Friday, October 12, 2018

Aid to Africa: China and the US

The Diplomat published on 11 October 2018 a commentary titled "Aiding Africa: If Not China, Then Who?" by Grace Guo, Vienna-based researcher.

The focus of the article is the large amount of concessionary loans that China has provided to Africa in recent years and whether there is any alternative to Chinese financing. It is important to understand that collectively, international financial institutions and Western countries provide far more financing to Africa than does China.

The commentary is misleading on several other points. The title suggests that Chinese loans constitute aid. While China's loans are significant and often fill a financing void not met by other sources, it is usually not aid. Most of the loans must be repaid with interest.

In recent years, US aid to Africa has been averaging about $8 billion annually versus about $2.5 billion in aid annually from China. United States' aid is in the form of grants. While the United States does not provide loans to Africa, there is no reason to be defensive about the amount of aid that it offers. In addition, Chinese loans are usually offered in connection with infrastructure projects that are contractually tied to Chinese companies, thus keeping much of the financing in China.

The commentary implies that a new American institution, the International Development Finance Corporation (IDFC), might be the answer to competing with China's loans to Africa. The IDFC replaces the Overseas Private Investment Corporation (OPIC) and several components of USAID. At $60 billion, the IDFC's maximum contingent liability limit is about double that of the former OPIC. The IDFC is a welcome addition to US financial institutions but when it comes to competing with Chinese loans one must be careful. The $60 billion is a GLOBAL cap; this is not an Africa only program. Conventional wisdom suggests that most of the financial support will go to projects in Asia. The portion that is designated for Africa is likely to be well under the amount of new loan activity offered by China.

The commentary suggests that China's $60 billion financial pledge over three years at the 2018 Forum on China Africa Cooperation (FOCAC) is a "doubling down" of its financial pledge at the 2015 FOCAC. This is misleading. China also pledged $60 billion over three years at FOCAC in 2015. In addition, the financial package for 2018 includes $10 billion whereby China "will encourage" companies to invest in Africa. Chinese companies are routinely investing in Africa, as are American companies. It is difficult to understand why this has been included as part of the new $60 billion package.

Finally, the commentary notes that 70 percent of Kenya's debt is held by China. This repeats a common mistake about Kenyan debt. China does hold 72 percent of Kenya's BILATERAL external debt, but this is only part of Kenya's total external debt. When you include Kenya's debt owed to international financial institutions and commercial banks, China holds only 21 percent of Kenya's external debt.