The myth of the debt trap

Over past decades, China has built large infrastructure projects in almost every country in Africa, making developed nations uncomfortable amid wider concerns about Beijing’s investments across the continent. On the other hand, people always think China is the biggest creditor to Namibia or other African countries and often talk about the “Chinese debt trap”. However, a deeper look shows that accusations of so-called debt trap diplomacy turn out to be unfounded.As of now, Namibia&#039;s total debt stands at around N$140.8 billion, constituting approximately 68% of its GDP. Notably, only 26% of this debt is foreign, with 74% being domestic. Within the foreign debt category, loans from the western creditors (Eurobond) account for a significant portion, while China represents a mere 1.5% of Namibia&#039;s total debt (N$2.1 billion). This was also confirmed by the finance minister in his interview on Namibian Sun’s The Agenda in June.Historically, African nations have faced substantial challenges in securing funding for development, particularly following their independence. From the 1970s onwards, many countries turned to Western creditors, notably members of the Paris Club, resulting in a dramatic increase in Africa&#039;s external debt – from US$8 billion to US$174 billion within two decades. Meanwhile, in order to address their economic problems, such as stagflation, these creditors raised their interest rates and the value of US dollars, which made it difficult and almost impossible for African countries to pay back the loans, leading to a debt crisis by the late 1980s, when Africa&#039;s debt ratio reached an alarming 88%, far exceeding the 20% international warning level.Recent years have seen another rise in debt levels across Africa, driven by factors such as drought, volatile commodity prices, and the Covid-19 pandemic.According to the World Bank’s 2022 International Debt Statistics, 28.8% of Africa’s external debt is owed to multilateral institutions, while 41.8% is held by commercial creditors. From this fact, it poses no risk for Namibia and other African countries to fall into the so-called “Chinese debt trap,” and labelling China as the main creditor is clearly an overstatement.RealityIn my view, rather than borrowing too much, Namibia and other African countries have been paying too much interest. Studies show that African governments are paying interest of 5% to 16% on 10-year government bonds, compared to near zero to negative rates in Europe and America. On average, the interest repayment is the highest expenditure portion and remains the fastest growth expenditure in Africa’s fiscal budgets. However, the vast majority of African countries have much lower debt levels than developed countries.The characterisation of a "Chinese debt trap" is often propagated by those who may not support Africa&#039;s development or who feel threatened by the strengthening China-Africa relationship. In reality, China has not forced any African nation to mortgage its essential resources. Such accusations serve to undermine the sovereignty of African countries to select their own development partners and hinder their own industrialisation efforts.Sustainable developmentWhile China is a relatively new participant in African financing, its contributions have been significant. By offering alternative financing avenues distinct from traditional models, China has played a crucial role in enhancing Africa&#039;s self-sufficiency and attracting diverse investment. Historically, China’s assistance has included grants and interest-free loans, most of which have already been waived, thereby minimising any additional debt burden. Recently, during FOCAC, President Xi Jinping accelerated Beijing&#039;s financing efforts to align with Africa&#039;s pressing development needs, focusing on infrastructure and manufacturing projects that address genuine regional demands.Furthermore, China&#039;s financing often contrasts with that from former creditors, which typically targets non-manufacturing and non-infrastructure sectors and is frequently tied to political conditions and human rights conditions. The emphasis here is not just on economic growth but also on fostering sustainable development and improving the living standards of African populations.Referencing on what Ambassador Zhao Weiping said last week, in terms of transparency, contracts between China and African nations are negotiated on equal terms, adhering to local laws and regulations. China has actively promoted innovative financing solutions, such as Build-Operate-Transfer (BOT), which do not exacerbate sovereign debt burdens.It is noteworthy that China stands out as a key lender, with financing levels that rival those of the World Bank, but it does not occupy the top position among official lenders in Africa as it has been labelled. Importantly, China does not harbour a "debt trap" agenda towards its African partners but rather seeks to foster mutual development and cooperation.*Haikali Ndatulumukwa is an economist with expertise in international trade and diplomacy and serves as the chairman of the Africa’s Youth in Agriculture Organisation.

The myth of the debt trap

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Namibian Sun 2024-12-23

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The myth of the debt trap

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Namibian Sun 2024-12-23

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