Risks of Belt and Road in Africa
Options limited for recipient countries looking to close infrastructure gap
by Kat Usita in London
Tue 25 Sep 2018
As China's cross-border Belt and Road initiative gains momentum, apprehension over its impact continues to build. Early on, some observers accused China of unduly exerting influence on other countries in the guise of infrastructure assistance. It is increasingly apparent that the risks to recipient African economies in particular are substantial, but their governments are left with little choice.
Chinese contractors credit their speed in building transport and energy infrastructure to their extensive construction experience, having been part of China's industrial boom. However, the more telling aspect is Beijing's willingness to offer African countries financing with no conditions, apart from that Chinese firms undertake the projects.
In contrast, projects sponsored by western governments and development agencies tend to include policies around anti-corruption, transparency and competitive tenders. They also devote a great deal of time to investigating a project's feasibility and financial viability to ensure that it will not be overly reliant on subsidies once operational. These constraints often delay project delivery, which makes Chinese assistance an appealing alternative for African governments committed to delivering new infrastructure.
Five years since the Belt and Road was launched, advocates can point to examples of moderate success in Africa, with more on the way. Kenya, Ethiopia and Nigeria have new rail lines. Djibouti has an ambitiously expanded megaport and a new international airport, as well as a railway that connects it to Ethiopia's capital, Addis Ababa. Another megaport will be built in Bagamoyo, a small fishing town in Tanzania, to ease container traffic in Dar es Salaam. It will take several years of use before one can properly measure the full economic benefits of this new infrastructure. Meanwhile, the risks are self-evident.
Tanzania, Ethiopia and Kenya have growing external debt, although the levels remain manageable at this time. Djibouti's foreign debt has ballooned to nearly the same size as its economy, reaching 87% of GDP in 2017. Much of this was used to finance Belt and Road projects.
Strategically located on the Horn of Africa, Djibouti is home to China's first overseas naval base, as well as the only permanent US naval base on the continent. That China has established a military presence in a country that owes it a great debt is unsurprising. The more important question is whether Djibouti will reap enough benefits from improved trade and transport links to make its impending debt crisis worthwhile, and if China will provide assistance should it not.
Even if African economies connected to the Belt and Road can manage their debt well and maximise growth opportunities spurred by new infrastructure, concerns remain over China's ability to deliver. A study by the Financial Times shows that top Chinese overseas contractors are nearly four times more leveraged than their non-Chinese counterparts. While this may not give a full picture of contractors' financial health, it confirms suspicions that the Belt and Road is at least as much about Chinese firms' gain as it is about helping countries close their infrastructure gaps.
In July, Chinese President Xi Jinping visited Senegal, Rwanda, South Africa and Mauritius, his fourth visit to Africa since taking office in 2013. The trip demonstrates China's commitment to broadening its presence across the continent; until now Beijing has focused most of its efforts on East Africa.
As there seems to be no curbing the programme, outsiders are instead finding ways to align their own objectives with the Belt and Road. The World Bank has undertaken a series of studies examining the policies needed to minimise recipient countries' economic risks. It can also assist governments in looking after vulnerable sectors and communities affected by Belt and Road projects, such as fishing communities who will be displaced by massive port projects, to give just one example. Other governments and institutions intent on aiding Africa may want to start doing the same.
Kat Usita is Economist at OMFIF. On Thursday 11 October in Bali, OMFIF is launching the second edition of the Absa Africa Financial Markets Index alongside the International Monetary Fund-World Bank Group meetings. The index is a premier indicator of the attractiveness of Africa’s capital markets, for use by investors and asset managers around the world.
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