Easy Money, Debt-Binging and the China-Nigeria Relationship

Nigerian President Muhammadu Buhari with Chinese President Xi Jinping
Nigerian President Muhammadu Buhari with Chinese President Xi Jinping at the Great Hall of the People, in Bejiing, China. Image credit: Presidency Nigeria (via Twitter)

A decade or two after independence, many African countries confronted their first economic crises. Through a combination of fiscal irresponsibility, external geopolitical factors, political instability and commodity price fluctuation, countries on the continent had little choice than to turn to the global financial markets for succor. Notwithstanding bilateral aid from the Western and Soviet blocs, the twin Bretton Woods institutions (IMF and the World Bank) would rise in dominance as the leading players on the continent’s financial dilemma. Policy recommendations from both institutions, aptly dubbed Structural Adjustment Programs, spurred endless controversies and gained eternal infamy. Nonetheless, leaders of African countries, whether pro-West or Marxist (in substance or words), grew increasingly dependent on both institutions while openly inveighing against the anti-people policies of the “neoliberalist institutions”. Nigeria was no exception. 

The discovery of oil in 1956 had a dramatic effect on the country’s economy, with consequences for key macroeconomic variables. Nigeria, which depended on an eclectic mix of tin, columbite, cocoa and peanuts for foreign exchange earnings, grew increasingly dependent on crude oil exports for the bulk of government revenues and foreign exchange reserves. And with it came the risk of single-commodity dependence which still plagues the country. A sudden drop in oil price had immediate effect on government revenues, thereby hampering its ability to deliver on much-needed public goods, including national security. Furthermore, price fluctuations had a simultaneous effect on monetary stability since the central bank depended on oil-derived foreign earnings to stabilize the exchange rate. This dangerous dependence on a single commodity for fiscal and monetary stability meant sudden or prolonged drop in oil prices automatically triggered an economic crisis in the country. This made Nigeria a regular client of the IMF and World Bank. And with the institutions’ intervention came the infamous demands for austerity measures and cuts to public spending which, unsurprisingly, were highly unpopular. Add to this the increasing demand for human rights-related policies from a country under a series of military juntas. Thus, it is not surprising that Nigeria sought a less-exacting lending partner. 

For Nigeria, and many African countries, the rise of China and its increased interest in Africa couldn’t have come at a better time. From its opening up in 1978 under the Deng Xiaoping regime, the World Bank reports that China averaged an annual economic growth of 10% per year. With the massive spate of growth came increased demand for external energy supplies and foreign markets for finished goods. Nigeria had both. As Africa’s most populous country and one of the continent’s leading crude oil exporters, Nigeria was an attractive target for China. And China was godsent for Nigeria. It asked no questions, avoided the human rights “noise”, and offered cash with no restrictions as the Bretton Woods institutions did. And so, the relationship began. And deepened. Following Nigeria’s 1999 democratic transition, her fourth attempt, the new government further deepened the Chinese partnership. In what was dubbed the “Oil for Infrastructure” agreement, China got oil drilling licenses for four wells in exchange for about $4 billion in infrastructure investments. Subsequent governments continued the partnership albeit under different names and backed by different memoranda and partnership contracts. All looked good. In Nigeria, and many African countries, China was the good guy; it eschewed interference in internal politics and avoided the human rights finger-pointing. 

Two decades since 1999, the underlying term of the relationship has hardly changed. Nigeria relies on China for infrastructure investment and more. The latest request by the Nigerian president to the parliament for approval of a $16 billion (and €1 billion) loan was approved two weeks ago. With the new loan, Nigeria’s external debt profile is set to reach over $50 billion. In response to concerns about the rising debt level, the government was quick to point out that the debt-to-GDP ratio remains far below the 25% threshold recommended by the World Bank. That’s true. However, a few things stand out. Foremost, the latest $16 billion loan relies even more on Chinese funding, with over $12 billion of the loan (nearly 77.5%), to be sourced from various Chinese financial institutions. While the sources appear diverse, nobody would doubt that the final approval for any disbursement must come from the central authority. This is in addition to an existing $3.1 billion debt to China which was the topic of muckraking about China’s ability to takeover Nigeria in the event of default. Funny as it sounds (maybe not so funny in light of the Sri Lankan precedent), the latest borrowing spree by Nigeria, and its increasing concentration in China, is consequential.  

Foremost, Nigeria’s debt profile, and the consequent interest rate payment, is set to worsen. Prior to the latest $16 billion binge, the country’s debt service to GDP ratio stood at 98%. With the bulk of government revenues dedicated to servicing existing debt, questions remain over its ability to provide much-needed public goods, including security. With the latest borrowing spree, even at concessional interest rates, debt service cost is set to increase significantly. This further hampers the government’s ability to provide necessary services. The only option would be to borrow even more, thereby exacerbating the fiscal vicious cycle. Add to this the country’s dangerous dependence on oil revenues at a time when uncertainties continue to cloud global economic recovery as well as the massive clamor for a global energy transition. The prognosis looks scary. Admittedly, the debt ratio remains within limits by World Bank standards. But is the debt service to revenue ratio sustainable? That’s a question worth pondering. But this is a problem that Nigeria will face, regardless of the loan’s origin. Now to the Chinese angle. 

Beyond the dangers of over borrowing, Nigeria’s increased reliance on China for her external loans poses risks to the former’s ability to take certain actions to enhance her political and economic sovereignty. Nigeria, like many developing countries, seeks to wean herself off excessive dependence on commodities export, especially one whose price she has little control over. Yet, Nigeria faces a dilemma. Her local markets continue to be flooded by cheap imports, the bulk of which come from China. On the contrary, beyond crude oil exports (which make up more than 85% of Chinese import from Nigeria), other products from the country, especially agricultural products, face restrictions to entry. This is clearly obvious in the massive trade imbalance between both countries. Of the over $13.6 billion in bilateral trade, Nigeria’s share stands at 15%, while China accounts for 85%. I certainly do not advocate blind protectionism. Nonetheless, basic economic arguments for open trade based on comparative advantages assumes free flow of goods between countries. If Nigerian producers find it hard to access the Chinese (and other international) markets while imports from these countries flood our markets, one would expect remedial actions from the Nigerian government. But how can the government take such actions when it is financially beholden to the Chinese government? 

Beyond the aforementioned economic consequences of Nigeria’s relationship with China, other less monetary consequences abound. Among these are reports of Nigerian workers abused by Chinese employers with impunity, with no decisive action from the national government. Last year, under the guise of taking Covid-19 precautions, eight Nigerians were reportedly locked up in a house for 4 months by their Chinese employers. Such actions would, expectedly, trigger national outrage in any country. However, no clear actions were taken. Of course, arrest might have been made, and a rescue operation launched. But the timid body language by, and continued unwillingness of, the national government to take deliberate steps aimed at tackling the negative impact of this Nigeria-China relationship is worrying. More so, it sends a clear message to the perpetrators that they have nothing to fear. In addition to this, complaints have consistently arisen over the rise of fake and/or substandard products shipped from the Chinese market to Nigeria. These include electrical products and faulty cooking gas cylinders. There is no overemphasizing the potential danger that lurks across millions of Nigerian homes. The Nigerian reaction so far? You guessed it. 

In conclusion, China has been clear-eyed on the terms of its engagement with Africa, including Nigeria. It offered much-needed funding to Nigeria. It placed less moral and ethical restrictions on the government. It took a much-longer horizon and risk than alternative lenders were comfortable with. Undeniably, that’s commendable. On her part, Nigeria has been clear-eyed on the terms of engagement. Or has she? Nigeria got funding from China. The government invested these funds in key infrastructure. At least, that’s the claim. Concerns over debt sustainability and other non-economic consequences of the engagement have consistently been swept under the carpet. But not for long. In the geopolitical poker game between Africa and China, sooner or later, the patsy would be obvious. In the meantime, the debt-binging extravaganza continues.  

The views and opinions expressed in this article are those of the author.