IMF Warns African Countries Over Economic Ties with China as Nigeria’s Chinese Debt Rises to $4.73 Billion

In a recent report, the International Monetary Fund (IMF) has issued a warning to Nigeria and other Sub-Saharan African countries about the potential risks associated with their close economic ties to China. This caution comes in light of new data revealing that Nigeria’s debt to China had reached a staggering $4.73 billion by June 30, 2023.

According to information obtained from Nigeria’s Debt Management Office (DMO), the country’s debt owed to China has surged by $800 million in just one year, rising from $3.93 billion as of June 30, 2022, to the current $4.73 billion. This debt primarily consists of concessional loans acquired by the Nigerian government to finance a range of infrastructural projects encompassing power generation, railways, water supply, airport terminals, agricultural processing, and communication.

Some of the notable projects financed by Chinese loans include the Nigerian National Public Security Communication System project, the Wu-Kaduna section of the railway modernization project, Abuja light rail project, Nigerian Information and Communication Technology infrastructure backbone project, expansion of airport terminals in Abuja, Lagos, Kano, and Rivers, Zungeru hydroelectric power project, 40 parboiled rice processing plants project, Lagos-Ibadan section of the railway modernization project, and the rehabilitation and upgrading of the Abuja-Keffi-Markurdi road project.

The first Chinese loan, totaling $200 million, was agreed upon in 2006 to fund the Nigerian Communications Satellite project, and this loan has been settled by the Federal Government, with an additional payment of $40.02 million in interest.

The exponential growth in Nigeria’s indebtedness to China underscores the increasingly close economic relationship between the two nations. China’s Ambassador to Nigeria, Cui Jianchun, reported that bilateral trade between China and Nigeria surged by nearly 142% from 2016 to 2021. Additionally, in the first ten months of 2022, the bilateral trade volume reached $20.04 billion, solidifying Nigeria as China’s third-largest trading partner in Africa and China as Nigeria’s largest source of imports.

Nevertheless, the IMF’s Regional Economic Outlook, released in October 2023, serves as a stark reminder of the potential vulnerabilities that Nigeria and other Sub-Saharan African countries may face due to their deep economic ties with China.

The IMF’s analytical notes in the report, titled “At a Crossroads: Sub-Saharan Africa’s Economic Relations with China,” acknowledge that over the past two decades, Sub-Saharan African countries have benefited from mutually advantageous economic connections with China. China has become the region’s leading trading partner, a significant source of credit, and a major provider of foreign direct investment.

However, the IMF sounds an alarm about the possible challenges ahead. It highlights China’s recent economic growth slowdown and the adverse effects this may have on its trading partners in Sub-Saharan Africa, including Nigeria. The IMF’s report mentions, “However, China’s support to Africa has also faced some criticisms. Recently, China has retrenched its financing activities in Sub-Saharan Africa amid a growth slowdown and reduced risk appetite. The projected future deceleration in China’s growth is likely to affect African trading partners negatively over the medium term, mainly through reduced trade.”

The report further underscores the potential consequences for infrastructural projects if China withdraws its commitments due to the slowdown in its economic growth. Currently, China is the primary source of funding for infrastructure projects in African countries, including Nigeria. The IMF explains, “China has also become a major funding source for African governments since the early 2000s after initiating its official ‘go out’ policy. Chinese loans—mostly directed at financing public infrastructure projects—have risen rapidly in the region in the late 2000s. Consequently, China’s share of total sub-Saharan African external public debt rose from less than 2 percent before 2005 to about 17 percent in 2021.”

The IMF’s report also reveals that five countries—Angola, Kenya, Zambia, Cameroon, and Nigeria—account for 55% of official Sub-Saharan African debt to China. Furthermore, it points out a correlation between the prevalence of bilateral trade and lending disbursement between China and Sub-Saharan African countries, suggesting that countries engaged in higher volumes of trade with China receive more loans from the Chinese government.

Aside from the increasing Chinese loans to Sub-Saharan African countries, the IMF highlights the substantial growth in China’s Foreign Direct Investment (FDI) in the region since 2006, reaching about 23% of annual FDI inflows, or $3 billion, in 2021.

However, the IMF report also indicates a shift in China’s financial support to Africa, with a reduction from $60 billion to $40 billion over three years. This change is linked to China’s shift away from direct infrastructure financing toward more trade credit, which was influenced by the increased debt vulnerabilities of many African countries.

The IMF’s concerns extend to the terms imposed on debtors and the use of natural resources as collateral in Chinese lending to Sub-Saharan African countries. Other issues include the lack of standardization and transparency in public debt due to the absence of systematic documentation of loans by Chinese lenders to individual overseas borrowers.

Regarding the controversial “waiving sovereignty” clause in the commercial loan agreement signed between Nigeria and the Export-Import Bank of China, the IMF underscores the importance of addressing these concerns. The clause had raised questions about the cession of Nigeria’s sovereignty to China, although it was clarified by former Minister of Transportation Rotimi Amaechi as providing relief to enable China to take over Nigerian assets for loan recovery if necessary.

The IMF reveals that Sub-Saharan African countries facing debt distress or at high risk of debt distress account for approximately 40% of the total public debt stock to China at the end of 2020. The situation has necessitated debt restructuring for some countries, but negotiations have been slow and challenging.

With China currently experiencing an economic growth slowdown, the IMF cautions that Sub-Saharan Africa could experience spillovers from China’s continued economic deceleration. The IMF suggests that Sub-Saharan African countries need to adapt to the changing economic ties. This involves increasing regional trade integration, strengthening policy frameworks to reduce macroeconomic vulnerabilities and external reliance, promoting economic diversification, and implementing reforms to create a favorable business environment.

While the IMF has raised concerns, some economists and financial analysts interviewed by Daily Post believe that Nigeria is not at significant risk due to its economic ties with China. They argue that Nigeria should focus on addressing its internal economic challenges, such as foreign exchange, fiscal matters, systemic liquidity, and market liquidity.

In conclusion, the IMF’s warning regarding Sub-Saharan African countries’ economic ties with China, particularly Nigeria’s rising debt, underscores the need for prudent financial management and strategic planning to mitigate potential risks associated with these economic relationships. The ongoing debate among experts about the extent of these risks emphasizes the importance of carefully managing international economic partnerships for the benefit of the African nations involved.