Written by Lakshay Sood
China’s economy has expanded over twenty years, becoming the second-largest, with a nominal GDP of $18.46 trillion in 2023 (IMF estimate). China’s rapid economic growth has helped its citizens escape poverty. It has become more economically and strategically ambitious globally. Beijing’s Belt and Road Initiative (BRI) reflects the country’s growing global ambitions. President Xi Jinping sees the BRI as a 21st-century Silk Road – a global economic corridor driven by investments in developing countries. China intends to use the BRI to establish self-sufficient supply chains to import key energy and mineral resources. China doesn’t want to rely on countries who could use supply chains as leverage. However, China has invested heavily in infrastructure in Africa projects to accomplish this goal. China has broken its promises – trapping countries with debt that harms their economies. China’s promising projects are typically faulty or incomplete, revealing its self-serving goals.
China started the BRI to achieve self-sufficiency. It strengthened diplomatic relations with several developing African nations, promising to construct urgently needed infrastructure projects. For project funding, China gave high-risk commercial loans. The main condition was paying China back after a short period. However, a lack of transparency around payment structure and relatively high interest rates make repayments arduous for African countries. As countries can no longer overcome their debt, they fall into a “debt-trap,” and reluctantly give China control of critical assets like infrastructure projects for several years (Dollar, 2019).
While China has built infrastructure throughout the continent, Ethiopia is a prominent example of African countries’ challenges. Ethiopia is diverse and rapidly developing with 110 million people. With a GDP per capita of $1700, it is classified as a low-income economy. This country is landlocked and is surrounded by hostile neighbors like Eritrea and Somalia, which prevent it from accessing a seaport. Additionally, Ethiopia lacks the funds to build a seaport in its ally Djibouti. China started investing in Ethiopia and agreed to construct a railroad from Addis Ababa to the Port of Djibouti. The project began in 2019, when China gave Ethiopia a $1.3 billion loan with 3% interest and a 6-year repayment period. The modernization project covered 750 km and cost $4 billion. China’s state-owned EXIM bank, one of the primary lenders for BRI projects, covered 70% of the cost with Ethiopia paying the rest in loan installments.
China has built similar projects in other African countries like Kenya and Zambia, with similar attractive promises, like the Nairobi-Mombasa railway and Mongu-Kalabo highway respectively. Both projects required large loans, yet they cost less than those in Ethiopia. However, the 6% Chinese loan interest rates have given these countries unsustainable debt.
There are further unfeasible economic costs imposed by China’s actions. In raw numbers, Ethiopia is the second largest African borrower of Chinese investments. Because Ethiopia heavily depends on loans from state-owned banks linked to China’s state-controlled market, it is affected by China’s economic health. This is also true for other African countries. The Brookings Institution estimates that China owns 32.9% of Ethiopia’s external debt. The Institution’s survey also found that this figure averages to 36.5% amongst all African countries. China can use its immense debt ownership as economic leverage. This economic leverage is primarily attributed to a system of high-interest, high-risk loans, as countries fall into a “debt trap” caused by unsustainable debt that continuously accrues (Dollar, 2019). China has tried to alleviate concerns by highlighting debt-restructuring agreements with African countries. These agreements aim to help struggling countries repay loans, but they’re vague and don’t adequately help countries overcome the debt trap (Clark, 2023).
Since 2022, after the Covid-19 pandemic, China’s economy has slowed. Reuters reported that China’s economy grew 3.0% in Fiscal Year 2022, underperforming 4-5% IMF growth forecasts. This trend of slowing economic growth has hurt economically-dependent African countries. For example, China purchases one-fifth of metals, minerals, fuels, and other natural resources exported by African countries. The IMF calculates that a one percent reduction in China’s economic growth rate could cause a 0.25 percent decline in Africa’s GDP. China controls 17.0% of external public debt in Africa due to its debt-trap diplomacy from high-interest loans (Abdel-Latif et al., 2023).
China’s Yuan, which has depreciated, or lost value, 8% against the US dollar is used for most loans. Due to weakening economic growth, the Chinese Yuan may devalue against currencies like Ethiopia’s Birr, increasing the debt burden of debt-trapped African countries. Because repayment amounts are denominated in Yuan, a weaker currency means inflated repayment costs, straining these countries. Therefore, Western economists argue that China’s system of loans has prevented Ethiopia’s development by trapping it in debt. Ethiopia and other African countries will lose out if they don’t follow rigid China’s rules. This is because of a lack of diversification in trade partners and heavy reliance on Chinese imports for infrastructure materials and consumer goods. China’s continued economic growth is crucial for closely-linked developing African nations, including Ethiopia (Diallo, 2023). African countries with higher rates of public debt held by China like Zambia (65.8% Chinese-owned debt) will suffer more.
Adding to Ethiopia’s woes are corrupt activities by Chinese companies. To get projects in Ethiopia, these firms have bribed corrupt politicians. When they start constructing in Ethiopia, Chinese companies fail to deliver their promises of high-quality infrastructure. In contrast, as Ethiopia’s debt increases, reports have appeared of faltering infrastructure due to lower quality materials than initially promised. This occurred with a $475 million light rail China built in Addis Ababa, Ethiopia’s capital. Low-quality infrastructure shows China’s self-interested actions and failure to deliver on its promises. China attracts developing countries with modern infrastructure to advance its strategic goals (Dezenski, 2023).
At face value, China’s projects like the Addis Ababa Railway seem very beneficial for Ethiopia. Chinese investments in infrastructure projects across the country have the potential to unite diverse ethnic groups like the Somalis, Oromos, and Amhara. They could also improve access to domestic trade and transportation. Furthermore, the prospect of creating an economic industrial corridor could lift millions of vulnerable people out of extreme poverty with new jobs. This all seems exciting, but the risk at which these perceived benefits come is too high (Bharti, 2023).
With all these potential benefits, Ethiopia and Africa’s economic dependence on China cannot be overlooked. China owns most of Africa’s public debt through unpaid and high-interest loans. China has stuck African countries in a debt trap that hinders their future development. Potential benefits like infrastructure development exist, but are yet to be realized. Ethiopia shows how China has broken promises in Africa, trapping countries with crippling debt and underdelivering with projects that are typically faulty or incomplete. All of this reveals China’s self-serving goals, not benefiting African countries.
Works Cited
Bharti, M. S. (2023). The Sustainable Development and economic impact of China’s belt and road initiative in Ethiopia. East Asia, 40(2), 175–194. https://doi.org/10.1007/s12140-023-09402-y
Clark, N. (2023, April 6). The rise and fall of the bri. Council on Foreign Relations. https://www.cfr.org/blog/rise-and-fall-bri
Diallo, M. (2023, October 11). China’s BRI brings roads, rails and debt to Africa. Voice of America. https://www.voanews.com/a/china-s-bri-brings-roads-rails-and-debt-to-africa/7306133.html
Hany Abdel-Latif, W. C. (2023, November 9). China’s slowing economy will hit Sub-Saharan Africa’s growth. IMF. https://www.imf.org/en/News/Articles/2023/11/09/cf-chinas-slowing-economy-will-hit-sub-saharan-africas-growth
Resnick, D., Lisa Curtis, J. T. W., & Graham T. Allison, J. M. C. (2023, September 7). Understanding China’s belt and road infrastructure projects in Africa. Brookings. https://www.brookings.edu/articles/understanding-chinas-belt-and-road-infrastructure-projects-in-africa/Sullivan, J. (2023, October 17). Cash, corruption, crumbling dams – that’s China’s belt and road initiative, 10 years in. FDD. https://www.fdd.org/analysis/2023/10/17/cash-corruption-crumbling-dams-thats-chinas-belt-and-road-initiative-10-years-in/