How China Took Over Sri Lanka Port: Debt Entrapment Lesson For Nigeria!

President Xi Jinping

  Debt-trap diplomacy is carried out in bilateral relations between countries with a negative intent. The creditor country intentionally extends excessive credit to a debtor country, thereby inducing the debtor into a debt trap. This is done with the intention of extracting economic or political concessions from the debtor country when it becomes unable to honor its debt. The conditions of the loans are often not madepublic, and the borrowed money commonly pays contractors from the creditor country. Although the term has been applied to the lending practices of many countries and the International Monetary Fund (IMF), it is, as of 2020, most commonly associated with China. Bilateral agreements made as part of China's Belt and Road Initiative have furthered this association, especially regarding commodity-backed loans to developing nations. 

The term "debt-trap diplomacy" was coined by Brahma Chellaney to describe China's predatory lending practices in which poor countries are overwhelmed with unsustainable loans and would be forced to cede control of strategic assets to China. The Belt and Road Initiative (BRI) is a multi-billion-dollar expansion project of China, to expand its power through lending to countries to spur their economic growth. The BRI project was launched in 2013 by Chinese leader Xi Jinping to improve the infrastructure of countries in Europe, Africa, and Asia in exchange for global trade opportunities and economic advantage. 

Studies of economic experts in the practices of China found the patterns of China's bank lending purposefully trap governments to gain strategic opportunities for China. According to Chellaney, this is "clearly part of China's geostrategic vision".[ China's overseas development policy has been called debt-trap diplomacy because once indebted economies fail to service their loans, they are said to be pressured to support China's geostrategic interests. Some commentators maintain China is supporting repressive regimes in a neocolonialist manner through high-interest loans, intending to coerce these countries, once they default, to align with China on key strategic and military issues. China has been accused of requiring secret negotiations and non-competitive pricing on projects in which bidding must be closed and contracts must go to Chinese state-owned or state-linked companies that charge significantly higher prices than would be charged on the open market. 

Sri Lanka a country of over 21 million people in South Asia because of bad leadership was entrapped by Chinese loans, which it could not pay, as a result the country has lost its seaport to a Chinese company. According to reports, Sri Lanka a country where corruption is rife like in Nigeria, getting foreign loans from the West was difficult because of Western nations insistence on human rights and other conditionality that include not giving bribes to public officials, as a result the country turned to its traditional ally China. China was ready to play ball. It was reported that every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes. Yes, though feasibility studies said the port wouldn’t work. Yes, though other frequent lenders like India had refused. Yes, though Sri Lanka’s debt was ballooning rapidly under Mr. Rajapaksa. 

Over years of construction and renegotiation with China Harbor Engineering Company, one of Beijing’s largest state-owned enterprises, the Hambantota Port Development Project distinguished itself mostly by failing, as predicted. With tens of thousands of ships passing by along one of the world’s busiest shipping lanes, the port drew only 34 ships in 2012. And then the port became China’s. Mr. Rajapaksa was voted out of office in 2015, but Sri Lanka’s new government struggled to make payments on the debt he had taken on. Under heavy pressure and after months of negotiations with the Chinese, the government handed over the port and 15,000 acres of land around it for 99 years in December 2015. The transfer gave China control of territory just a few hundred miles off the shores of a rival, India, and a strategic foothold along a critical commercial and military waterway. The case is one of the most vivid examples of China’s ambitious use of loans and aid to gain influence around the world — and of its willingness to play hardball to collect. The debt deal also intensified some of the harshest accusations about President Xi Jinping’s signature Belt and Road Initiative: that the global investment and lending program amounts to a debt trap for vulnerable countries around the world, fueling corruption and autocratic behavior in struggling democracies. 

In a country like ours where memory is short, by now many may have forgotten the heated debate over the possibility of Nigeria losing its sovereignty to China over bad debts. Perhaps the broom has been used to sweep that debate which was rather inclusive under the carpet. Other more important issues have also relegated it to the backburner. However the danger remains till government comes clear on the loan contracts it signed with Chinese government and companies on infrastructure projects. Back in August the debate over Nigeria’s debt entrapment by China followed claims by federal lawmakers who are pushing for a probe into China’s lending practices to Nigeria, in the wake of a sovereign guarantee clause in loan agreements that was feared to have compromised Nigeria’s sovereignty. The dominant and controversial narrative was that the clause could see Nigeria sign away its sovereignty in the eventof a payment default. And the outcry was loud enough for China’s embassy in Nigeria’s capital to deny plans to seize Nigerian assets. Nigeria’s transport minister Rotimi Amaechi has attempted to clarify the purpose of the clause and described it as a waiver of immunity which would allow China pursue paths, including arbitration, to settle possible disputes over payments. ”They (the Chinese) are saying, if you are not able to pay, don’t stop us from taking back those items that will help us recover our funds. And it’s a standard clause, whether it’s with America you signed it or with Britain or any country, because they want to know they can recover their money,” he explained in a press release. 

Many Nigerians did not find the explanation that the minister satisfactory and the situation is not helped by the growing list of African and developing countries said to have lost their national strategic assets to China through debt entrapment. There have been credible reports of talks between the Zambian government and China on handing over the country’s national electricity company, ZESCO to the Chinese due to the inability of Zambia to meet its loan repayment promises. This was not the first casualty of Chinese debt, as China had earlier taken control of the country’s broadcasting company, ZNBC. There are also fears the main airport in Lusaka could be the next target. Obliviously, Zambia is in trouble. And for other African beneficiaries of Chinese loans, they should prepare for the same possibility in the eventuality that they aren’t able to repay China. China had been smart and deliberate about its policy in Africa. It understands the development deficit on the continent and it is strategically using this to keep Africa’s economic future under its arms. Africa has what China needs to further propel its economy, specifically crude oil and copper. The best way to ensure an abundant supply of these in the future would be to make the depository countries owe it, which it has excellently done so far. The plot is simple. Give staggering loans to inept leaders and keep the details of repayment from the prying eyes of the public. Eventually, if debtors are unable to service their debts, China takes over its collateral which is mostly in national assets. 

Reports show that a substantial number of African countries have taken Chinese loans since 2000, totaling a whopping $124 billion by 2016. Of course, there have been more after that. But, Africa is only a victim of its own ignorance as the world had severally warned of China’s end goal. Nearly all major economies in sub-Saharan Africa today are massively indebted to China. What makes this worse is that most of them have poor economic projections for the next few years and will almost certainly have problems servicing their debts. For instance, around 72 percent of Kenya’s $50 billion bilateral debts are owed to China, with the East African country requesting an additional $3.8 billion extension. Nigeria also recently accrued some $5 billion in loans from China, and Angola still owes about $21.2 billion with a pending proposal for another $4.4 billion. South Africa should be getting $14.5 billion in Chinese investment soon and another $2.5 billion loan for its embattled national power company, ESKOM. 

Weaker economies like the Democratic Republic of Congo, Sudan, and Ethiopia have also incurred large debt from China. The reality in these figures is that the majority of the beneficiary countries will not achieve the intended goals of the loans. This is primarily because of corruption and poor economic structure. How the beneficiary countries will manage to repay China without ending up like Zambia is yet to be seen, especially now that China is responding hard. Defaulters should not also expect any help as they had from the IMF in 2005, with the Multilateral Debt Relief Initiative that canceled over $100 billion debt for 30 Africans countries. The US has admonished the IMF not to bail out any country having debt servicing troubles with Chinese loans. It also does not seem like any other bloc will be willing, too, considering the volume of money involved, or in light of risking the US consequences.

 Meanwhile Nigeria’s Debt Management Office (DMO), in a press statement published on its official website on June 18, 2020, stated that as at March 31, 2020, the total borrowing by Nigeria from China was USD3. 121 billion (₦1,126.68 billion at USD/₦361). This amount according to it represents only 3.94% of Nigeria's Total Public Debt of USD79. 303 billion (₦28,628.49 billion at USD/₦361) as at March 31, 2020. On the terms of the loans from China, the DMO said that the total borrowing from China of USD3.121 billion as at March 31, 2020, are concessional Loans with Interest Rates of 2.50% p.a., Tenor of Twenty (20) years and Grace Period (Moratorium) of Seven (7) years. “The Terms and other details of the Loan are available at www.dmo.gov.ng. These Terms are compliant with the provisions of Section 41 (1a) of the Fiscal Responsibility Act, 2007. In addition, the low interest rate reduces the Interest Cost to Government while the long tenor enables the repayment of the principal sum of the Loans over many years. These two benefits, make the provisions for Debt Service in the Annual Budget lower than they would otherwise have been if the Loans were on commercial terms,” it stated. It said that the USD3.121 billion Loans are project-tied loans. 

“The projects, (eleven – 11 in number as at March 31, 2020), include: Nigerian Railway Modernization Project (Idu-Kaduna section), Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project (Abuja, Kano, Lagos and Port Harcourt), Nigerian Railway Modernization Project (Lagos-Ibadan section) and Rehabilitation and Upgrading of Abuja – Keffi- Makurdi Road Project. See a Full List of the Projects at www.dmo.gov.ng. The impact of these Loans is not only evident but visible. For instance, the Idu – Kaduna Rail Line has become a major source of transportation between Abuja and Kaduna. Also, the new International Airport in Abuja, has improved air transportation for the populace, while the Lagos – Ibadan rail line when completed, will ease traffic on the busy Lagos -Ibadan Expressway. The projects also have the added benefits of job creation, not only by themselves but through direct and indirect service providers, a number of which are Small and Medium Enterprises. It is widely accepted that investment in infrastructure is one of the most effective tools for countries to achieve economic growth and development. Using Loans from China to finance infrastructureis thus in alignment with this position,” it stated. Whether the explanations by the DMO is enough to stop the fears of China debt entrapment remains to be seen. What is not in doubt is that the last has not been heard on Nigeria's growing borrowing and indebtedness to China which could have dire consequences for the country if it defaults in paying back the loan at the stipulated time.