s Nigeria and China celebrate their 50th anniversary of official relations this year, a relationship that started on the 21st day of February 1971, concerns about the imbalanced relationship are growing, particularly in light of China’s predatory lending bond with Nigeria and the country’s debt exposure to the Asian powerhouse, which has increased geometrically in recent years.
As trade and investment have expanded, so has lending, resulting in a greater emphasis on the bilateral relationship’s balance. Nigerian President Muhammadu Buhari is forced to refute that his country is overly reliant on Chinese debt on several occasions.
However, the public discussion over the extent of Nigeria’s debt to China, including charges that Abuja is jeopardizing its sovereignty, is never far from the foreground. The level of current debt is the subject of our fact sheet.
Nigeria was accused of being under Beijing’s heel because of increasing borrowing in 2020 and the early months of 2021, but Federal Government Ministers pushed back, including parliamentarians.
Nigeria’s Transport Minister, Rotimi Amaechi, announced in August 2020 that the country has waived immunity on a loan, which would have prohibited China from bringing it to arbitration in the case of a default. However, this did not imply that the country had relinquished its sovereignty.
In his words, “We must learn to pay our debts and we are paying, and once you are paying, nobody will come and take any of your assets”.
Amaechi was backed up by Justice Minister Abubakar Malami, who said the phrase in question was normal and aimed to safeguard lenders. A statement was also issued by the Chinese Embassy in Nigeria.
“This is not the first time that a loan issue has erupted in Nigeria and other African countries. China would never pursue hegemony, and we have no plans to take over any country”, according to an Embassy official.
Nigeria’s public debt was N32.9 trillion, or $86.3 billion, as of December 2020, according to the most latest official figures available. According to the country’s debt management authority, this is the case.
This debt consisted of the following items:
The Federal Government has a total external debt of N12.7 trillion ($33.3 billion).
Domestic debt totals N20.2 trillion ($53 billion), including bank loans. The Federal Government owes N16 trillion ($42 billion) of this total, with the rest made up of debts from state governments and the Federal Capital Territory.
The Export-Import Bank of China owns 9.7% of Nigeria’sexternal debt, or N1.2 trillion ($3.3 billion). This is a government-owned and funded bank that facilitates China’s international trade and investment.
China accounted for 80.1 percent of the bilateral debt, or $4.1 billion. The term “bilateral debt” refers to debt owed by one country to another. France, Japan, India, and Germany are among the countries that have lent to Nigeria.
The African Development Bank, the World Bank, and the International Monetary Fund owed $17.9 billion in multilateral debt.
China’s loans are concessional, meaning they come with more favorable conditions than market loans.
According to the debt office, the money would be used to fund eleven projects. Water supply, power, and railways are among them, as are airport terminals, communications, and agricultural processing.
“Those are all concessional loans, and there are no reasons to be concerned about them,” Patience Oniha, the Debt Office’s Director, said in a February 2021 media interview. “They’re all project-tied, which I think Nigeria should be pleased about.”
Nigeria has agreed to a total of $5.6 billion in loans from China. Beijing, on the other hand, had disbursed $3.3 billion as of March 2020. Nigeria was already servicing the loans, which totaled $3.1 billion at the time.
The first of these finance agreements were struck in 2010, and the most recent one was signed in May of this year. They all have a 2.5 percent annual interest rate, a seven-year grace period, and a repayment period of around 20 years.
The first debt will be paid off in September 2030, while the last loan will be paid off in March 2038.
Nigeria’s debt to China increased by 136% between September 2015 and September 2020, from $1.4 billion to $3.3 billion, according to official estimates. Buhari began his first term in office in May 2015.
External debt increased from $10.6 billion to $32 billion during that time period.
The country will not default on its loans, according to the Debt Management Office. Nigeria specifically provides for debt service on both external and internal obligations in its annual budgets, according to a 2020 statement credited to the debt office. In practice, this implies that debt service is acknowledged and payment is scheduled.
Furthermore, a number of the loans-financed projects are either revenue-generating or have the potential to be revenue-generating.
In a February 2021 interview, Patience Oniha of the debt office also stated that the country’s debt service to revenue ratio might be “far better.” “However, let us be clear: there has been no default, whether of domestic or international debt.”
Nigeria paid $195.5 million in 2020 to pay down its debt to China, accounting for around 12.6% of the $1.6 billion it spent on its external debt.
It is inaccurate to judge a country’s debt and ability to pay based solely on the amount borrowed; after all, the world’s superpowers are indebted as well, but there is a system of checks and balances in place among their arms of government that prevent the executive from borrowing indiscriminately.
The debt-to-gross domestic product ratio, or any other ratio, has no bearing on the borrowing restrictions of any government. Developing countries with a lot of room for economic growth may have a strong incentive to borrow a lot of money to fuel that expansion.
However, the purpose of the borrowing should be taken into account. Because these are project-targeted loans, there should be no need to be concerned about Nigeria defaulting on China loans. When a government borrows for personal consumption, such as to import food, pay salaries, or for administrative purposes, it is bad. It also funds the Executive’s extravagant lifestyle.
Nigeria announced in February 2021 that it had increased the maximum amount of public debt it could take on from 25% to 40% of its GDP.
The hike was intended to assist cover government budget deficits and other “obligations.” The new debt-to-GDP ratio is “still significantly below the World Bank and IMF suggested threshold of 55 percent for nations in Nigeria’s peer group,” according to the debt office.
Nigeria, for example, had a total of $1.41 billion in loans agreed but not yet disbursed by the Export-Import Bank of China as of December 31. (The total is made up of $1.05 billion and 2.3 billion, which converted to around $361.33 million when the agreement was signed in May 2018).
On paper, the debt rise appears to be manageable, but in fact, it may cause problems. Consider the following two critical questions: what would happen if the country’s export and foreign exchange profits fell significantly? How would the government continue to service its debt if the global oil market collapsed?
In actuality, greater borrowing meant that future administrations would have to focus on debt repayment rather than reaching their growth targets.
Changing perceptions about greater migration on both sides have resulted from increased trade and the presence of Chinese in Nigeria. Chinese loans to Nigeria totaled $3.121 billion as of March 31, 2020, accounting for 11.28 percent of the country’s external debt of $27.67 billion.
Meanwhile, according to a recent study, China, the world’s largest public lender to developing countries, imposes one-of-a-kind requirements on borrowers, giving Beijing excessive influence over their economic and foreign policies.
According to a report issued two weeks ago by Germany’s Kiel Institute for the World Economy (IfW), China’s funding state banks create new lending terms or tweak traditional ones in ways that “go beyond maximizing commercial benefit” after evaluating 100 Chinese loan agreements with 24 nations.
According to the paper, “such stipulations can enhance the lender’s influence over the debtor’s economic and foreign policies.” It then goes on to give a few examples.
Over 90% of the Chinese contracts studied have a clause that allows the creditor to terminate the contract and demand repayment if the borrowing country’s laws or policies change significantly. While policy change provisions are common in commercial contracts, the researchers argue that when the lender is a government institution rather than a private company subject to regular financial regulation, this takes on a new dimension.
Researchers discovered “unusually broad secrecy terms” in the contracts. “Many of the contracts contain or refer to borrowers’ commitments not to disclose their conditions — or, in some cases, even the fact of the contract’s existence,” wrote the authors, who only had access to these documents thanks to Aid Data, a US-based research lab.
Other lenders are unable to judge a country’s creditworthiness due to the secrecy. “Citizens in lending and borrowing countries alike cannot hold their governments accountable for secret debts,” the authors write.
While the country’s debt to China grows, projects backed with borrowed monies suffer cash flow and viability issues, creating doubts about Nigeria’s capacity to meet its obligations to the lender.
The Federal Government regards China as a trusted partner in its efforts to resuscitate the country’s ailing infrastructure, despite mounting concerns about the country’s ability to offset the growing debt, much of which the National Assembly stated the circumstances are shrouded in secrecy.
The dwindling interest among traditional European lenders, like the Paris Club, has made the frequent journeys to China tempting, according to sources in the government’s establishment saddled with the tasks of negotiating the debt arrangements and managing the underlying projects.
“When you consider the extended period of neglect of the most vital infrastructure, it’s a conundrum. The government will have to come up with a mechanism to fund the projects. Should the government sit back and lament if the traditional market is unwilling to lend?” the source wondered.
Nobody, not even the opposition, expects the government to sit on its hands in the face of a decreasing economy, low production, and rising unemployment due to bad infrastructure; however, the government is expected to maintain a bloated governance system in the face of adversity.
Economists and other experts have urged the present Administration to stick to its election promise to minimize the cost of governance, which manifests itself in low-cost official lifestyles and excessive wages/allowances for public employees.
Despite this, the Administration clings to its guns, giving lip service to cutting the cost of governance, living off future gains, or printing money, as stated by Edo State Governor Godwin Obaseki, to subsist while borrowing heavily to fund basic infrastructure.
This has sparked fears of a debt-trap diplomacy with China, despite the government’s repeated denials that the new-found affection for the Chinese government and its agencies is a trap.
The debt-trap diplomacy of China is a global worry that has taken root in Nigeria in recent years, attaining the status of a market square joke among urban dwellers. The Administration, on the other hand, frequently dismisses it as “unfounded.”
Recognizing the growing concern, the Debt Management Office (DMO) explained that the concessional loans had a 20-year term with a seven-year moratorium, a clause that inadvertently shifts the responsibility for servicing and full payment of the current tranches of facilities to subsequent Administrations.
Though China’s proportion of Nigerian credits is still small, accounting for only a small percentage of the country’s foreign borrowing a decade ago, Nigeria’s debt exposure to the EXIM Bank of China has grown 22-fold in eight years, from $8.4 billion in 2012 to $195.5 billion in December. The increase is almost 2,200%.
EXIM Bank’s debt assets in Nigeria have grown steadily from $58.8 billion to $195.5 billion over the last five years, more than tripling.
Although overall Chinese credits to Nigeria are unknown, EXIM Bank alone accounted for 76 percent of Nigeria’s $258 billion bilateral loans at the end of last year, pushing Paris Club members to the periphery of the country’s debt market.
However, it is important to note that waiving sovereign immunity in a business or credit deal does not imply that the country is relinquishing all or part of its sovereignty. In the event of a default, the waiver is only a protective clause that allows the lender to sue the borrower nation in a foreign court or arbitral forum and enforce the judgment or award on the borrower’s foreign assets.
Foreign loan agreements frequently include sovereign immunity waiver clauses, particularly where the borrower lacks a strong track record of repayment or a convincingly independent judiciary or dispute resolution forum. As a result, any country or entity providing Nigeria a loan is unlikely to refuse to include such a clause in the loan deal.