Chinese loans offer best alternative for Kenya

Commentators continue to contradict each other on whether the loans Kenya has secured from China are good for us and whether they are comparatively better than loans secured from the West. However, on the part of the anti-Chinese loans to Kenya part of the divide, the stratagem seems to be a largely fallacious attempt to paint a good image of lenders from the West devoid of any empirical evidence.

The propensity to the West has conveniently led to the ignorance of Kenya’s debt history, which was predominantly from the West. History proves that loans from the Bretton Woods Institutions were expensive, ineffective and a tool of political manipulation while facts in the recent past suggest that loans from China; and specifically from the Exim Bank of China are cheaper due to the amicable policies towards Africa by the Chinese government.

Besides creating dependence, most of the Bretton Woods loans are too low to enable any meaningful progress. Many are also mainly destined to non-productive ventures such as democratic governance, policy reforms or humanitarian aid. Indeed, critics have coined the term “humanitarian alibi” to describe how humanitarian assistance is used by Europe and America to appear that they have been doing something when, in actual fact, they have not brought about any meaningful change in economically promising countries like Kenya.

In the book, Confessions of an Economic Hit Man, John Perkins exposes how deceptive foreign development assistance from the West has been. He chronicles how the West deploys experts to convince developing countries to accept loans that do not contribute to development and which they have no capacity to pay. Consequently, such countries are forced to default which places them at the mercy of the lenders. This could be one of the reasons why Kenya had not implemented any large infrastructure project before going East.

China has been lambasted by Bretton Woods’s apologists for “dangling” loans and for making beneficiaries to sign commercial contracts with Chinese contractors. But this has been the norm. Indeed, before China became a major international lender, ‘traditional’ lenders (i.e. Japan, USA and the EU) constituted what the Development Assistance Committee (DAC) for the purpose of jointly setting conditions on how to dish out international loans. But when other lenders came to town (i.e. Chinese, Brazilian and Indians), they refused to be bound by DAC guidelines. Instead, they have been negotiating their own terms in line with their own national development policies.

The Chinese approach is seen a “win-win principle” in that aid is given only if it contributes to China’s own national interests as well as those of the recipient country. In addition, we cannot begrudge the Chinese for wanting to benefit from the loans they give us. What we need to do is to ensure that we negotiate with them so that they can subcontract our own engineering firms and local road contractors even as we build our own capacity to international standards.

Unlike lenders from the West, the Chinese government has explicitly stated in policy that it does not interfere with the internal affairs of the recipient countries and that it “fully respects their right (of such countries) to independently choose their own paths and models of development.” We need to remember the havoc caused to our economic mainstays after we agreed to adhere to the structural adjustment programmes imposed by the IMF and the World Bank in late 1980s. This must be a constant reminder of Kenya’s debt history and the best alternative offered by the Chinese.

On debt-GDP ratio is not as bad as we are persuaded to believe. We are at par with our peers in the continent. For instance, data from the National Treasury in South Africa shows that by end of last year, Pretoria had a 50.10 Debt-GDP ratio. This in no way suggest that we recklessly borrow and go overboard, however, there’s nothing wrong in surpassing prudential loan limits in the short run; the real danger is when it is breached on a long-term basis. Indeed, even the IMF acknowledges that it is practically difficult to pin-point what constitutes a prudent amount of public debt.

A high Debt-GDP ratio is not necessarily a sign of bad economic management. For instance, at 170pc Japan had the highest debt ratio in the world by 2007 while Italy’s debt rose to more than 100pc around the same time. “None of these countries experienced spiraling inflation or very high interest rates as is commonly feared,” says Anis Chowdhury and Iyanatul Islam in Is there an optimal debt-to-GDP ratio? The two authors rubbish the claim that high public debt causes lower growth saying that this is “not grounded in robust empirical evidence.” What is important is to ensure the loans go to fund productive ventures. There’s little doubt, even amongst the naysayers development of large infrastructure projects is likely to promote more economic growth.

It is therefore prudent to bear in mind that there are no quick fixes to reduction in debt ratio. Indeed, IMF reports show that bringing debt-GDP ratios to sustainable levels requires unprecedented and long-term measures. It therefore means that for Kenya to reduce its debt burden, then it needs to expand economic growth -which is what the implementation of large infrastructure projects are meant to achieve.

We should also remember that the Jubilee government is only implementing projects that were planned more than 20 years ago and partly implemented by the coalition government with the help of China. Cynicism therefore basically serves to distract Kenyans from seeing the long-term economic benefits of the SGR and other infrastructure projects. We must look at the bigger picture and take into account the progress offered and guaranteed by Kenya’s economic engagement with China.

(The writer comments on International affairs)

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