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U.S. Senators Warn as African Countries Fall in Chinese Debt Trap

American Senators have expressed alarm at the bailout requests to the International Monetary Fund (IMF) by countries who “have accepted the predatory Chinese infrastructure financing.”

In 2016, the IMF agreed to a $1.5bn bailout loan with Sri Lanka due to unsustainable debts to China.

The incoming government of Pakistan is expected to pursue an IMF bailout in part due to rising current-account deficit and external debt obligations caused by the China-Pakistan Economic Corridor (CPEC).

The Senators warned these financial crises “illustrate the dangers of China’s debt-trap diplomacy and its Belt and Road Initiative (BRI) to developing countries as well as the national security threat they pose to the United States.”

At this week’s conference in Beijing, China announced the availability of $60bn as financing for infrastructure projects in Africa.

The Senators’ warning comes against the backdrop of concerns that Uganda could be gradually falling in China’s debt trap.

The Ministry of Finance records indicate the value of disbursed and outstanding loans from China to Uganda have since grown to Shs6 trillion ($1.6b) as of March 2018 up from Shs4.12 trillion ($1.10b) in 2016.

This accounts for 21.8 per cent of Uganda’s total external debt.

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Ugandan officials say the Chinese loans are easy to access due to limited restrictions.

President Museveni also praised the Chinese, saying they do not interfere with the internal affairs of the recipient countries.

Unlike loans from World Bank with carry grace periods of up to 10 years, borrowers start paying interest on Chinese loans instantly.

But in a letter dated August 3 to the Secretary of U.S. Department of the Treasury, Steven Mnuchin and Secretary of State, Michael Pompeo; Senators said the “Chinese behaviour as a creditor has not been subject to the disciplines and standards that other major sovereign and multilateral creditors have adopted collectively, and in the process, debt levels and dependence on China are rising.”

They stated that as financially strapped countries negotiate with China to free themselves of mounting debt, Beijing has “extracted onerous concessions, including in equity in strategically important assets. Further Beijing has repeatedly used economic pressure to affect foreign policy decisions.”

Djibouti

The U.S. Senators gave an example of Djibouti which has received more than $1.4bn in infrastructure funding, equivalent to 75 percent of its GDP.

“Most of that capital comes in the form of loans from the Export-Import Bank of China. The most recent IMF assessment stresses the extremely risky nature of Djibouti’s borrowing program, noting that in just two years, public external debt has increased from 50 to 85 percent of GDP, the highest of any low-income country.”

As Djibouti increases its independence on China, said the Senators, “there are fears that China will gain control of the Doraleh Container Terminal, further consolidating China’s influence in the critically strategic region.”

Similarly, Sri Lanka which was unable to repay over $1bn of Chinese debt for construction of the Hambantota Port, granted a Chinese state company a 99-year lease on the facility.

The U.S. Senators asked the Trump Administration to explain how it intends to “raise the dangers” of Chinese infrastructure financing through BRI with the IMF and whether additional countries will ask for a bailout from the IMF due to BRI.

The Senators also want the State Department to explore means of using “its influence to ensure bailout terms to prevent the continuation of ongoing BRI projects or the start of new projects and working with allies and partners to educate countries about the risks of Chinese infrastructure loans.

The senators further asked their government to provide alternative financing to developing countries’ projects.

Uganda’s case

According to Uganda Debt Network, with Uganda’s projected expenditure of Shs 29.274 trillion, only Shs 12.744 trillion (43.5percent) will be available for service delivery (excluding budget and project support, debt repayments and domestic refinancing).

The proposed fiscal deficit level is at 5.4percent (including grants and HIPC debt relief).

This projection excluding grants increases by 1.2percent to 6.6percent in the same period (FY 2018/19).

This also means that Uganda continues to have a high dependency on external financing.

Officials say Uganda plans to reduce investment in infrastructure in an effort to reduce its fiscal deficit.

In the FY 2018/19, the deficit is expected to reduce to 5.4percent and later gradually reduce to 3percent in FY 2020/21.

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