The “Chinese debt trap,” has started glaring its bold teeth and has become a scary nightmare to all East African nations.
Although leaders of these nations pretend that all is well the truth is that there is general fear that some of the huge infrastructure projects built with Chinese borrowed money may not have been worth it after all.
And that is not all. The dream to realize the United States of East Africa could end up in jeopardy because of these colossal Chinese debts.
If the Chinese lenders decide to recover their money in the stipulated period, which is very short (10 to 20 years) some of these East African countries could end up losing assets they mortgaged as collateral to China.
China has loaned Uganda at least $2.9bn from 14 loans; Kenya $9bn (40 loans); Tanzania $2bn (12 loans); Democratic Republic of Congo $2.4bn (53 loans) and Ethiopia $13.7bn from 52 loans.
Rwanda, South Sudan and Burundi owe China the least amounts — $289 million, $182 million and $99 million respectively.
The East Africans have invested much of this money in roads, dams, railways and bridges to open up their economies to international trade and foreign investments.
Some of the infrastructure projects include; the East African Standard Gauge Railway that connects Kenya’s port city of Mombasa with East and Central African countries, Karuma hydroelectric dam (Uganda), Entebbe-Kampala Expressway (Uganda) and Nyabarongo II hydropower plant in Rwanda.
However, the massive borrowing by the East African states from China coupled with economic after effects of the covid 19 pandemic are threatening to derail the region’s ambitions of fully federating.
Sensing a debt trap, a nonsense Felix Tshisekedi, the president of the Democratic Republic of the Congo (DRC), has taken a bold move and called for a review of mining contracts signed with China in 2008 by his predecessor, saying he wanted to get fairer deals.
Former President Joseph Kabila, who held power from 2001 to 2019, negotiated a highly contentious minerals-for-infrastructure contract with the Chinese in 2008 valued at $9bn.
“It is not normal that those with whom the country has signed exploitation contracts are getting richer while our people remain poor,” Tshisekedi said last month.
Kenyans have had to literally kneel down for the Chinese to soften conditions for repayment of their debt.
Initially, Kenya’s attempt to extend a debt freeze is thought to have met resistance from the Import-Export Bank of China.
However, in January 2021 China and Kenya agreed to a six-month debt repayment holiday worth $245m. Kenya will have the next six years to make payments on the suspended debt service costs including a one-year grace period after June 2021.
Chinese and Kenyan negotiators finalized the arrangement less than 24 hours before a critical deadline when a $1.4bn loan from the China Exim Bank to build the Nairobi-to-Naivasha railway would have been due.
The Uhuru Kenyatta administration is tied in a debt trap mostly by the Standard Gauge Railway (SGR).
The SGR was constructed at a high price of US$3.3 billion and yet funding required to extend the line from Nairobi to Uganda has not been forthcoming even though the mega railway is supposed to deliver essential goods to the landlocked nations.
Due to the crumbling state of infrastructure among the nations of Eastern Africa, intra-trade is severely restricted. Connecting the major cities via railways would reduce transportation time and costs, thereby boosting trade and exports via the Mombasa port.
But at US$5.6 million per kilometre for the track alone, Kenya’s line cost close to three times the international standard and four times the original estimate due to the difficult terrain upon which the track was built.
To service the loans taken for construction, the fares charged for transporting goods along the SGR are exorbitant. It costs about US$800 to truck a container from Mombasa to Nairobi, but it costs US$1,100 by rail.
The lower demand for freight resulted in revenue of US$126 million in 2019, falling greatly short of the operating cost, which was estimated to be US$170 million.
Hidden operating costs, high interest rates, and a closed bidding process all have resulted in a reduction of the project’s overall profitability.
A 2013 World Bank study predicted that freight traffic on the entire East Africa Community rail network would grow to approximately 14.4 million tonnes per year by 2030.
The same study found that investment in a standard gauge railway appeared “only to be justified if the new infrastructure could attract additional rail freight in the order of 20-55 million tonnes per year.”
By that measure, the railway would need to win all of the freight currently trucked to and from Mombasa and more to make fiscal sense.
What is disturbing is that should Kenya fail to repay the loans for construction advanced by Chinese lenders, the lucrative Mombasa port could be taken over by the Chinese. Terms of the loan specify that the port’s assets are collateral, and they are not protected by Kenya’s sovereign immunity due to a waiver in the contract.
In Jan 2021, Tanzania asked Beijing for debt relief but also signed a new multibillion-dollar railway deal during Chinese Foreign Minister Wang Yi’s Africa tour. Tanzania signed a $1.32 billion rail-development contract with the China Civil Engineering Construction Corp. and China Railway Construction Corp.
The new rail deal will support the construction of a 341-kilometer (212 miles) section of Tanzania’s planned wider railway network. Magufuli will seek another loan from China to help build an additional link in the expanded rail system.
Before President John Magufuli died he had asked the Chinese to cancel old debts totaling $167.7 million. Magufuli’s debt-forgiveness request included $137 million that was taken for a housing project for the police, $15.7 million for an old Tanzania-Zambia railway and $15 million for a textile mill.
It appears by the time his first term of presidency wound up, Magufuli had started feeling the liability of the Chinese loans when in 2020, he cancelled a Chinese loan worth $10 billion signed by his predecessor Jakaya Kikwete to construct a port at Mbegani creek in Bagamoyo over terms an
d conditions that, he said, beat the logic.
Magufuli said that the terms of the Chinese loan agreement could only be accepted by a drunken man.
His predecessor, Jakaya Kikwete had signed the deal with Chinese investors to build the port on condition that they would get 30 years to guarantee on the loan and 99 years uninterrupted lease, according to local media reports.
Another shocking demand made by the Chinese and accepted by Kikwete administration was that the Tanzanian government would have absolutely no power to raise concerns on whoever invested in the port during that period.
After coming to power, President Magufuli initiated the renegotiation process and pressed the investors to bring down the lease period to 33 years instead of 99 years signed by his predecessor.
Magufuli administration also made it clear that there would be no tax or utility exemption for the Chinese investors and they would need government approval to start new operations at the port.
However, the investors didn’t meet the deadline issued by the Magufuli government, hence, the agreement got cancelled.
Similarly Uganda has started having problems paying back the Chinese loans.
For instance, Uganda is already dilly-dallying on the $350 million Entebbe-Kampala Expressway loan that is supposed to be paid in 20 years. In addition, Uganda is to incur management fees and commitment fees on the loan.
The Uganda government also had to contribute $126 million towards construction costs and $40 million to compensate displaced landowners along the route. Overall, the cost of the highway was approximately $2.5 million per lane km, which, was amongst the most expensive roads in the world
The loan agreement required that the government make 26 bi-annual repayments of $13.4 million each commencing on 21 July 2019 (running through to January 2032).
The government initially argued it would repay the loan from revenue raised from tolls. However, this is problematic because it would be impossible for the expected volume of traffic to generate this amount of money (over $73,000 per day).
In April 2019, a senior government official announced that Uganda could not afford to make the first repayment on the loan, which was due on 21 July 2019, because no provision for this had been made in the national budget.
Uganda has spent in excess of $3bn Chinese borrowed money on roads and energy projects. This is slightly above 10 percent of Uganda’s current GDP at $27.53 billion (World Bank, 2015).
According to the loan agreement performance data (2016) according to the Uganda Ministry of Finance, China through its EXIM Bank committed $350 million for Entebbe-Kampala Expressway, $100 million to improve road networks, $483 million for Isimba hydropower plant and $1.4 billion for Karuma Dam, among others in the said period.
However, the greatest worry underlies the conditions and terms for which the Chinese loans are contracted.
In addition, these loans are to be paid in a short period of time averagely 10 years yet they are invested in long term projects. This implies that if Uganda doesn’t comply with the debt obligations to China, the country is likely to undergo debt distress.
It is unclear whether there are assets that Uganda has mortgaged for the loans. Although, it is speculated that the Chinese could have banked on profits from the country’s oil resource that is soon getting processed from the ground.
For example Angola that received a $2 billion-loan in 2004 from the China Exim Bank to finance reconstruction following the civil war had to pay off by committing to provide China with 10,000 barrels of oil per day for 17 years.
The other concern is whether Uganda will get loan relief from China taking advantage of the close relationship between President Yoweri Museveni and the Chinese President Xi Jinping in case of default.
Uganda’s public debt is gradually rising based on bilateral relations. For instance between January 2010 and June 2016, Uganda signed 96 loan agreements worth $8.8billion with China (in particular EXIM Bank) being the largest creditor at 29% of the total loans, followed by the World Bank (27%) and African Development Bank (21%). Other creditors account for 23% (BADEA, EIB, France, Germany, IFAD, Japan, Kuwait, OPEC, South Korea and Saudi Arabia).
The Chinese loan burden has of late forced President Museveni to begin personally handing construction tenders to selected Chinese companies.
In May and June this year, President Museveni wrote directing the Uganda National Roads Authority to award several road tenders to four Chinese construction companies that include China Communications Construction Co. ltd (CCCC), Chongquing International Construction Corporation (CICO), Zongmei Engineering Group and Ashoka Buildcon ltd.
Surprisingly, it’s not government that identified the need and urgency to construct these roads but rather it’s the Chinese that proposed to President Museveni to construct them.
In one such letter dated May 15, 2021, the president wrote; “The above mentioned company (Zongmei Engineering Group) has approached me proposing to pre-finance the construction and building of the above road (Kanoni-Misingi-Mityana—37km). This is a Chinese company that has financed and completed many roads in Uganda. This is therefore to direct you (UNRA) enter into an agreement with this company to design and build this road since it is in NDP111 (National Development Plan 3).”
In April this year, Uganda said it may approach its major creditors including China and the World Bank to negotiate a possible suspension of loan repayments amid a growing default risk after its debt load ballooned 35% in a single year.
Uganda’s total public debt surged to $18 billion as at December 2020, a 35% rise from a year earlier, fuelled by fresh borrowing to cover revenue shortfalls as measures taken to combat the coronavirus hit the economy hard and stifled tax collections.
In August 2020, the Ugandan government asked the China Exim Bank for a repayment delay on the loans needed to build the $1.7 billion Karuma dam project but the bank replied with a simple answer: no. Repayment on the Karuma loans was to begin after December 24, 2020.
With the expectation of considerable revenue in the future from the exploitation of the oil reserves in Uganda’s Albertine Graben region, there have been growing demands for the construction of public infrastructure in Uganda, requiring substantial funding that the Ugandan Government currently does not have. To meet its infrastructure needs, Uganda needs to invest over $1.4 billion annually, into the infrastructure. This why Uganda has had to go for the “cheap” Chinese loans.
Unfortunately, the Chinese loans lack transparency, create unsustainable debt, promote China’s interests over the borrowing country, increase unemployment, unfairly compete with local business, deal in corruption, have poor working conditions, and result in substandard construction.
For Rwanda even though government there claims Chinese loans represent less than five percent of Rwanda’s debt will now spend more on making interest payments—and have less to spend on basic services for its people because debt-to-GDP ratio has risen to 53 percent.
A year after signing deals for China’s Belt and Road Initiative, Rwanda announced that it would also be joining China’s Asian Infrastructure Investment Bank, a potential rival to the World Bank.
In July 2018, China’s President Xi Jinping signed two loans worth US$126 Million. The two loans are for road construction. An estimated 70 percent of Rwandan roads have been financed and built by the Chinese.
Early 2021 Rwanda and China signed agreements where the Asian country will provide Kigali with a grant worth $60 million and but also canceled its $6 million. In addition, the Chinese government signed the deal with Rwanda to provide a loan, worth up to $214 million, for a 43.5 MW Nyabarongo II hydropower plant.
However, the for all these loans the Chinese gave Rwanda a sweetener in form of the prime minister’s office built at a cost of $27 million, a gift. Tens of millions of dollars have also flowed into Rwanda’s underdeveloped Eastern Province, where China has financed and is building three multi-thousand-person stadiums.
The China Star Construction has also partially built Rwanda’s “Prime Economic Zone,” an industrial hub that has become an engine of economic growth in recent years.
Apart from taunting East Africa with debts China is also holding hostage some mega projects that are supposed to interconnect the region and improve intra-trade and movement of East Africans.
In March 2020, the China Exim Bank declined to continue financing Uganda’s section of the Standard Gauge Railway until the Uganda government secures a guarantee that Kenya will complete the Naivasha to Malaba section, something that is unrealistic since the China Exim Bank has not yet approved the loan to Kenya for the Naivasha to Malaba section.
Estimated to cost $2.3 billion, the 273 km Kampala to Malaba section was initially intended to have been completed in 2018. And for the Uganda section to be viable the 375 km Naivasha and Malaba in Kenya must be constructed.
The Bank has also demanded that Kampala adequately compensate all project-affected persons, amounting to some $90 million. With a 60m wide corridor being required, over 3000 people have been displaced, and 33 schools and 11 factories have been affected.
Another condition was that a study of the financial viability of the project had to be conducted. The Bank is concerned about whether construction of the railway makes real business sense and about Uganda’s ability to meet its repayment obligations.
The East African SGR also faces other hurdles. The first two sections of the railway line in Kenya, from Mombasa to Nairobi, and then to Naivasha, created much controversy. In Uganda, there have been complaints about the estimated cost of construction. For example, after visiting rail projects in Ethiopia and Djibouti a Ugandan parliamentary committee demanded a review of the proposed project noting that the costs of Uganda sections were much higher.
In May 2017, Kenya opened the first leg of the railway line (some 472 km) linking the port of Mombasa to Nairobi, costing $3.2 billion, which was borrowed from the China Exim Bank.
After Kenya secured a second loan amounting $1.5 billion from the China Exim Bank in May 2017, the 120 km Nairobi to Naivasha section was completed in October 2019.
It is hoped that the network will continue from Naivasha to Malaba (on the Kenya–Uganda border), and then be extended within Uganda, and eventually to the neighbouring countries of South Sudan, Rwanda, Burundi, and the Democratic Republic of Congo.
Within Uganda, four sections of the Standard Gauge Railway are planned, costing an estimated total of $12.8 billion. The primary section connects Malaba (on the border with Kenya) with the capital city, Kampala.
It should be noted without these mega infrastructure projects to interconnect East Africa and jump start trade and attract foreign investment there will be less agitation to unite the region. In addition, these East African countries should be able to pay back the Chinese loans or lose their assets mortgaged to China.
China’s lending to Africa between 2000 and 2018 was $152 billion, much of which went to Belt and Road Initiative projects, making Africa one of the biggest recipients of Chinese investment.
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