As Nigeria’s Chinese debt reaches $4.73bn, the IMF issues a warning to African countries about the ramifications of their economic connections with China

As Nigeria’s Chinese debt reaches $4.73bn, the IMF issues a warning to African countries about the ramifications of their economic connections with China.

Nigeria and other Sub-Saharan African countries have been warned by the International Monetary Fund (IMF) about the dangers of developing strong commercial connections with China.

With news that Nigeria’s debt to China had climbed to $4.73 billion as of June 30, 2023, the IMF has issued a warning in its current Regional Economic Outlook for Sub-Saharan Africa.

The Debt Management Office (DMO) data on Nigeria’s external debt profile shows that the country’s debt to China climbed by $800 million between June 30, 2022 and June 30, 2023, from $3.93 billion to $4.73 billion.

Debt includes concessionary loans the Nigerian government used to build infrastructure like power plants, railways, water systems, airports, food processing facilities, and communication networks.

Nigeria’s National Public Security Communication System, the Wu-Kaduna railway modernization project, the Abuja light rail project, the Nigerian Information and Communication Technology infrastructure backbone project, the expansion of airport terminals in Abuja, Lagos, Kano, and Rivers, the Zungeru hydroelectric power project, the 40-parboiled rice processing plants project, and the Lagos-Ibadan railway modernization project are all being carried out with loans from China.

The first Chinese loan, a value of $200 million agreed on in 2006 to support the Nigerian Communications Satellite project, has been cleared by the Federal Government with additional payment of $40.02 million interest.

Nigeria’s growing debt to China is indicative of the two countries’ strong economic connections. Trade between the two countries surged by 142% between 2016 and 2021, as reported by Chinese Ambassador to Nigeria Cui Jianchun in an article published on the website of the Ministry of Foreign Affairs of the People’s Republic of China.

According to China’s ambassador, bilateral trade volume hit $20.04 billion in the first 10 months of 2022. Currently, Nigeria is China’s third largest trading partner in Africa, and China is Nigeria’s top supplier of imports.

However, the IMF warned that Nigeria and other Sub-Saharan African nations are vulnerable due to their close economic linkages with China in its most recent Regional Economic Outlook, published in October 2023.

According to the IMF’s “At a Crossroads: Sub-Saharan Africa’s Economic Relations with China” section of their “Analytical Notes” on the Regional Economic Outlook: Sub-Saharan Africa, China has become the region’s largest trading partner, major credit provider, and significant source of foreign direct investment over the past two decades.

However, the IMF has issued a warning, saying that Nigeria’s trading partners in Sub-Saharan Africa will be negatively affected by China’s recent slowdown in economic growth.

However, China’s aid to Africa has also been criticized, the IMF said. As its economy slows and its appetite for risk decreases, China has recently cut back on its financial efforts in sub-Saharan Africa. Over the medium run, a slowdown in China’s growth is expected to have a negative impact on Africa’s trading partners, mostly through decreased trade.

The IMF also noted that if China reduces its obligations to the countries of Sub-Saharan Africa because of the slowdown in economic growth, funding for infrastructure projects will suffer.

The risk is that China is currently Nigeria’s and other African countries’ primary source of funding for infrastructure projects.

The International Monetary Fund reports that “China has also become a major funding source for African governments since the early 2000s after initiating its official “go out” policy.” Increases in Chinese lending to the region in the late 2000s were primarily used to fund public works projects. As a result, China’s proportion of total external public debt in sub-Saharan Africa increased from less than 2% before 2005 to nearly 17% in 2021.

As a result, “China is now the largest bilateral official lender to countries in the region, providing African countries with a new source of infrastructure financing.”

IMF data shows that 55% of official Sub-Saharan African debt to China is held by just 5 countries: Angola, Kenya, Zambia, Cameroon, and Nigeria.

The International Monetary Fund found that increased bilateral trade and lending disbursement between China and Sub-Saharan African countries is associated with increased trade and lending activity on the continent.

The International Monetary Fund (IMF) found that China’s FDI into Sub-Saharan Africa has skyrocketed since 2006, to the tune of around 23% of annual FDI inflows (or $3 billion) to the region by 2021. This was in addition to the boom in Chinese loans to these countries.

However, during the 2021 China-Africa Cooperation Forum, China announced its first cutback in financial support to Africa, from $60 billion to $40 billion over three years, which the IMF interpreted as a red flag for China’s economic connections with Sub-Saharan African countries. Many African countries’ rising debt vulnerabilities were seen to have prompted China’s shift away from direct infrastructure investment and toward more trade credit, which led to the decline.

The IMF also made the observation that there has been a lot of backlash against Chinese financing to Sub-Saharan Africa because of the relatively severe conditions imposed on debtors and the use of natural resources as collateral.

“Other concerns include the lack of standardization and transparency in public debt because Chinese lenders do not systematically document loans to individual overseas borrowers, leading to significant data gaps,” the IMF stated.

The Nigerian government has consistently guaranteed that loans secured from China came with relatively forgiving terms.

However, in 2020, it was feared that the divisive practice of “waiving sovereignty”

Nigeria’s cession of some of its sovereignty to China was stipulated in the commercial loan deal it signed with the Export-Import Bank of China.

Former Transportation Minister Rotimi Amaechi, however, clarified that the phrase did not technically transfer sovereignty, but rather gave some respite to enable China to take over Nigerian assets for loan recovery in the event that it became required.

About 40% of the entire public debt stock to China at the end of 2020 is held by Sub-Saharan African nations, which are either in debt distress or at high danger of debt distress, as reported by the International Monetary Fund (IMF). The current state of affairs in those nations necessitated debt restructuring. The IMF did say that negotiations for some countries’ debt restructuring have been protracted and difficult.

The IMF has expressed concern that the slowdown in China’s economy could have negative repercussions in Sub-Saharan Africa.

Since the pandemic, China’s economy has slowed even further, and the current IMF forecasts predict that over the next five years, the country will grow by an average of only about 4 percent per year, with notable tendencies toward decreased investment and greener technologies.

An additional slowdown in China’s growth in the medium to long-term is likely to influence economic activity in Sub-Saharan Africa, according to the IMF’s most recent Regional Economic Outlook. It went on to say that trade ties will be the main source of negative spillovers, manifesting mainly as a drop in export volumes and commodity prices.

To avoid this risk, the IMF recommended that Sub-Saharan African nations adjust to new patterns of economic interaction. As the author puts it, “Sub-Saharan Africa has benefited from China’s growth take-off, but the region needs to adapt to China’s slowdown and declining economic engagements.”

The International Monetary Fund (IMF) urged Sub-Saharan African countries to adapt to the situation and eventually escape the dangers posed by the Chinese slowdown by increasing regional trade integration, strengthening policy frameworks to reduce macro-economic vulnerabilities and external reliance, promoting economic diversification, and undertaking reforms to create favourable business environments.

Some economists and financial analysts, however, told DAILY POST that Nigeria’s economic relations with China pose no threat to the country.

Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise, CPPE, said Nigeria had nothing to worry about considering the reported economic downturn in China.

It’s not something Nigeria has to be concerned about, in my opinion. In my opinion, the threat to China’s economy is not catastrophic. Yusuf told twiscoloaded, over the phone, “I don’t think it has reached a level we have to worry about.”

Second, if the economy is slowing and you still have a trading partner, the danger to you is minimal. You can always find an other trading partner if things are not working out with them. Even though China’s economy is declining, I don’t think Nigeria is in a particularly dangerous position. However, I don’t anticipate any serious disruptions in the Chinese economy.

Yusuf pointed out that Nigeria’s rising debt level and the high cost of debt servicing should cause the country concern. He continued, “I think such alarm is disproportionate if there is any alarm concerning China.”

Ayo Teriba, Chief Executive Officer, Economic Associates, EA, stated that the IMF warning is a distraction as Nigeria has a lot of internal economic difficulties it should be worried about.

“Nigeria already has too many problems at home. The forecast for China’s economy is negligible compared to Nigeria’s other woes. He argued that, while the attitude of China could have some impact on Nigeria, the country should instead focus on fixing its own problems.

Teriba also remarked that IMF estimates are not always stable.

You can’t put your faith on IMF projections. A forecast will be made today, and it will be updated tomorrow. Multiple forecasts are released and revised before the end of the year. Therefore, if you start telling Nigeria to start worrying about the IMF’s forecast on China, you would divert Nigeria’s attention away from addressing the problems that Nigeria has that are not related to the forecast.

When asked about Nigeria’s issues, he said, “These are not predictions; they are facts.”

We need to address issues with systemic liquidity and market liquidity in addition to foreign exchange and budgetary concerns. They exist right now, not in some hypothetical future. Let’s not lose focus, Teriba said; “charity begins at home.”

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