Wednesday, January 18, 2023
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BusinessAs emerging countries struggle with debt, China embraces new investment model in...

As emerging countries struggle with debt, China embraces new investment model in Africa

Its preference for loans over investments entangled it in a trap

China is taking a new approach to Africa in light of the continent’s countries’ inability to repay loans they have received from Beijing, among them Ethiopia, researchers say.

Undertaken by Chatham House, the renowned policy institute based in London, the study reveals China is moving away from a high-volume and high-risk model of investment in Africa to one where deals are struck on their own merits, at a smaller and more manageable scale than before. The study was conducted by researchers, including Alex Vines, Creon Butler and Dr Yu Jie, at the policy institute.

China is shifting to a “new development paradigm,” one that prioritizes FDI over loans, green development over carbon emissions, and small and medium-sized businesses over large ones, according to the study. This is the outcome of the failure of African countries to repay loan secured from Chinese lenders. Ethiopia alone is at a risk of defaulting on 13.7 billion externa loan it secured from the same source.

Between the turn of the century and 2016, China grew to become a significant lender to numerous African countries. New Chinese loans to African countries peaked in 2016 at USD 28.4 billion, but have since fallen to USD 8.2 billion this year and are expected to shrink further to USD 1.9 billion by 2025.

The economic repercussions of the COVID-19 outbreak and the war between Russia and Ukraine, notably a steep increase in interest rates, have impeded the capacity of many African states, such as Djibouti, to pay their sovereign debts. This is further compounded by internal conflicts in countries like Ethiopia, which spent a lot of forex to finance their war economy.

“China has built a large stock of debt across the African continent, and now faces the challenge of managing these investments amid economic woes linked to the legacy of the COVID-19 pandemic and the war in Ukraine, which have heightened the prospects of default in some African nations, according to researchers at Chatham House that have conducted the study.

“It remains to be seen how long this approach will continue and how far it reaches,” said the researchers, adding, “Eventually, China may feel it needs to become more forceful in extracting payment through unilateral actions, regardless of the political costs. This would be particularly detrimental if China resorted to appropriating significant assets such as ports, railways or power networks in response to defaults.

Unresolved debates exist within the Chinese system on whether it should give substantial debt relief to countries such as Ethiopia for solely diplomatic reasons or be more cautious and prioritize maximizing the likelihood of retrieving its investments, according to the study.

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