by Pamela Nakamba-Kabaso and Caesar Cheelo
The buzzword around Africa this month (September) is China!
Earlier in the month, Chinese President Xi Jinping made an impressive and generous offer of US$60 billion in financial support to African countries over the next three years. Since then the African continent cannot stop talking about China.
Some observers are keen for Africa to benefit from the funding galore. Others are worried that the financial bonanza is actually a spring-trap set to ensnare African states into inadvertently giving up their sovereignty.
On that note, it might be a good idea to understand what this US$60 billion financial support really entails for Africa and Zambia, lest the continent’s borrowing enthusiasts go laughing all the way to the nearest Chinese bank to borrow some more.
Reports pursuant to the Forum on China-Africa Cooperation (FOCAC) held in Beijing are that President Xi pledged: U$15 billion (25 percent of the total pledged support) in grants, and concessional and interest-free loans; US$20 billion (33 percent) in credit line financing; US$10 billion (17 percent) in development financing; U$5 billion (8 percent) in funds to buy imports from the continent; and US$10 billion (17 percent) pledged on behalf of Chinese companies who will be encouraged to invest in African countries.
So what does all this mean, especially for Zambia, a heavily indebted poor African country? Based on an assessment of each of the five components of FOCAC 2018, the following is noteworthy:
Above all else, given Zambia’s current circumstances, when presented with any financing option, yes even FOCAC, our first instinct should be: “we already owe too much; let us not borrow more!” To the extent possible, we should avoid borrowing more until we have a handle on the current debt challenges.
However, realistically speaking, some amount of borrowing will be inevitable despite our dire fiscal and debt situation. Given this inevitability, the US$15 billion pot of funds for grants, interest-free loans and concessional loans should probably be at the front and centre of any “borrow-from-China” plan. These funds would impose the least amount of additional debt service burden to Zambia since they entail relatively low interest payment obligations.
The US$20 billion credit line is the largest pot under FOCAC 2018. However, Zambia should avoid this pot like the plague! By definition, a credit line is a non-concessional, commercial lending option. Zambia simply cannot afford any more non-concessional borrowing now and over the next three to five years. Thus, tempting as the option might be (considering that commercial loans are usually the easiest to access) Zambia must stay away from this pot.
The development financing option (US$10 billion) would typically be quite attractive for Zambia. However, drawing lessons from the country’s failure to account for the utilization of the debt proceeds from the three Eurobonds, totaling US$3.0 billion, Zambia must come to terms with the fact that we are not prudent in using development financing resources. This development financing option is yet another poison chalice, which Zambia should avoid.
The U$5 billion earmarked for Chinese entities to buy imports from the continent is welcome, but now puts pressure on countries like Zambia to restructure their economies quickly and establish value-added export lines. If, for instance, Zambia remains dependent on the export of the primary commodity exports like copper, the benefits from the import purchases pot will be meager.
Finally, the US$10 billion that President Xi pledged on behalf of Chinese companies as foreign direct investment (FDI) into Africa tops the list as the best financial support option under FOCAC 2018. If Zambia can improve its business environment and reclaim a spot as one of African’s most attractive FDI destinations, it could benefit considerably from the proceeds of this pot. The financing will be indirectly available for private Zambia businesses that are worthwhile for China and for joint public-private partnerships. However, it will be outside the control and influence of the fiscal authorities, thus being insulated from risks of fiscal slippage and misappropriation. Moreover, if well-targeted to Greenfield projects (as opposed to mergers and acquisitions), the FDI will protect itself from possible nationalisation sentiments in the future. That is, the risk that someone down the road will claim that China took over strategic assets of national interest, which should be nationalised, will be averted.
Thus in closing, our view is that Zambia should focus on attracting FDI, attracting China to import from the country, and to a much lesser (and more calculated) extent, accessing grants, concessional loans and interest-free loans. These options should be pursued in that order of priority under FOCAC 2018. The country should stay clear of the development financing option and especially credit line option. Of course, all five financing options are quite fleeting for Zambia currently, given the prevailing economic situation. In particular, the huge debt overhang should impose natural borrowing constrains over the medium term.