Over the past few years, China has cemented its place as one of the world’s economic superpowers and as such positioned itself to be one of Africa’s biggest trade partners and lenders.
While Chinese support to Africa has aided Africa to pursue loads of developmental projects for growth and development, several nations on the continent have been saddled with deepening debt to the country (China).
According to Africa Facts Zone, Ghana has been ranked 9th most indebted African country to China. It is estimated that Ghana owes China about US$3.4 billion.
Angola holds the first position with a total debt of $25 billion, followed by Ethiopia ($13.5 billion), and Kenya with $8 billion.
Debt and its effect
A country’s debt also called Sovereign Debt in its simplicity refers to the loans taken by the government of a nation to engage in projects for development and growth. Debts have both positive and negative effects.
Positively, debts may;
- serve as an economic stimulus. Meaning, the government can undertake expensive projects such as the construction of highways, powerplants, hospitals, research facilities among others. These have the multiplying effect of creating jobs and boosting the well-being of the people as well as the economy.
- boost exports and the manufacturing industry. Some countries will devalue their currency in order to pay off their debts. The drop in value of their currency makes goods cheaper for customers in other countries thereby helping local manufacturers and triggering a boost to the economy.
On the other hand, negative debts;
- may lead to a rise in borrowing cost which negatively affects trade and commerce.
- may lead to privatization. Sometimes a nation may sell off a state corporation to pay what it owes.
- may lead to political instability. With deepening debts, comes with it an unstable economic atmosphere which may lead to an insurrection.
Is Ghana’s ranking as the 9th most indebted African country to China positive or negative? We’ll leave that analysis for posterity to determine.
What happens when a country can’t pay off its debt.
A country unable to pay its debt is slightly different from a business or individual. While a firm may go out of business as a result of rising debt, a country cannot go out of business and as such may either re-negotiate payment terms, extend the due date or devalue its currency to make its goods cheaper.
Moreover, an initiative such as the Heavily Indebted Poor Countries (HIPC) Initiative which was launched in 1996 by the IMF and World Bank is aimed at “ensuring that no poor country faces a debt burden it cannot manage.”
Africa’s rising debt concerns
Over the past decade, China’s economic involvement with Africa has vastly expanded which has stirred up some sense of wary amongst several economists, international organizations, and other world superpowers like the United States of America.
According to the African Centre for Strategic Studies, “In 2009, China surpassed the United States as Africa’s largest trading partner, and by 2015, China’s trade with Africa had reached $300 billion.”
In November of 2018, the BBC reported that “The total amount of external debt for the continent is estimated at $417bn (£317bn)” and between 2000 and 2018, China’s lending to countries in Africa was $152 billion.
With China given out billions of dollars in loans to African nations, and with the current pandemic that is pushing several economies into recession, many African countries are at risk of defaulting.
As China continues to roll out loan facilities to African governments which some describe as cheaper, quicker, and with fewer strings attached, China is exacting its influence across the continent. In Djibouti for instance, China has established a strong military base which according to some U.S senior leaders was designed to secure enough political and economic influence.
Ghana ranks 9th most indebted African country to China
In 2018, in Ghana, for instance, Ghana and Beijing signed a $2 billion Master Project Support Agreement (MPSA) in exchange for a 5% access to Ghana’s bauxite reserves. This is one of the facilities that have contributed to Ghana’s ranking as the 9th most indebted African country to China. China also has a similar deal with Guinea where it is exchanging $20 billion in loans across the next two decades for access to bauxite ore.
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So, what does this mean for Ghana?
The 5% access to Ghana’s bauxite reserve may just be the beginning of China’s quest to take hold of the country’s rich natural resources.
Moreover with Ghana’s debt stock now at 74.4% of GDP (GH¢286.9 billion), there is the growing concern of debt sustainability in a country that was bailed out by the IMF in 2015.
Ghana may thus be heading towards drowning itself in debt and may push for another IMF bailout.
According to the Managing Director at Geopolitical Risk Advisory, Elizabeth Stephens, though the investments from China have a mutual benefit, they usually strengthen the divide between the affluent and the poorest residents on the continent.
“This is because African governments often lack the will or capacity to ensure the proceeds from mega-projects have the desired trickle-down effect, and Chinese investors do not make this a prerequisite of investment,” she said.”
That also seems to be the case for Ghana.