Repeated assurances from China and borrowing countries that the debt situation is under control do not allay these fears. As the discussion of threats posed by Chinese lending continues, lessons from these countries suggest that the public should be concerned less about asset foreclosures and more about the liability of their own leaders and the economic consequences of irresponsible borrowing. .
Sri Lanka and Malaysia were cited as examples of China’s âdebt trap diplomacyâ. However, in both countries, these allegations turned out to be fictitious.
The article continues below
Get Your Free PDF: Top 200 Banks 2019
The race for transformation
Fill out the form and download for free the highlights of the exclusive ranking of Africa’s top 200 banks published by The Africa Report last year. Get your free PDF by filling out the following form
Despite the emerging consensus among many academics and analysts that the “China’s debt trap” is indeed a myth due to the lack of credible evidence, Chinese debt concerns continue to be raised by the media and social media memes that insist assets were in fact seized in multiple countries.
The latest such scandal came from Uganda. The Ugandan government and Chinese lenders have dismissed claims that Entebbe airport was seized by the Chinese.
Some of these claims appear to be fueled by a misinterpretation of waiving sovereign immunity clauses in contracts, raising fears that borrowing countries may lose control and authority over their sovereign assets.
However, the lack of clarity on many of these contracts and the admission by the Ugandan finance minister that Uganda should not have accepted some of the clauses is an indictment against the leaders who took part in the negotiations and accepted the agreement. Ugandans will be particularly concerned that the state will be subject to China’s legal regime in the event of default or disagreement over the loan in what their finance minister has recognized as flaws in the Entebbe deal.
The common understanding of debt is that when we default, the warranty is affected. However, defaulting on sovereign debt is more complicated than defaulting on corporate debt because domestic assets cannot realistically be foreclosed on to repay funds. What usually happens is that the terms of the debt are renegotiated, often leaving the lender in dire straits.
The suspicious Ugandan public would be happy to know that China has already made huge concessions and provided substantial debt restructuring to several affected countries, including Zambia, Angola, Rwanda, Botswana, among others. However, some Chinese lenders have indicated reluctance to accept further cancellations beyond the zero-interest loans they had granted.
It also appears that borrowers may have underestimated China’s ability to dig in and demand repayment, leaving them in precarious positions. For example, Kenya’s offer to extend the debt service suspension beyond June was flatly rejected by Chinese lenders. Likewise, he alleged that Uganda’s offer to renegotiate payment terms for the Entebbe airport expansion of $ 207 million was also rejected on the grounds that changes would set a bad precedent.
Lessons from the first country to default on its sovereign debt show that Chinese lenders have played hard and pressured the Zambian Treasury to avoid any late payments or default and sought new collateral in the event of default. These rejections should serve as a warning to African borrowers to remain cautious and not to expect too many concessions from Chinese lenders. Creditors need to be flexible but firm because if they don’t it can encourage irresponsible borrowing and laxity to pay and if they push too hard the pressure can lead to total economic collapse.
The Zambian case shows that despite no threat of seizure of assets, the real threat lies in the “tragedy of the commons” where leaders neglect the welfare of society due to lack of accountability and the necessary checks and balances in a somewhat predatory lending regime.
Zambia now faces painful economic reforms that include the removal of unsustainable high agricultural and energy subsidies tIt will probably make life more difficult for ordinary citizens. More generally, these agreements reflect the structural inequalities that define Africa’s trade and credit relations with China, which cannot be seen as a mere misinterpretation of the terms of the contract.
We don’t need any precedent of actual foreclosures to be concerned. The basics of borrowing tell us that all debt comes at a cost. James Lensdal Basford observed that “the man who can never have enough to pay his debts has too much else”. With that in mind, there must be clarity on what is at stake.
This article was published in partnership with The China Africa Project