It is economic déjà vu for Zimbabwe as the central bank battles spiralling inflation. The Reserve Bank of Zimbabwe is attempting to introduce ever-higher denomination notes; but inflation still approaches 400%.
Ethiopia’s China challenge
Prime Minister Abiy Ahmed is in the midst of renegotiating Ethiopia's relationship with China due to the debt burden created by previous governments.
Last September, Prime Minister Abiy told reporters in Addis Ababa that China had agreed to restructure the repayment period for some of its loans from 10 to 30 years. He had just arrived from the Forum on China-Africa Cooperation summit, where China’s President Xi Jinping pledged $60bn for development in Africa while warning against “vanity projects”.
In February 2019, Prime Minister Abiy told parliament that his government has successfully renegotiated the repayment period for 60% of its external debt, which currently stands at over $26bn.
Relief and reform
Ethiopia needs this debt relief, as it works to reform its political system while stabilising and growing its economy. At the moment, imports far outrank exports by as much as 400%, while government debt stands at 59% of its gross domestic product. About half of its external debt is owed to China, which has invested in several massive projects in the country.
- The largest part of the debt was for the construction of the $4bn Ethiopia-Djibouti railway. The Export-Import Bank of China backed the project with $3.3bn in loans. The railway has so far been crippled by light loads, electricity shortages and disruptions due to protests in the Afar region.
- A Chinese diplomat told the Financial Times in June 2018 that China is “way overextended” in Ethiopia. China’s main project insurer, China Export and Credit Insurance Corporation, known as Sinosure, also said it had lost more than $1bn on the Ethiopian-Djibouti railway. This crisis has affected funding for two extensions to the railway, which will cost more than $3bn to complete.
- Chinese firms also built and funded the $475m light railway in Addis Ababa, a $86m ring road and the East African country’s first six-lane highway.
In August 2018, Chinese paper Xinhua reported that Ethiopia had licensed 1,294 Chinese investments in the 2017/8 financial year out of a total of 5,217 investment projects. There are about 400 Chinese investment projects valued at more than $4bn already in full operation in Ethiopia. A good number of this are based within industrial parks and the real estate sector.
- Ethiopia has a target of 30 industrial parks, some built by the government and others by private investors. Abiy inaugurated Adama and Dire Dawa industrial parks, both built by China Civil Engineering Construction Company, which also built Hawassa Industrial Park.
- The two join more than five industrial parks already in operation. Chinese companies are jostling for space with Korean, Italian, French and other companies. Most of the industries so far are in the manufacturing, textiles and apparel sector. They have come under scrutiny for offering low wages.
Some Chinese companies, such as China Gezhouba Group Co., are working to complete already existing projects such as the Grand Renaissance Dam. China has a deep interest in the completion of the dam, not just to support the electrified railway but also because it gave Ethiopia a $1.2bn loan to build 400kV and 500kV transmission lines in 2013.
The bottom line
- It might already be too late for China to get cautious on some of the projects it has funded in Ethiopia, if it ever hopes to recoup its loans. The Ethiopia-Djibouti railway, for example, still needs extensive supporting infrastructure and branches to have a positive economic impact. Doubling down on Ethiopia’s chances may be a tough call, and the jury is still out on the likely success of its extensive reform programme.
- For other African countries, Ethiopia’s success and failure in its relationship with and indebtedness to China are a useful lesson. Ethiopia has already proven that China is willing to negotiate on repayment terms as fears grow in countries such as Kenya on what happens in case of default.