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Home Business News Politics

Nigeria is falling into China’s debt trap

Abiola Odutola by Abiola Odutola
May 21, 2020
in Politics, Research Analysis, Spotlight
Chinese debt trap, Nigerian Economy: Solution To Fixing Buharinomics

Nigerian Economy: Solution To Fixing Buharinomics

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Nine days ago, the House of Representatives mandated some of its committees to investigate all China-Nigeria loan agreements from 2000 to date. The intention of the green chamber here was to ascertain the viability of the facilities, then regularize and renegotiate them, especially as the country is expected to slide into recession this year.

There and then, Ben Igbakpa, one of the legislators, moved a motion on the need to review and renegotiate existing China-Nigeria loan agreements. The motion was adopted.

READ ALSO: Nigerian assets that may be taken over by China

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Why it matters…

Igbakpa argued that the agreement should be investigated as there were global concerns about the alleged fraudulent, irregular, and underhand features of Chinese loan contracts with some African countries, which had resulted in a new form of economic colonialism foisted by China.

Meanwhile, Nigeria has obtained 17 Chinese loans to fund different categories of capital projects, and Nigeria will still be servicing the Chinese loans till around 2038, which is the maturity date for the last loans obtained in 2018.

The lawmakers’ concern is worthy to be considered. Nairametrics found that the history of Chinese loans, especially in Africa, is a growing concern. Several observers, including some of the United States Representatives, have warned many nations on what they described as Chinese Debt trap diplomacy, as the Asian nation allegedly used finance as a weapon in many developing countries.

READ MORE: COVID-19: Could Africa’s Awakening be the Silver Lining?

Victims of Chinese alleged Debt trap diplomacy

Since all Chinese loans are tied to infrastructural developments, some of the African nations have had to forfeit their stakes in the infrastructure, which they used as collateral, after they defaulted. For instance, $7.4 billion of Zambia’s total $8.7 billion foreign debt is owed to China, representing a large debt burden, given the relatively small size of Zambia’s economy. It was reported in late 2018 that the Zambian Government was in talks with China that might result in the total surrender of the state electricity company ZESCO as a form of debt repayment since the country had defaulted on the plethora of Chinese loans for Zambia’s infrastructure projects.

Also, Kenya may soon lose its largest and most lucrative port, Port of Mombasa to its creditor (China) after it defaulted in the refund. This could force Kenya to relinquish control of the port to China.

One of the most cited examples of alleged debt-trap diplomacy by China is a loan given to the Sri Lankan Government by the Exim Bank of China to build the Magampura Mahinda Rajapaksa Port and Mattala Rajapaksa International Airport. The state-owned Chinese firms’ China Harbour Engineering Company and Sinohydro Corporation were hired to build the Magampura Port at a cost of $361 million, which was 85% funded by China’s state-owned Export-Import Bank at an annual interest rate of 6.3%. Due to Sri Lanka’s inability to service the debt on the port, it was leased to the Chinese state-owned China Merchants Port Holdings Company Limited on a 99-year lease in 2017.

Can Nigeria refund the loans? Expert say …

Nigeria owes China about $3.1 billion, more than 10% of the $27.6 billion external debt stock. Minister of Finance, Zainab Ahmed, disclosed in February that the Federal Government decided to go for a $17 billion loan from China as the World Bank and the African Development Bank’s (AfDB) failed to show much interest in Nigeria during the recession.

But can Nigeria refund the loan? Experts think otherwise, as they argue that if care is not taken, the nation may fall into the Chinese Debt Trap.

In an interview with Channels TV, the Director of Centre for Infrastructure Policy Regulation and Advancement (CIPRA), Lagos Business School, Dr Bongo Adi, explained that Nigeria lacks accountability, transparency, and responsibility to refund the loans. He noted that when it comes to loans, Nigeria has failed to implement the three factors in its engagement with the Chinese.

According to him, Chinese Exim Bank has offered $6.6 billion to Nigeria and that is quite significant. He said:

“We have to look at the total debt and the capacity to repay not just to China but to our creditors. Our Debt independent revenue is at 96% now. That means for every N1 we earn, 96 kobo is used to refund loans. That has passed a critical threshold.

“What it means is that we lack the ability and we don’t have the headroom anymore to repay because our independent revenue has been strangulated by our enormous debt hanging over the Federal Government as it stands now.”

READ MORE: A Post-COVID Economy

He also expressed concern that increasing Chinese loan is an indication that the nation has not considered the history of Chinese loans. He said:

“Out of 64 countries that host the Chinese Belt and Road initiative projects, 20 have gone under distress and 8 are about to lose their sovereign debt sustainability if they should take any further loan. If that were supposed to be a good guide, it means Nigeria needs to be very careful when we are borrowing from the Chinese.

“We have seen this Chinese cycle and need to be careful. What normally happens is that the Chinese will begin to take over infrastructure asset, which is what some call Chinese Chopstick Imperialism and the experience is not just pleasant. Chinese strategically tie loans to infrastructure and that is with the intention of taking possession of the infrastructure asset if there is the default, as such asset became their collateral.”

READ MORE: Nigerian Pharmaceutical importers lament over impact of Coronavirus

Meanwhile, contrary to the belief of some pro-government pundits that the Abuja-Kaduna rail was a success, a Chartered Accountant, Peter Adebayo, said that It depends on how the success is qualified. He said:

“When you look at the economics of the project, questions have been asked. Minister of Transportation has said in a forum that government subsidised the project by 60%. Now, that the cry all over is for the government to remove subsidy, will the project continue to be sustainable if the subsidy is removed?

“If that is the case, will we be able to repay the debt? What is the impact of all these, we need to be careful. We should look away from PPP and focus on Blended finance. It is a strategic move where you bring in development finance with some philanthropic funds to activate private capital into infrastructure development. Our debt is high and it is a precarious situation for everyone. We cannot do without taking loans but the government has displayed incapacity and incompetence to manage projects.”


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Tags: Business NewsChina EXIM bankChina-Nigeria loan agreementsDebt Servicing in NigeriaFederal House of RepresentativesFinance Minister Zainab AhmedNigeria NewsNigeria's external debtResearch Data
Abiola Odutola

Abiola Odutola

For further inquiries about this article, contact: Email: abiola.odutola@nairametrics.com Twitter: @AbiolaOdutola @nairametrics

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Comments 4

  1. Oyetunji Kuforiji says:
    May 21, 2020 at 11:13 am

    I would have thought the government would have explored Islamic loans under the principles of either mudaraba or musharaba. These loans appear more transparent and equitably modelled. If you need loans tied to specific projects, Islamic loans are better suited to protect the borrower. Thanks

    Reply
  2. Sunday says:
    May 21, 2020 at 4:45 pm

    Whatever may be the explanation for the indignities of african Leaders that, it is high time we ask them to GO. They have abused of us, failed to protect us from all forms of calamities, and sold out our Humanity. The result today is that Africa – Nigeria in particular – is no longer Home for the majority of us. There can be no worse failure.
    In the case of Nigeria where petroleum explains the larger share of the source of income for the so-called Leaders, and that is supposed to have been for the people, it can no longer be the same again. In effect, the World before Covid-19 will not be World after it. So, it is time to show them the way out of the stage. And this, we should do with insistence and conviction.
    FEAR must change camp.

    Reply
  3. Dome says:
    August 16, 2020 at 6:45 pm

    African is a sad story why do we have ineffective ineffective and dumb leaders
    Nigeria does not have accountability they lack integrity and common sense
    Not only a corrupt but damn useless government
    Then you the corrupt and ineffective reps not investigating the loans and Ameachi
    This government selling us out to our new slave masters

    Reply
  4. JOSEPH MOK says:
    June 7, 2021 at 12:27 pm

    All over the world infrastructure is not stand alone profitable. A railway’s success is not measured by its capital and operating costs against revenue alone but by the growth it brings to places it connects.

    The only exceptions to this rule are extremely heavily used metro lines in tier 1 cities like Hong Kong, HSR connection between Tier 1 cities like Beijing and Shanghai.

    Except for those exceptions public infrastructure is always government subsidised no matter where you go in the world.

    Reply

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