CMI INSIGHT 2019:1 1 NUMBER 1 CMI INSIGHT JUNE 2019 Levy Mwanawasa stadium in Ndola, Zambia, constructed with Chinese funding and completed in 2012. Photo: Arve Ofstad Zambia’s looming debt crisis – is China to blame? AUTHORS Is China pressuring poor countries with debt? Debt trap diplomacy is a Arve Ofstad recent term that is used to describe Chinese loans for infrastructure and Economist, former ambassador to Zambia and former senior development in developing countries. Zambia is one of the countries researcher CMI where China is the biggest single creditor and a major provider of finance for development. It has borrowed heavily in recent years and Elling Tjønneland is now in high risk of debt distress. However, the Chinese are not the Senior Researcher, Chr. Michelsen Institute main culprits for the looming debt crisis. This CMI Insight reviews the sources of the Zambian debts, examines how the loans have been used and misused, and asks whether any defaults will result in Chinese takeover of major public assets. 2 CMI INSIGHT 2019:1 Main points • China is accused of promoting debt trap • There is limited transparency in Chinese lending diplomacy. This case study from Zambia shows and financial flows to Zambia with little accurate that many of the dramatic claims about Chinese data on loan conditions. The Chinese approach take-over of major state assets are exaggerated. to finance is creating incentives for kickbacks Yet, they should not be disregarded. and inflated project costs that may lead to rent- seeking and cronyism. Despite government • Zambia benefited from the HIPC debt relief denials, “hidden loans” may also exist. in 2005 but has borrowed heavily since 2012 and is now in high risk of debt distress. China • The Zambian government must take full is the single biggest creditor, but Zambia responsibility for the debt crisis as they have has also borrowed from others, including received ample warnings against the increasing the development banks and the commercial debt burden from its own economists and Eurobond market. opposition, as well as from external advisers, the IMF, World Bank and donors. • Zambia has borrowed for important infrastructure in roads, energy, railways and • China is concerned about the level of debt and telecom, while other loans have covered budget viability of projects funded by the Chinese deficits. Some loans for infra-structure have policy banks. This may lead to increasing had significant socio-economic benefits, while attention to debt sustainability, especially in others have generated few benefits so far. relation to concessional loans. Economic decision-making is centralised in the Office of the President without adequate • Options for debt sustainability include economic considerations. postponing new loans and new projects, renegotiating loans from China and others, • Chinese project loans are often on a build- entering an IMF loan agreement, and generally operate-transfer (BOT) model, resulting in more prudent financial management. The Chinese or joint management for many years government’s approach so far has been of specific projects, but no full take-over of inconsistent and too weak. whole institutions. In Zambia, this is the case inter alia for the hydropower projects with ZESCO, the digitalisation of the broadcasting service ZNBC, and two airports. Chinese development finance, loans and debt Official Chinese statistics on financial flows Over the past two decades, China has become a major to developing countries are poor and contain few source of finance for development in developing details. Their lending operations are obscured by countries. The 2013 launch of China’s grand Belt limited transparency. However, we do know that and Road Initiative – a worldwide network of the Chinese state-owned policy banks (the Export- Chinese-funded infrastructure-development projects Import Bank and China’s Development Bank) are – reinforced this role. For some, like the US national the main instruments. They are used to encourage security advisor, John R. Bolton, this is an indication Chinese companies to go abroad, and to get foreign of China making “strategic use of debt to hold states companies and governments to purchase goods and in Africa captive to Beijing’s wishes and demands.” 1 services from China. There is solid evidence on how China has emerged as a dominant provider of this has contributed to major Chinese commercial finance for infrastructure development in Africa, expansion in Africa and elsewhere. The evidence and is now a key player in transport, energy and has also displayed the “Achilles Heel” of the Chinese telecommunications.2 The most recent report from approach and financing model: China’s control over the Infrastructure Consortium for Africa finds that the banking system and the close ties between China’s role is the single biggest factor driving the the state and available funding may encourage higher level of funding for infrastructure in recent investments, but it is also a model that relies heavily years. on Chinese companies developing projects together CMI INSIGHT 2019:1 3 with host country officials. This model creates strong who are either in debt distress or in high risk of debt incentives for kickbacks and inflated project costs and distress. It notes that eight countries have received may lead to rent-seeking and cronyism.3 relatively small Chinese loans, and six have received China has an expanding development aid budget more substantial loans. Chinese loans are major or coordinated by a dedicated aid agency. Many of the dominant in three countries: Republic of Congo, disbursements are linked to lending from the two Djibouti and Zambia.6 policy banks and to Belt and Road projects in selected The high volume of the lending has forced China countries. Details and the country breakdown are to address the issue of debt sustainability. This is not provided, but the two most recent Chinese handled in bilateral arrangements, mainly through white papers on aid (from 2011 and 2014) provide rescheduling or new loans, but there are also a the global figures. More than half of the aid budget number of debt cancellations. However, most of the are concessional loans (subsidising interests on debt cancellations appear to be linked to China’s commercial loans from the policy banks), typically aid-funded interest free loans and are typically for infrastructure and economic development projects. A smaller amounts (less than USD 100 million).7 further 10% constitutes interest free loans, typically It is also noteworthy that there have been several spent on major public and government buildings, recent examples of China becoming more careful in stadiums and so on. Some have also been used for providing loans to Africa. China now admits that the infrastructure, such as the railway between Zambia planning of some of its major infrastructure projects and Tanzania in the 1970s. Historically, these interest abroad, was “downright inadequate,” and led to huge free loans have been cancelled when they mature. financial losses. A good illustration is China’s funding The remaining part of the Chinese aid is provided as to the Kenyan government for the two first phases of grants – mainly to agriculture, health and education the railway that connects Mombasa port with Nairobi, sectors.4 and then onto Uganda. The Chinese government has refused two attempts by Kenya to secure Chinese Debt sustainability funding for the final leg beyond Nairobi connecting China’s expanded lending to developing countries to the landlocked countries of the Great Lakes region.8 contributes to increased debt. Debt sustainability has Djibouti has emerged as a new investment become an issue because of the sheer scale of Chinese destination for China in Africa. Djibouti has a strategic loans posing a risk for failed projects and the misuse location. It is at the entrance to the Red Sea, close to of funds. Careless borrowing for infrastructure could the transit routes of the Suez Canal shipping, and to lead to balance of payments problems. Most countries the Horn of Africa and the Arab Peninsula. Djibouti borrowing heavily from China have histories of IMF has attracted several military tenants (the US, France, bailouts, and unsustainable debt due to new such Italy and others). China opened its first military base borrowing has become a main issue in some Central outside China in Djibouti. China sees Djibouti as a and South Asian countries.5 potential hub for transhipment, industrial processing The most frequent example is the case of the and duty-free wholesale. It has provided major funding Hambantota port in Sri Lanka. The Sri Lankan for the development of a multi-purpose port connected government secured in 2007 finance from China’s to the Djibouti-Ethiopia railway terminal and funded Export-Import (EXIM) Bank to develop the port. In the railway to Ethiopia. Today, Djibouti is at high 2015, however, Sri Lanka had to arrange a bailout from risk of debt distress with perhaps two-thirds of the the IMF although the Chinese loans only accounted country’s debt being to China (Eom et al 2018). for some 10% of the debt. The government sought to raise cash by privatising state-owned assets, including The case of Zambia a major stake in Hambantota port. A Chinese Zambia’s debt is one of the fast-increasing ones in company was the successful bidder and bought 70% Africa. China is a major creditor. Several stories of the shares. The Sri Lankan government used the are circulating on China taking over essential proceeds to make payments on the Chinese loans as infrastructure and central institutions as a result of well as other debt service (Bräutigam 2019). Chinese the debt. Africa Confidential reported on 3 September companies have made similar investments in other 2018 that “The state electricity company Zesco is already ports being privatised, e.g. the container terminal in talks about a takeover by a Chinese company, AC has in Piraeus in Greece and the Zeebrugge Terminal learned.