How Will China React to Uganda’s Looming Debt Crisis?

Uganda is heading toward a debt crisis. According to a senior official at the Bank of Uganda, unless the country is able to sustain a growth rate of at least 7 percent—which economic projections show Uganda will not do—the country will default on its payments. As is the case for many African countries, China is Uganda’s largest creditor, making up 39 percent of total debt this past fiscal year. If Uganda defaults, it is unclear how China will react. Will China flex its muscles and negotiate for the rights to Uganda’s sovereign assets like it did in Sri Lanka, or ease the debt pressure, by restructuring Uganda’s loans over a longer time period as it did in Ethiopia?

Generally speaking, foreign governments and international financial institutions are hesitant to make loans to Uganda. They remain skeptical that Uganda will be able to honor themexcept, apparently, China. Ugandan President Yoweri Museveni recently admitted that China is the only partner that would agree to lend Uganda, Tanzania, and Kenya $3.5 billion to construct a series of railways and roads.

In addition, China is financing a $4 billion oil pipeline, currently under construction, that will connect the western region of Uganda to the port in Tanga, Tanzania—giving the landlocked country access to the Indian Ocean. Many of China’s loans to Sub-Saharan Africa can be seen in the context of China’s belt and road initiative.

China has reacted differently to each country’s individual debt crisis. At one end of the spectrum, China allegedly uses its leverage to gain strategic and material concessions if a debtor country is unable to pay their debts, exemplified by Sri Lanka handing over control of the Hambantota Port to China for ninety-nine years. China’s alleged practice of debt-trap diplomacy, as it has been dubbed, has been hotly debated, though there seems to be a consensus that their lending practices are problematic. At the other end, China works with governments to restructure loans over a longer time period—often forgiving past interest payments—as illustrated by China’s twenty-year-loan extension to Ethiopia.

Completed in 2010, the Hambantota port did not draw enough ships to make the operations economically feasible. By July 2015, Sri Lanka could not service its payments. Consequently, in order to avoid defaulting on its debt, the government relinquished control of the port to China for nearly a century. Uganda’s auditor general report warns that the conditions of their loans similarly threaten the country’s sovereign assets. If the economic predictions hold and the country defaults on its payments to China, Uganda’s infrastructure projects might face a similar fate.

Ethiopia faces a similar debt crisis, linked in large part to the Chinesefinanced, $4 billion Addis AbabaDjibouti Railway. Opened in January 2018, the railway intended to expand Ethiopia’s export market by connecting its capital to the sea via Djibouti. But Ethiopia is importing more than it is exporting via the railway, not generating the revenue needed to service its debt to China. In response, China renegotiated the terms of the loan with Ethiopia to extend the payments over a longer period of time.

Based on China’s approach to Ethiopia and the similarity of its infrastructure projects connecting Uganda to the sea, it is more likely that China will work with Uganda to extend the repayment terms of the loans. There is speculation that China sought control of the Hambantota port because it is strategically important. According to some analysts, the port should be thought of as part of a string of pearls—China’s plan to have a line of ports stretching from Beijing to the Persian Gulf. Viewed this way, the Hambantota port is of much more strategic significance to China than Ethiopia’s and Uganda’s railways. Finally, internal and external criticism of China’s lending practices are likely to encourage a more constructive approach to debtor countries.


Posted by on Nov 13 2019. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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