/china-ethiopia-its-complicated/