It was a bad new year for Kenya. Waking up in January 2019 to the final lap of its "grace" pay-back year, Kenyans braced themselves for an army of Chinese technocrats to sail over to run a part of Kenyan life. The country had defaulted on the $2.27 billion it borrowed from China Export Import Bank (CEIB) to build a railway-line linking its strategically located Mombasa on the Indian Ocean to Nairobi, the country's capital. The 5-year CEIB grace-period for repayment began in 2014, and China is set to seize control of Kenya Port Authority (KPA), whose inadequate revenues would have to be diverted to pay off China. Under CEIM management (it becomes the KPA principal in case of a default), Kenyans workers would be serving an external paymaster in their own country. As we will see, this is not an isolated case: its rapidly expanding outreach may be at a tipping point.
Built as Kenya's most magnificent post-independence (post-1963) project, the episode exposes two key features of global importance in the 21st century: rampant internal corruption over projects of this size when left unmonitored; and a foreign country's continued iron-grip of lesser-endowed countries in this post-imperialism age. Kenya Railways Corporation created Standard Gauge Railway to manage this particular project, but SGR corruption and perpetual losses have left Kenya heavily indebted: its debt has mushroomed to over half of its gross domestic product (GDP). That debt might seem peanuts compared to Japan's 234 per cent debt-GDP ratio, or the 109 per cent of the United States, or 85 per cent of the United Kingdom, but Kenya's economy by comparison is more embryonic, fragile, and lacking the forward-linkages predicting pay-back viability. Just out of comparisons, Bangladesh's debt-GDP ratio is about 33 per cent, a more manageable figure, as is India's 67 per cent, not because of the smaller size, but owing to sustained economic vibrancy generating plenty of policy and sector-based spillovers (though Pakistan's 67 per cent ratio stands upon a far feebler economy to muster as much confidence as India's).
What is striking, though, has an unsavory external footprint: China's. Since Hambantota Port construction also culminated in Sri Lanka defaulting to China's Belt Road Initiative (BRI) projects in 2017, one cannot but start interpreting the BRI master-plan through colonial prism. Behind Sri Lanka's Hambantota Port's default-triggered 99-year lease to the same Chinese company as Kenya, lies not only a national debt-GDP ratio of 75 per cent but also an economy sputtering more often than sailing (as before). In 2018, Zambia, another BRI host, also plunged into a debt in building the Kenneth Kaunda International Airport (another major post-independence project meant to evoke the glory of independence), while Djibouti, allured by China from as early as 2014, is witnessing its debt spiral from 50 per cent to over 85 per cent of its GDP account (over two-thirds of which goes to China). Burundi, Chad, and Mozambique await in the defaulting wings, as Africa's representation in that league deliberately ranks high given its (a) greater desire to develop; (b) larger catch-up phase to rapidly globalise, like other parts of the world; (c) reservoirs of a wide variety of minerals at a juncture when Chinese demands have been spiraling, as much for consumption as stockpiling; and (d) obvious attraction to China for minerals, markets, and evolving geostrategic interests.
China emphasised infrastructural development funding for no fewer critical reasons. First, it helped expand exports and investments, while boosting mineral access, as just observed. Second, it paved the way to building as global a network as possible, not just for economic purposes, but also security: not just how Djibouti became a Chinese naval base, but also Hambantota being too strategically located for China to give up. Third, China using these links to strengthen its own multinationals even if they remain publicly owned. Fourth, China diluting global hard-power challenges with soft-power resources and relationships. Fifth, China slowly but surely and seriously challenging the Washington-dominated post-Bretton Woods institutions, particularly the World Bank and International Monetary Fund (primarily by losing a possible client base, and secondarily by being out-priced, if it came to that, in bidding prices).
No wonder China stays aloof of the 22-member western debt-alleviating Paris Club, but steps in gleefully when World Bank or IMF loans become hard to get, have strings, or involve long-term and tedious negotiations: too many countries need new, maiden infrastructures, which China can supply, but China has also built up a multi-trillion dollar treasure trove from over a generation of single-minded trade-surpluses search that needs investment windows. Although China has been able to exhaust particularly potential challengers of the financial clout they will need to match China, it has proven to be a less transparent financial partner, more overbearing, and, in the final analysis, imposing higher interest rates than western counterparts. The LDC (less developed country) advantages from China's presence are simply to avoid greater global glare into its domestic corruption practices, fewer pressure to change authoritarian leaders and practices, and an anti-western platform to hook on to as and when needed.
As noted in Kenya's call, China's Export Import bank and China Development Bank lead the Chinese global economic strategy, the former doling out about $150 billion in loans and the latter just under $200 billion in financing. That they have been reaping such harvests as defaulted infrastructural projects only boosts China's global economic salience: they feed diasporic groups and notch up critical real-estate, while also more than doubling its own share of global debt.
Perhaps the most tell-tale case of borrowing from China is Pakistan. Hitherto its staunchest ally, originally its only one (in the 1960s when Zulfiqar Ali Bhutto played the first China card of any foreign country), Pakistan is now not only deeply indebted to China, but under Imran Khan's prime minister tenure, also drifting from China back to the World Bank that it once scorned. One-fifth of its total loans are owed to China: $19 billion, but the China-Pakistan Economic Corridor (CPEC), connecting China overland to the Arabian Sea, could easily add another $14 billion through some majestic projects at the highest possible location above sea-level. Gwador is the prize, a second port for Pakistan and an even more strategic port for China than Hambantota, given its adjacent location to the Straits of Hormuz and the world's most traversed oil-routes.
Against an economic crisis, Imran Khan could only coax $2.5 billion out of China as loan to avoid bankruptcy. It needs $12 billion, and though Qatar, with $3 billion, Saudi Arabia with another $3 billion, and the United Arab Emirates chipped in handsomely (out-sizing China's contribution), Pakistan returned to the institutions it revolved around previously, garnering $6 billion from the International Monetary Fund. What is worth noting here is the possibility of Pakistan spearheading a retreat from China and return to the western institutions. If this were to happen, Chinese arrogance and monopolistically pricing debt-relief may be the reasons why. Yet, China is shrewd enough for the occasion and any misfiring: it anticipates and readjusts policies when push turns to shove. Will it begin any transition out of authoritarianism into democratic folds we do not know, but its capacity to do so only grows.
For all of the above reasons, though we may all be counting how fast the United States may be sinking, it may help us ponder on the opportunity costs entailed first, then explore more globally practical options rather than those so country-centric or regionally concentrated.
© 2017 - All Rights with The Financial Express