The TownhallPolitics

Is Uganda a victim of China’s “debt-trap diplomacy?”

By Simon Mwebaze

Editor’s note: The opinions expressed here are those of the authors. View more opinion on ScoonTV.

Uganda is among 20 African countries with Chinese loans. By 2016, the East African state owed 29% of its total debt to China. The loans are directed toward infrastructure projects including dams, roads, electrification, and telecommunications. Specific projects in Uganda financed by Chinese loans include the Isimba Hydropower Project ($483 million), Karuma Hydropower Dam ($1.4 billion), the Kampala-Entebbe Expressway ($350 million), and the recently controversial Entebbe International Airport Project ($207 million). 

Many other African countries have seen a shift in debt financing. The move is from former Western loan providers such as the IMF, the World Bank, and IDA that lend on concessional terms. Since these loans have several conditions, African countries that do not have a good track record of paying off their debt are moving toward China.

Why China? It provides long-term loans with low interest without considering the track record of African countries. This means that African countries can borrow loans without concern for their poor track record of loan repayment. 

This raises questions about the motives for increased Chinese investment under such loan terms. Not just in Uganda, but the African continent. Why is China going from being Africa’s largest trade partner to its largest infrastructure stakeholder?

One of the major global concerns about the large investment in Africa is debt-trap diplomacy. Debt-trap diplomacy is a term to describe how China is allegedly using debts through loans to recolonize Africa. By negotiating terms and conditions in loan agreements that are difficult to fulfill, China can take over critical resources and assets of the borrowing nations. 

With corruption rife in the African continent, this makes it easy for China to execute debt-trap diplomacy. Corruption affects Chinese investment loans in two ways; poor contract negotiations and project inefficiency. 

Poor contract negotiation is the first major culprit for Uganda’s challenges due to Chinese loans. Contract terms for projects in Uganda include unfavorable terms for the country. For example, the $207 million loan for the Entebbe International Airport included terms where the government of Uganda opened an escrow account with Stanbic Bank. There, transactions are monitored and approved by Exim Bank. Additionally, the Uganda government is obligated to seek permission from Exim Bank for approval of budgets and strategic plans. 

More so, Uganda waived international immunity over the collateral attached which included the only international airport Uganda has. Worse still, any disputes that arise from the loan contract must be handled by the China International Economic and Trade Arbitration Commission (CIETAC) in Beijing under Chinese law. In 2021, the President of Uganda sought renegotiation of the contract terms but discussions were unsuccessful. 

The second challenge is project inefficiency. Due to corruption, project funding from the loans is mismanaged. Uganda currently ranks 144 out of 180 in the Global Corruption Ranking. One in five companies expect to pay a “gift” to win contracts. Worryingly, as a result of corruption, 9.4% of the total contract value is lost at local and central government levels. 

This environment is ripe for Chinese companies to secure contracts by paying bribes and negotiating favorable terms for themselves. 

Unfortunately, corruption leads to poorly completed infrastructure. Poorly completed infrastructure leads to higher maintenance costs and sometimes, total collapse of infrastructure. Poor Infrastructural completion leads to a vicious cycle of continued borrowing, further increasing the debt burden. 

So, yes, rising debt has led to concerns over China capturing state resources and assets through debt-trap diplomacy. But so far, there is no evidence of that on the African continent. 

In Uganda’s favor, the nation’s debt-to-GDP ratio is under the recommended threshold according to the International Monetary Fund. The threshold is based on the economic level of a country. The three thresholds are; 77% for developed economies, 64% for emerging markets, and 50% for developing economies,

More so, Uganda is not a top ten country in accumulated loans from China. The top African countries include Angola, Ethiopia, Kenya, Sudan, Nigeria, and the Republic of Congo. 

Additionally, China has a track record of leniency when it comes to loans to African countries. It has canceled $3.4 billion in debt and restructured $15 billion in debt. Between 2000-2017, It has written off loans worth $67 million. Most recently, China pardoned 23 interest-free loans of 17 African countries. This shows its leniency toward loan repayment and commitment to financing African projects. 

While there does not seem to be any concern for a possible takeover of any loan-funded assets, there are reports that leave room for concern. Sri Lanka owed over $1 billion to China. Due to their debt, they were forced to lease out a port for 99 years to Chinese-owned companies. In Zambia, China had plans of taking over the state power company. Similarly, in Kenya, Mombasa port had been offered as collateral for its $3 billion railway. 

These reports seem to suggest that China’s motives are not philanthropic. But there is not enough evidence to conclusively say they are using debt-trap diplomacy considering all the loans they have canceled, especially for African countries.

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Simon Mwebaze

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