Nigeria’s indebtedness to China has recently come into sharp focus. This has become a hot topic for good reasons. There is concern about who truly benefits from China’s infrastructure investments in developing economies through direct loans, especially given stringent conditions that could mean handing over sovereign assets to the country in the event of a default. This reputation has recently been earned with China’s takeover of the $1.3bn Hambantota Port in Sri Lanka for 99 years in 2017, a project which suffered financial losses and could not repay the debt financing the construction.
Concerns about Chinese lending are also not helped by the usual lack of transparency around them, much unlike commercial debt obtained from the Eurobond market and multilateral debt sourced from institutions such as the World Bank, the International Monetary Fund (IMF) and African Development Bank (AfDB). In our view, what is clear is that while China’s interests in these projects can be strategic and unclear, it is also mostly about selling excess capacity to the rest of the world, with China financing projects that use its products and services.
In Nigeria, the Debt Management Office (DMO) has sought to address these concerns by providing clarity on bilateral loans from China. Historical data suggest that total bilateral lending from China since 2010 is $5.6bn, with an average size of $506.8m at 2.5% interest rate per annum, seven (7) years moratorium and a tenor of twenty (20) years across eleven (11) projects. These projects are mainly in road, airports and railway development but also for infrastructure in agriculture, power, water and ICT. Only five (5) project loans have been fully disbursed, four (4) have a disbursement rate ranging from 17.5% to 91.1% while three (3) are yet to be disbursed at all.
The $1.3bn loan obtained for the Ibadan-Lagos section of the Nigeria Railway Modernisation Project is the largest. As at Q1:2020, total outstanding borrowing from China stood at $3.1bn (₦1.1tn), which is 3.9% of total public debt and 11.3% of total external debt. The low share of borrowing from China and the attractive terms signal low risk, especially when compared with Zambia which is facing debt troubles as 65.8% of its total external debt is owed to China according to the Brookings Institution in 2019. To buttress this point, the DMO noted that loan terms were properly reviewed before signing and that repayments are fully provided for in annual budgets while the projects either generate revenues or have revenue generating potentials.
Another issue of contention is the quality of these projects but experts have noted that this is assured under the right framework and bidding process, much like projects implemented by non-Chinese firms. In our opinion, China's infrastructure loans provide strong expertise and offer access to infrastructure financing through concessional debt which would have been difficult to obtain otherwise. China’s investments also provide competition to other financing options available, which means Nigeria should get better terms for its investments assuming selection is done right.
Overall, the lesson is that the impact of these projects ultimately depends on Nigeria’s selection of funding/implementation partners, project specifications and the identification of projects that can deliver the most economic benefit. Our concern is that getting these conditions right is rarely assured in Nigeria, which could result in sub-optimal impact.