Chinese debt-trap: Africa should take lesson from Sri Lankan economic crisis
The island nation of Sri Lanka is facing one of the worst economic crisis, skyrocketing inflation, food shortages and weak government finances. This has been an outcome of a sharp rise in foreign debt since 2010, reaching 88 percent of the country’s GDP in 2019, causing a severe economic crisis.
The prices of food items have shot up by as much as 25 percent in the last few months. The pandemic to an extent dried up the revenues that were being generated from the tourism industry, one of the highest earning sources of foreign exchange.
Low foreign remittances over the last few years also exacerbated the situation. The credit rating agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
The debt management programme that was mostly dependent on sectors like tourism and foreign remittances derailed. Consequently, the nation’s foreign currency reserves plummeted by about 70 percent down to around USD 1.6 billion, enough for a few weeks of imports.
Additionally, the foreign debt obligations of Sri Lanka exceed USD 7 billion, including repayment of bonds worth USD 500 million. Primarily, the declining foreign reserves are due to those infrastructure projects, built with Chinese loans, which hardly generated any revenue.
The Hambantota Port and the Colombo City Port projects have been the main projects for which China has lent huge amount of money to Sri Lanka. Hambantota Port has already been leased out to China for a period of 99 years.
Sri Lanka is now left with hardly any foreign reserves and the International Monetary Fund (IMF) has pointed out that the public debt has risen to “unsustainable levels” and forex reserves are insufficient for near-term debt payments.
The IMF added that the recent measures by the government are insufficient to restore debt sustainability and strongly indicate “the need for debt restructuring”.
Wijedasa Rajapaske, a member of Sri Lanka’s Parliament in the ruling party wrote a six-page letter to Chinese President Xi Jinping accusing Beijing of trapping Sri Lanka into its ‘Debt Trap’ to expand its influence.
Amidst this deepening forex crisis, Colombo appealed to China for restructuring of the debt to mitigate the economic crisis during the meeting of Sri Lankan President Gotabaya Rajapakasa with the Chinese Foreign minister Wang Yi.
However, China reportedly refused to do so. It is also being speculated that due to this, the relations between China and Sri Lanka might be affected and concerns have also been raised in other Asian countries such as Myanmar, Nepal and Malaysia about suspending Chinese investment projects.
African countries have also been a destination for BRI projects. According to estimates, five of Africa’s heavily-indebted countries – Ghana, Kenya, Angola, Ethiopia and Zambia are about to experience serious debt risks.
Countries like Ghana are already witnessing a rise in inflation over 15 percent amid a hike in fuel prices and a near 16 percent loss in the value of its currency, the cedi, against the dollar this year.
The national taxi drivers’ union has threatened to strike over soaring fuel costs and farmers are also reportedly reducing their crop production due to high costs of essentials.
The credit ratings agency Moody’s has downgraded Ghana’s sovereign debt rating, when Ghana’s debt stands at around 80 percent of its GDP. Similarly, inflation in Nigeria is high, the price of diesel fuel shot up 190 percent as the country depends on imports despite being the continent’s biggest oil producer.
Similar trends have been observed in Ethiopia, Sudan, Egypt and Tunisia. In Sudan, cost of an average food basket has risen by 700 percent in the past two years and Tunisia is also nearing state bankruptcy.
Africa, in general, has been witnessing a slowdown in economic growth and the outbreak of the Covid-19 pandemic has made the situation worse.
Fearing default on payments, a number of African countries are re-negotiating loan terms with Chinese entities including deferment of interest payments and suspending the non-viable projects.
At least 18 African countries have re-negotiated their debts while 12 others are in talks with China for restricting an approximate USD 28 billion loan.
As per the IMF estimates, additional financing of up to USD 285 billion would be needed during 2021-25 by the African countries to step up their spending response to the Covid pandemic.
China’s total loans to Africa during 2000-18 have been to the tune of USD 148 billion, mostly in large-scale infrastructure projects. China presently is a leading bilateral lender in 32 African countries and the top lender to the continent as a whole.
The debts have been triggering a repayment crisis. China owns around 72 percent of Kenya’s external debt which stands at USD 50 billion.
It was also reported that there was widespread discontent in Angola because of oil repayment against loans from China, leaving Angola with little crude oil to export.
During 2010-15, Nigeria’s debt to China had also grown by 136 percent from USD 1.4 billion to USD 3.3 billion and the country had to spend USD 195 million in 2020 as a debt repayment to China.
In Djibouti, China has provided nearly USD 1.4 billion in funds which is 75 percent of the country’s GDP.
Developing countries such as, in Africa, with relatively weaker political institutions and governance mechanisms are highly susceptible to economic risks emanating from debt concerns.
China has been predating on countries with weak institutions and taking them into its ‘Debt Trap’.
Looking at the severe crisis situation in Sri Lanka and given the fragile nature of their current economies, African countries need to be extra cautious in their borrowing from China, which has an insidious agenda of taking over sovereign assets of African countries.