2021:China won’t seize assets from African countries, but won’t forget the debts

There is a sense of anxiety over Chinese debt in several African countries and beyond. From Zambia to Kenya, Uganda, and now even in the small Balkan country of Montenegro.

Repeated assurances from China and borrowing countries that the debt situation is under control aren’t quelling these fears.  As the discussion about the threats posed by Chinese loans lingers large, lessons from these countries suggest that the public should be less concerned about asset seizures and more about their own leaders’ accountability and the economic consequences of irresponsible borrowing.

Sri Lanka and Malaysia have been cited as examples of China’s “debt-trap diplomacy”. Yet in both countries, these allegations have been proven to be fictitious.

Despite the emerging consensus among many scholars and analysts that indeed “China’s debt trap” is a myth due to lack of any credible evidence, anxieties about Chinese debt continue to be sparked by media reports and social media memes that insist that assets have, in fact, been seized in several countries.

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The latest such scandal came from Uganda. Both the Ugandan government and Chinese lenders have dismissed allegations that Entebbe airport had been seized by the Chinese.

It is emerging that some of these allegations are being fueled by a misinterpretation of the waiver of sovereign immunity clauses in the contracts heightening fears that borrowing countries will lose control and authority over their sovereign assets.

However, the lack of clarity on many of these contracts and the admission by Uganda’s finance minister that Uganda should not have accepted some of the clauses is an indictment on the leaders who took part in the negotiations and accepted the deal. Ugandans will be particularly concerned that the state will be subjected to the Chinese legal regime in case of default or any disagreements over the loan in what their finance minister admitted as loopholes in the Entebbe deal.

The common understanding of debt is that when one defaults, the collateral is affected. However, defaulting on sovereign debt is more complicated than defaulting on corporate debt because domestic assets cannot realistically be seized to pay back funds. What usually happens is that the terms of the debt are renegotiated often leaving the lender in unfavourable situations.

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The wary Ugandan public would be glad to know that China has already made considerable concessions and provided substantive debt restructuring to several affected countries including Zambia, Angola, Rwanda, Botswana, among others. However, some Chinese lenders have indicated their unwillingness to accept further cancellations beyond the zero-interest loans that they had agreed to.

It is also emerging that borrowers may have underestimated China’s capacity to dig in and demand repayment leaving them in precarious positions. For instance,  Kenya’s bid to extend the debt service suspension beyond June was flatly rejected by Chinese lenders. Similarly, it alleged that Uganda’s bid to re-negotiate payment terms for the $207m Entebbe airport expansion was also rejected on the basis that alterations would set a bad precedent.

Lessons from the first country to default on its sovereign debt shows that Chinese lenders played hardball and put pressure on Zambia’s treasury to avert any delays in payments or defaults and sought fresh collateral in case of default. These rejections should serve as a warning to African borrowers to remain prudent and not to expect too many concessions from Chinese lenders. Creditors must be flexible yet firm because if they don’t it may encourage irresponsible borrowing and laxity to pay and if they push too hard, the pressure may lead to the total collapse of the economy.

The Zambian case shows that despite no threat of asset seizure, the real threat lies in “the tragedy of the commons” where leaders neglect the well-being of society due to lack of accountability and the necessary checks and balances in a somewhat predatory lending regimen.

Zambia now has to contend with painful economic reforms that include the removal of unsustainable high energy and agricultural subsidies that will likely make life more difficult for ordinary citizens. More broadly, these deals reflect the structural inequalities that define Africa’s trade and credit relationships with China, which can’t be argued away as simply misreading contract terms.

We do not need any precedent of actual seizures to be concerned. Basic borrowing principles tell us that all debts come at a cost.  James Lensdal Basford remarked that “the man who never has enough to pay his debts has too much of something 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

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