China has “canceled interest on Ethiopian loans” and agreed to invest $1.8 billion to improve electricity on the line between Ethiopia and Djibouti, on the sidelines of the summit “Initiative belt and road”.
According to the Ethiopian authorities, China canceled interest on all loans contracted before the end of 2018. Prime Minister Abiy Ahmed’s cabinet made the announcement following a meeting with President Xi Jinping in Beijing.
Researchers estimate that since 2000, Ethiopia has borrowed more than $12 billion US dollar from China – Including £4 billion from a railway linking Addis – Abeba in Djibouti. Ethiopia is not the first country in Africa to see its financial burden lightened. Earlier this year, China cleared $78 million in debt for Cameroon. The amount of interest, which has not been made public, has become a major concern of anti-debt activists. They demand that the loans be transparent because many African countries have been crushed in the past by unsustainable debts.
According to Jean-Raphaël Chaponnière, an economist specializing in China, associate researcher at Asia21 and member of Asia Center, contacted by BBC Africa, “the public debt of Ethiopia, it is 40% of GDP that is linked to Chinese debts. It is one of the most indebted countries vis-à-vis China.”
$1.8 billion deal on electricity
In a tweet, the cabinet of the Ethiopian Prime Minister, Abiy Ahmed, also said that China had agreed to invest 1.8 billion to improve electricity on the line between Ethiopia and Djibouti and increase the supply of electricity from Ethiopian cities and 16 industrial parks.
The economist Jean-Raphaël Chaponnière is not surprised: “The investment rate of Ethiopia has nothing to do with that of Africa. It’s 30% of GDP, a rather Asian rate.” But he warns: “All these investments that have been made, if they do not produce after a certain time a rise in productivity and a structural transformation in the country, the latter will not be able to repay (…) the level of industrialization in Ethiopia is still very low, much lower than the rest of Africa”.
The agreement was reached on the sidelines of the summit on the program “Belt and Road Initiative”, to which Mr. Abiy and some forty other leaders participate since Thursday, April 25, and until Saturday, April 27 in the Chinese capital, Beijing. Officially known as the “Belt and Road Initiative”, President Hu Xiping’s massive land and sea infrastructure project aims to improve links between Asia, Europe, and Africa. With more than $1 trillion in the financing, IMF Managing Director Christine Lagarde on Thursday (April 25th) welcomed the “Debt Sustainability Framework”.
However, Western countries suspect the project to be a way for China to cover its raw material needs and get rid of its surplus production on poor countries, invited to borrow from Chinese banks such as China Exim Bank – the main public export bank – to build infrastructures benefiting Chinese firms.
Jean-Raphaël Chaponniere relativizes and explains that even if “until now China had favored technical feasibility at the expense of public profitability, China is not the main cause of indebted countries”.
“A debt trap“
Beijing denies that its initiative is a “debt trap” for recipient countries. A notorious example in the minds of recalcitrant countries: in December 2017, Sri Lanka, unable to honor its repayments, had to give in Beijing control of the deep-water port of Hambantota for… 99 years.
In response, at the summit, Xi Jinping, the head of the world’s second-largest economy, called for projects that are “fiscally sustainable” for recipient nations. Jean-Raphael Chaponniere emphasizes a “slowdown in projects” because “this year, China may end up in deficit currencies, all this context makes the country start to ensure the profitability of projects” Because “China no longer has the same room for maneuver”, he adds.