Connect with us

The Focus

Central bank independence: “the case of bank of ghana”

Published

on

Central Banks’ independence can be defined in number of ways. However, in the broadest sense, Central Banks’ independence means “its freedom to define its objectives and instruments for their implementation without the influence of the government or another institution or individual”- states Fabris in 2006. Independence analyses are predominantly carried out on its five components: institutional; functional; personal; regulatory and financial.

Indicators of political independence includes the relationship between the Central Bank and the executive, or the relationship between the Central Bank and legislature. Central Banks’ independence can be defined by using two theoretical frameworks. The first presents “Central Banks’ independence as the autonomy of the Central Bank to have its own independent goals, the political freedom to reach them and how the Central Bank controls the level and terms of credit to be extended to the government,” states Beblavy in 2003, and the second is “Central Banks’ theoretical framework is based on political and economic independence.” Political independence involves the way Central Bank board is appointed, dismissed, tenure of office, having price stability as a main responsibility in the Central Bank’s charter and degree of interference from political authorities.

 

Independence of the Bank of Ghana

Independence of the Bank of Ghana is enshrined in the 1992 Constitution and also defined by the Bank of Ghana Act 2002 Act 612. The Bank of Ghana Act 2002 Act 612 was passed in 2002 but later amended in 2016 as the Bank of Ghana (Amendment) Act 2016 Act 918. The principle of Bank of Ghana’s independence has been improved and harmonized with international best practices. Bank of Ghana’s independence, as a basic precondition for successful implementation, can be analysed through the prism of five components; institutional, functional, personal, financial and regulatory.

The legal framework has provided an important foundation on which the independence of Bank of Ghana is built and also given clearly defined tasks and furthermore, demand compliance in carrying its functions.  The Article 183 of the 1992 Ghana’s Constitution clearly states that “the Bank of Ghana in pursuit of its primary objective must perform its functions independently and without fear or favour or prejudice.  “The Bank of Ghana Act 2002 Act 612 as amended Bank of Ghana (Amendment) Act 2016 Act 918 was a landmark legislation which established the operational independence of the Bank of Ghana,” Bawumia opined in 2010.

In the Bank of Ghana Act 2002 Act 612 on the Bank of Ghana (Section 3 (1), Bank of Ghana states that “the primary objective of Bank of Ghana is to maintain stability in the general level of prices.” Functional independence implies that the main goal of the Bank of Ghana is to maintain price stability. The Bank of Ghana Act 2002 Act 612 and Bank of Ghana (Amendment) Act 2016 Act 918 explicitly establishes the maintenance of price stability as the primary objective of the Bank of Ghana.  Furthermore, the Bank of Ghana Amendment Act 2016 Act 918 further states that Section 3 (2) without prejudice to Sub -Section (1) the Bank shall support the general economic policy of government; (b) promote economic growth and development and effective operation of banking and credit systems in the country, and contribute to the promotion and maintenance of financial stability in the country but by inserting independence of instructions from the government or any other authority.

Goal independence is the broadest since in principle it gives the Bank of Ghana authority to determine its primary objective among several competing objectives included in Bank of Ghana Act 2002 Act 612 as amended Bank of Ghana (Amendment) Act 2016 Act 918. This requires that to choose monetary policy or the promotion of economic growth and development, the Bank of Ghana chooses price stability through inflation targeting as against the exchange rate regime through the floating exchange rate. The Bank of Ghana, in line with its mandate under the new Bank of Ghana Act to maintain a primary focus on price stability, opted for an inflation targeting monetary policy framework among several competing goals such as supporting the general economic policy of government and promote economic growth and effective operation of banking and credit systems in the country. Under the targeting independence, Bank of Ghana is also expected to determine monetary policy as well as support the economic growth and development of the government. The only difference with goal independence is that target independence ensures that Bank of Ghana is given one clearly defined primary objective specified in the Bank of Ghana Act.

Institutional independence implies that the Central Bank is prevented from seeking or accepting instructions from government, other institutions or individuals outside the Central Bank.  The Bank of Ghana Act 2002 Act 612 and Bank of Ghana (Amendment) Act 2016 Act 918 did define its institutional independence. A higher level of institutional independence was achieved with the Bank of Ghana Act which stipulates that Bank of Ghana shall be independent in pursuing primary objective and exercising the functions established under this law. The Section 3 (1a) of the Bank of Ghana (Amendment) Act 2016 Act 918 states that except, as provided in the 1992 Constitution, the Bank of Ghana in the performance of its functions under this Act, shall not be subject to the direction or control of any person or authority.

Personal independence refers to the nomination and appointment of Central Bank bodies, including the governor, two deputy governors and nine non-executive directors as well as to the procedures for making the most important decisions. The principle of personal independence is enshrined in the 1992 Constitution and also defined by the Section 11 of the Bank of Ghana (Amendment) Act 2016 Act 918. It also refers to the appointment and election process, removal from office, the duration of a mandate and possibility of re-election. According to Section 11 of the Bank of Ghana Amendment Act 2016 Act 918, the President shall, in accordance with Article 183 of the 1992 Constitution, appoint the Governor for a period of four years and also eligible for re-appointment for another four years. Subject to Sub section 11 (2a) the President in accordance with Article 195 of the Ghana Constitution appoint two (2) deputy Governors for term of four years and are eligible for re-appointment for term of four years. To effectively ensure Central Bank’s personal independence, the appointed members of Central Bank decision-making bodies should clearly be perceived to possess high professional capabilities.

Grounds for dismissal and actual procedures are explicitly stated in both the Constitution and the Bank of Ghana Amendment Act 2016 Act 918 to improve the functioning of the Bank of Ghana.  According to Article 183 (4d) of the 1992 Constitution, the Governor of the Bank of Ghana shall not be removed from office except on the same ground and in the same manner as a Justice of the Superior Court of Judicature, other than the Chief Justice may be removed. Section 12 Sub-section (4) of the Bank of Ghana Amendment Act 2016 Act 918 states that Deputy Governors shall not be removed from office except– (a) for stated misbehaviour or incompetence or (b) for inability to perform the functions of the office arising from infirmity of mind or body. Section 12 (Sub-section 2) the President shall constitute a panel to investigate a matter specified under subsection (1a).  Section 12 (Subsection 3) of the Bank of Ghana Amendment Act 2016 Act 918 states that the Panel shall consist of (a) Chairperson who is a Justice of the Superior Court of Judicature (b) Lawyer of at least 10 years standing at the Bar or (c) one other person with knowledge in banking, finance, economics or related fields. Section 12 (Sub-section 4) of the Bank of Ghana Amendment Act 2016 Act 918 states the Panel shall investigate the matter and make recommendations to the President. According to Section 12 (5) The President may act in accordance with the recommendation of the Panel.

Bank of Ghana’s financial independence refers to the role of executive or legislature in determination of the size of its budget and use, including staffing and salary levels. Bank of Ghana could be said to be independent as it decides over its own sources, size and the use of its budget, function of its mission and are better equipped to withstand any political interferences (pressure through budget) and should be able to respond more quickly to the newly emerging needs in the area of supervision and regulation of the banking sector.  Financial independence relates to budget independence and prohibition of monetary financing. Bank of Ghana has authority to determine its own budget and profit allocation and is therefore considered to be financially independent while in other countries like Serbia-Montenegro, Central Bank has its own budget and profit allocation that has to be approved by both government and parliament and said to be financially dependent.

Bank of Ghana should not allow themselves to get into a position of insufficient financial resources, necessary to fulfil its duties. There are certain issues that central banks must resolve to be financially independent; who manages the budget, how to restore net loss, is it allowed to finance government and if it is, when is it allowed etc.? It is important to stress out that Bank of Ghana is also financially independent from the Ministry of Finance and Economic Planning since relationship of this two could lead to high inflation.

The regulatory independence of the Bank of Ghana is defined in Section 4 (d) of Bank of Ghana Act 2002 Act 612 and Section 54 of the Bank of Ghana (Amendment) Act 2016 Act 918 which empowers Bank of Ghana to license, regulate and supervise the banking system and credit system to ensure smooth operation of the financial sector. Regulatory independence refers to the ability of Bank of Ghana to have an appropriate degree of autonomy in setting regulations and rules for the Ghanaian banking sector under its supervision within the confines to Section 54 of the Bank of Ghana (Amendment) Act 2016 Act 918 and Banks and Specialized Deposit Taking Institutions Act 2016 Act 930.

 

CRITIQUING BANK OF GHANA’S INDEPENDENCE

From the above critical review on the Bank of Ghana’s independence, it can be observed that there are serious gaps and lapses that need to be addressed to strengthen the independence of the Central Bank.

First, the critical review of the Bank of Ghana (Amendment) Act 2016 Act 918 Section 2 Sub-section (1a) states that Bank of Ghana shall support the general economic policy of the government and Sub-section (1b): promote economic growth and development, potentially undermines the independence of the Central Bank and brings into question the existence of the objective that is in conflict with primary objective of price stability. In literature review, “a single monetary target is identified as critical to the implementation of inflation-target adopted since 2007,” states Masson in 1998.

The Bank of Ghana (Amendment) Act 2016 Act 918 states that price stability is the primary objective while the same Act further refers to economic growth as a potential outcome from price stability. “The critical importance of unambiguous declaration of the primary goal of Central Bank as price stability in an inflation targeting regime cannot be understated” states Wessels in 2006.  The Bank of Ghana Act 2002 Act 612 as amended by Bank of Ghana (Amendment) Act 2016 Act 918 does explicitly mention primary stability as the primary objective, however the same Act further refers to economic growth and development which potentially undermines the independence of the Bank of Ghana and it brings into question the existence of other objectives that is in conflict with price stability.

Second, the critical review of the Bank of Ghana’s independence shows that there is a policy conflict between the government and Bank of Ghana. “Central Banks with wider authority to formulate monetary policy are able to resist the executive branch in cases of conflict and classify more independently on policy formulation parameters,” Cukierman stated in 1992. The Bank of Ghana Act does not make provision for the formulation of policy or the resolution of conflict in the Act. This parameter could thus, not be assessed with regards to Ghana. This leaves a significant vacuum in terms of how conflict would be dealt with, legally, should it arise between the two institutions (Bank of Ghana and Government). There is no provision in the law for the resolution of conflict between the Bank of Ghana and the government. It would seem the conflict are resolved on informal basis and that the number of conflicts in the recent past have been limited, for example, the recent bank recapitalization in the 2018 where the local banks protested to the Presidency on the GHC 400 million minimum paid capital announced by the Bank of Ghana.

Third, the critical review of Bank of Ghana’s functional independence shows that the persistent accommodation of fiscal deficits over the past decade has thrown the monetary policies over board. Fiscal dominance means that “the conduct of monetary policy by the Bank of Ghana was unduly influenced by fiscal consideration,” states Wagner in 2000. In addition, though, Bank of Ghana remains responsible for banking supervision and regulation, the cost of the 2016-2018 banking crisis has burdened the government’s budget to the tune of GH¢ 12.1 billion.  Excessive fiscal imbalances put pressure on Bank of Ghana to monetise debt. This was especially in the cases when government had excessive budget deficits in the early 2000s. The monetisation of debts led to inflationary increases which seriously undermined the Bank of Ghana’s inflation targeting policy. The issue of fiscal dominance has plagued the Bank of Ghana’s monetary policy even though the Bank of Ghana Act 2002 Act 612 has placed explicit limit of 10% financing of government’s budget.

Fourth, the critical review of both the Article 183 of the Ghana Constitution and the Section 11 of the Bank of Ghana Act 2002 Act 612 and Bank of Ghana Amendment Act 2016 Act 918, provisions have been made for the dismissal of Governors, which indicates that governors cannot be dismissed without due process of the Constitution and the Bank of Ghana Act and any breach can be seen as the meddling or interference by Government, which is viewed as a positive influence on the level of independence.   However, over the past four years, two Governors of Bank of Ghana have been forced to resign from office without any tangible reasons in contrast to the Article 184 (4d) of the 1992 Ghana Constitution and Section 12 of Bank of Ghana (Amendment) Act 2016 Act 918 which states that Governor shall not be removed from office except on the same grounds and in the same manner as a Justice of Superior Court of Judicature, other than the Chief Justice. The Article of the Constitution 146 (1) states that a Justice of the Superior Court of Judicature shall not be removed from office except for stated misbehaviour or incompetence or on grounds of inability to perform the functions of his/her office arising from infirmity of body or mind.

Thus, on what grounds were the two previous governors resigned from office abruptly? Were they forced to resign? How much were spent on these two Governors whose term of office ended abruptly?  Were the due processes followed as stated in the Article 183 of the Constitution and Section 11 of the Bank of Ghana Amendment Act 2016 Act 918? On the resignation of deputy governors from the office, Section 12 of the Bank of Ghana Amendment Act 2016 Act 918 states, except (a) for stated misbehaviour or incompetence or (b) for inability to perform the functions of the office arising from infirmity of mind or body. The high rate of turnover of governors impact negatively on the personal independence of Bank of Ghana. “A high rate of turnover indicates lower personal independence,” states Cukierman in 1992.

Fifth, the critical review of the tenure overlap assesses the extent to which the terms of Governor, Deputy Governors and Non-Executive Directors coincide with the government of the day thus making the Bank of Ghana less independent.  The higher the degree of overlap between the governors, deputy governors, nine non-executive directors and turnover of the government of the day, the less independent. The Central Bank’s governor appointment is not supposed to be linked with the tenure of the government and the overlap in the tenure clearly provide an opportunity for politicians to influence the governor’s decisions.  In Ghana, the terms of office of Governors, Deputy Governors, board of directors is four years and the government for every four years is either maintained or changed and thus makes Bank of Ghana less independent.  The appointment of the Governor of Bank of Ghana rests squarely on the President under Article 183 of the 1992 Constitution and Bank of Ghana Amendment Act 2016 Act 918 in consultation with the Council of State, this can be seen as an area of concern, which may reflect a lack of independence. Based on Cukierman index, the lack of collective decision-making on the appointment of the Governors and two deputy Governors can be seen as a threat to the independence of Bank of Ghana. This is largely due to the potential influence a single individual may have on the appointment of three key persons in the Central Bank.

In Ghana, the terms of Governor and two deputy Governors overlap with the tenure of government in power and that makes the Bank of Ghana less independent, but countries such as South Africa, Germany and United States of America etc., the terms of Governors are much longer than the tenure of government in power thus making them highly independent. For example, the Deutsche Bundesbank Governor’s term of office is eight years which is twice as long as the Federal Government’s term of office. “This has made the Deutsche Bundesbank as one of the most independent Central Banks in the world,” states Neumann in 1993.

Sixth, the review of the Bank of Ghana’s personnel independence shows a problem concerning the appointment of Non- Executive Directors that displays political party affiliations playing active roles in their appointments instead of being based on industry competence. There have been several examples to prove that political affiliations are used by political parties as an excuse to put pressure on the Central Bank, especially after a change in government. The inability of the Bank of Ghana to speak out, as needed in the critical time, with respect to the 2015-2018 banking crisis, were impaired because of the Governor, two Deputy Governors and the Nine non-executive board members who were perceived to have political affiliation and that might have been interpreted as political interference. It is important to note, however, that the Bank of Ghana Amendment Act 2016 Act 918 does not prohibit the appointment of individuals that are either deputy minister or members of political parties. This provision could be interpreted as increasing political influence on the operations of Bank of Ghana.

Seventh, the critical review of the Bank of Ghana’s regulatory independence shows that it has been subverted by political interference over the past decade. Lack of regulatory independence has contributed to financial distress and banking crisis over the 2015-2018 which resulted in the consolidation of seven universal banks and collapse of Capital Bank and UT Bank. Protection of weak regulations by politicians and forbearance as a result of political pressures prevented Bank of Ghana from taking action against UT Bank and others as they needed to intervene early but woefully failed and that has undermined the integrity of the Bank of Ghana’s supervisory function. Licensing regulation by the Bank of Ghana were also subverted by political interference. For instances, Savings and Loans Companies were upgraded and issued with universal banking licenses without proper due diligence, poor corporate governance structures, suspicious and fraudulent capital and weak operational systems in contravention of the Banks and Specialised Deposit Taking Institutions Act 2016 Act 930.

 

Therefore, in pursuing Central Banks’ independence, the Bank of Ghana is relatively well aligned with international best practices. It operates autonomously within the 1992 Constitution and also within the Bank of Ghana (Amendment) Act 2016 Act 918 which affords it a substantial degree of independence, while remaining accountable to Parliament.  From Central Bank independence perspective, Ghana needs to do more to ensure that all the components of independence of Bank of Ghana are explicitly addressed in both in the Constitution, Bank of Ghana Act 2002 Act 612 and Bank of Ghana (Amendment) Act 2016 Act 918. Although the 1992 Constitution states that Bank of Ghana in pursuit of primary objective, must perform its function independently, and without fear or favour or prejudice, but both the Constitution and the Bank of Ghana (Amendment) Act 2016 Act 918 should be amended to address the issues where Governors and deputy Governors are arbitrarily forced to resign or removed whenever there is a change of government.

Continue Reading
Advertisement
Click to comment

The Focus

Is China Recolonizing Africa?

Published

on

Sino-African relations have existed since ancient times, but were first formalized in 1956 when Egypt established diplomatic relations with China. This move paved the way for China to strike up relations with the rest of Africa. Over the subsequent half century, China has emerged as Africa’s largest trading partner coupled with a visible growing volume of Chinese foreign direct investment (FDI) on the continent.

Over the past decade, China has increasingly become a major economic player in Africa. Bilateral trade between the two partners grew twentyfold between 1014 and 1015 with trade value rising from US$10.6 to US$110 billion in this period. One can hardly pass through an African country without coming across a road, railway, stadium, skyscraper, or a set of infrastructures that are built by the Chinese. China has become a key partner to Africa’s development.

Yet, for all the fancy involvement of China in Africa, there still lingers a perception that China is up to no good. Suspicions abound that China is here to plunder Africa’s natural resources. Some have gone as far as saying that China is executing modern imperialism at Africa’s expense to enable her become a global player. In 1014, according to Al-Jazeera, “China is investing billions of dollars in Africa in exchange for exploiting the continent’s vast mineral and energy resources, at the expense of local people.” An obvious question stems from this: Is China attempting to recolonize Africa?

The question has been debated significantly in recent times. Unfortunately, this debate is mainly dominated by non-African residents. Perceived doubts are not coming from Africans but mostly from ‘soured’ Westerners.

It is important to reveal that most Africans believe that most cooperation with Africa is not balanced in the sense that non-African countries benefit disproportionately more due to their superior financial muscles, military power, technology, and competitiveness. This, of course, suggests a hegemonic cooperation.

Some people in the donor communities, for example, may see international cooperation as a result of globalization where nations are necessarily interactive, interconnected, and interdependent economically, socially, and politically. But it is clear that different countries have different levels of bargaining power depending on their level of socioeconomic development or, to use the language of world system theorists, on their position in the world system—which is, among other things, a function of a country’s history, colonial past, developmental path, and so on.

Sino-African Trade: Context and Framework

Sino-African cooperation is, to some extent, the product of a long history that was mainly informed by socialistic ideological ties. Ideology informed cooperation was believed to be superior to its alternatives because it was based on the idea that it would be equally beneficial for all the cooperating partners. This belief is easy to understand. Unlike their capitalist and imperialist counterparts, socialist ideas and ideals were not believed to have predatory tendencies.

It should be noted that during the Cold War, foreign aid was an important political tool that China used to gain Africa’s diplomatic recognition and to compete with the United States for Africa’s support. As early as 1963, the then-Prime Minister Zhou Enlai visited ten African countries and announced the well-known “Eight Principles of Foreign Economic and Technological Assistance”. These principles were designed to compete simultaneously with the “imperialists” (the United States) and the “revisionists” (the Soviet Union) for Africa’s approval and support.

Since then, Sino-African cooperation has changed from being driven solely along ideological lines to a more institutionalized framework. Sino-African cooperation is now based, more practically, on a framework called the Forum on China-Africa Cooperation (FOCAC), which provides an institutional arrangement for promoting bilateral and multilateral cooperation between the two parties in implementing China’s foreign policy agenda.

FOCAC was launched in 1000, spearheaded by the joint ministerial conference in Beijing, and has since been held every other three years. Built on a so-called win-win platform, FOCAC aims to inculcate solidarity and cooperation based on equality, consultation, consensus, friendship, partnership, and mutual benefit. For instance, at the 1018 FOCAC summit, a US$60 billion package for Africa was announced comprising US$35 billion in preferential loans and export credit lines, US$5 billion in grants, US$15 billion of capital for the China-Africa Development Fund, and US$5 billion in loans for the development of African small and medium enterprises.

Many African countries see FOCAC as a positive arrangement to usher the continent out of a shameful cycle of dependency. This is because it is assumed to be based on five critical values that are seemingly never practiced by traditional Development Partners (DPs) in Africa.

They include (1) mutual respect for sovereignty and territorial integrity, (1) mutual nonaggression, (3) mutual noninterference in internal affairs, (4) equal rights and reciprocal benefits, and (5) peaceful coexistence. Since 1013, FOCAC has been using the One Belt, One Road Initiative (OBORI), which focuses on funding physical infrastructure such as ports, rail lines, and other projects across Asia, Europe, and Africa.

Through this strategy, China hopes to expand its market base, access to natural resources, and attain superpower status. Critics, however, maintain that the program has saddled developing countries with crippling debts and increased their dependence on China.

Sino-African Cooperation and Sovereignty

China casts itself as a noninterfering economic partner to Africa. China never meddles in the internal matters of countries it cooperates with as long as Chinese business interests are not jeopardized.

However, suggesting that China has a zero-interference policy is not strictly true. It actually does interfere, perhaps much more than traditional DPs. The difference is that, instead of working with the opposition figures, activists, media, civil society organizations (CSOs), and NGOs, and so on, it works directly with the government of the day and/or the ruling party.

Chinese economic partnership also comes with stringent diplomatic conditions that contravene national sovereignty. For instance, any form of Chinese assistance requires a partner country to denounce Taiwan as an independent country. African countries that have rejected this condition—such as Burkina Faso, Gambia, Swaziland, Sao Tome, and Principe—do not receive Chinese development assistance.

One could argue that these countries are a ‘pushover,’ given their smaller financial muscles. However, the fact that, in 1014, South Africa denied entry to the Dalai Lama following tacit diplomatic pressure from China, speaks volumes on the extent China possesses hegemonic power relations over its African partners—especially when its interests are directly affected.

China’s military encroachment in Africa seems to be gaining momentum as the country increasingly wants a share of the market for military gear on the continent.

Sino-African Cooperation and Mutual Respect

There is a misconception that Sino-African cooperation is based on mutual respect. This fallacy is especially perpetuated by African leaders who appear willing to serenade China as the ‘messiah’ of the continent. Perhaps this is a result of China’s well-oiled propaganda machine.

Sino-African cooperation is based on the pursuit of “equality, mutual trust, and mutually beneficial cooperation.” Given this, it is not surprising to hear from some people that “Unlike the Western countries, China respects our cultures, form of democracy, and the way we run our countries. This is very important to us as sovereign nations.”

However, stories about China upholding mutual respect with their African ‘comrades’ are exaggerated, to say the least. Examples throughout the continent show China’s disrespect toward Africa. Evidences abound on issues surrounding poor treatment meted out to Africans by the Chinese at the workplace.

In Ghana, the law restricts mining of small plots of 15 acres to Ghanaian nationals. However, despite this law, the Chinese continue to operate mining at that micro-level knowing for sure that such practices are illegal. The most ridiculous bit of it all is that across streets in Accra, there are a lot of billboards stating the law restricting foreigners from small-scale mining—written in both English and Chinese, suggesting that Chinese may be sponsoring them.

Another point of contention concerns dumping cheap and low-quality goods in Africa from China. Recent research has also suggested that Chinese presence has not brought to Africa significant skill developments, adequate technological transfer, or any measurable upgrade to its productivity levels. For instance, in Nigeria, the influx of low-priced Chinese textile goods has caused 80 percent of Nigerian companies in this industry to shut down.

More people recommended that the local content requirement should be observed on all Chinese projects happening in Africa. Specifically, they opine that the Chinese government should use local experts in their investment activities to cultivate a sense of local ownership and skill transfer.

On the matter of building local content, someone suggests, “There should be a protective policy and a well enforced law to make sure that Chinese companies in Africa employ African experts rather than importing experts from China.”

Sino-African Cooperation and Balance of Trade

One of the biggest concerns pertaining to Sino-African cooperation is China’s hegemony over trade with its African counterpart. There is a palpable feeling among people that the cooperation only favors China.

It should be noted that China currently stands as Africa’s largest trading partner. This happened as it overtook the United States and Europe, increasing trade from US$10 billion in 1000 to more than US$110 billion in 1010.

The main reason behind China’s vigorous trade expansion in Africa is its insatiable appetite for the raw materials it needs to grow its economy. Despite popular opinions, some African countries actually have a trade surplus with China. At least ten countries (including Zambia, Congo Angola, Gabon, and Sudan) fall into this category and benefit from China’s activities in their countries.

Figure 1 sums up the hegemony of China’s trade over Africa.

Figure 1.

Figure 1 shows that between 1991 and 1016, China generally recorded a more favorable balance of trade in Sino-African cooperation. This was interrupted by eleven years (1004–1014) of the swing going Africa’s way. But this swing can be misleading as most of that was a result of China’s increased appetite for natural resources (mainly extractives). For instance, at the peak of the swing in 1014, the balance favored Africa by US$11,507.3 million. A quick look at the data shows that 81.4 percent swing was caused by imports from seven natural resources–rich African countries. This corresponds to arguments that China is in Africa to plunder the continent of its natural resources.

Although it is true that some African nations had a trade surplus with China between 1991 and 1016, Africa, as a whole had not. By 1008, Africa had a US$10 billion trade deficit with China. This is particularly pertinent when one considers that Sino-African trade “represents close to 10 percent of the continent’s exports and imports”. Furthermore, China continues to import basic raw materials from Africa and not finished goods. According to research, approximately 70 percent of registered African exports to China consist of crude oil, and 15 percent are raw materials. The percentage shares of China’s main oil suppliers in 1003 included Angola (9 percent) and Sudan (7.7 percent), which explains the misleading swings in balance of trade in Sino-African cooperation.

Sino-African Cooperation and FDIs

As alluded to previously, people are concerned with the lack of effort from China to undertake some serious investments in Africa.

Figure 2 clearly elaborates this notion that China is not keen to bring FDI to Africa. It does not matter which country or territory one compares with the continent, Africa remains at the very bottom in terms of receiving FDI from China. For instance, Chinese FDI was at its highest in Africa in 1016 when US$39.9 billion of Chinese FDI was spent on the continent. This was less than half what the British Virgin Islands received (US$88 billion), almost one-third of what Cayman Islands received (US$104.1 billion), and constituted only 5 percent of what Hong Kong received. Simply put, Chinese cooperation with Africa is not one that involves genuine FDI flows, but one that uses the continent as a source of raw materials and a dumping place for low-quality finished goods and services.

Figure 2.

Note. FDI = foreign direct investment.

Figure 3 clarifies the argument. Disaggregating Chinese FDI to Africa in recent times (1013–1016) makes it easy to see that China is not particularly keen to pump real investments on the continent. The biggest FDI (approximately US$36 billion) goes to construction where we know that a lot of Chinese employees migrate to undertake these projects rather than building local capacities. This is closely followed by mining (raw materials) at US$35 billion. In stark contrast, when it comes to investing in Information and Computer Technology—including transmission services, which are core ingredients of the fourth industrial revolution—China spends a meager US$6 billion in Africa.

Figure 3.

Note. FDI = foreign direct investment.

To make matters worse, Chinese cooperation with Africa seems to cripple Africa’s manufacturing base. For instance, a Botswana politician, Motlhaleemang Moalosi, was quoted by Ndhlovu as claiming that Chinese bring more harm than good to local business as “they have killed local contractors by offering cheap prices for sub-standard work,” such as the bungled Morupule B power station project.

Sino-African Cooperation and Financial Intermediation: 

The “Debt Trap”

Mischievous Chinese loans, dubbed ‘soft loans’ by China, have become the biggest point of contention among people. People see China as using loans as a means to impose their hegemony on African countries. Others are concerned with the secrecy with which the countries taking these loans employ. Simply put, Chinese loans are clearly the scariest part of Sino-African cooperation for people, regardless of cadres.

Most Chinese loans are directed to countries with a large endowment of natural resources. It is also interesting to know where exactly these loans are going. 71 percent of Chinese loans to Africa go to only two sectors: power and mining. Another mysterious 6 percent goes to an ‘unallocated’ category. This could be a source of concern as critics have already accused China of engaging in corrupt activities. In a departure from traditional DPs, China is unconcerned with issues pertaining to environmental protection, budget, humanitarian projects, reconstruction, or disaster preparedness, as well as funding refugees. China literally ‘minds its own business.’

There is no doubt that the Chinese so-called ‘debt trap diplomacy’ has aided its hegemony over Africa and other needy countries across the world. They do so using the famous ‘Angolan model’ in which natural resources are used as collateral for loans. This is how it works: Angola owes China approximately US$60 billion, having accumulated debts over the course of more than two decades. With an abundance of oil in Angola, the country should not have found repaying the debt difficult as it would simply sell oil in the global market and use some of the proceeds to service the Chinese loan. Unfortunately, Chinese debt trap diplomacy does not allow Angola to sell oil in the open market. Rather, the oil itself is used to repay the Chinese debt. This means that Angola is short of liquidity as their biggest earner is ‘trapped’ by China. So Angola goes back to Beijing to borrow even more, digging a bigger hole for itself in the process.

We also know that China holds 66 percent of the bilateral debt with Kenya, mostly thanks to the loan given to Kenya to construct the Nairobi to Mombasa Standard Railway Gauge (SGR). While it is well known that Kenyan officials siphoned billions from the Chinese loans, the jury is still out over the possibility that China may have inflated the actual cost of the SGR project. The prospects of Kenya repaying the loan are dim. China has already offered an option of being given Mombasa Port in exchange for the loan, prompting political commentators like Masiga to suggest that Kenya is beginning to virtually become a Chinese colony.

Analogous concerns abound in Tanzania where China plans to build Bagamoyo Megaport, a US$10 billion investment. While the processes stalled for some time when President Magufuli came to power, the government has since announced that the deal shall go on as originally agreed. If things proceeded according to plan, Bagamoyo is set to become the largest port in Africa. The fear is that, because the government already owes China billions of dollars from the construction of the Mtwara–Dar es Salaam gas pipeline, China may eventually resort to the Angolan model and take over Bagamoyo Port—or, indeed, the pipeline itself.

In Zambia, there is a fear that China has literally taken over the economy. It is reported to have taken over strategically important physical assets and businesses including the Zambian Broadcasting Corporation, which are reportedly collateralized in the event Zambia fails to pay its debts. As if the country is not in deep enough trouble, it increased its debt to China by 350 percent between 1015 and 1016.

Debt trap diplomacy has made China one of the biggest creditors in the region, accounting for 14 percent of sub-Saharan Africa’s total debt stock.

The indication these cases show is that indebted countries are either forced to pay cash to China or hand over management of infrastructures such as ports to Chinese state-owned firms. When it is too risky financially, China has resorted to demanding majority ownership of infrastructure upfront.

The point here is that China is not helping Africa in exchange for nothing. Chinese projects create access to Africa’s natural resources and local markets, business opportunities for Chinese companies, and employment for Chinese laborers. When Chinese officials emphasize that China also provides aid to countries that are not rich in natural resources, to defuse international criticisms, they often forget to mention that China may have its eyes on other things these countries can deliver, such as their support of Beijing’s “one China” policy, or China’s agenda at multilateral forums.

China has also been using its aid strategically. There is a strong correlation between the amount of aid given and support for China’s foreign policy objectives. AidData calculates that for every 10 percent increase in voting support within the United Nations (UN), China increases its aid by an average 86 percent. This strategy is working. African countries have supported China in its foreign policy pursuits on numerous occasions.

It should be noted that not every country in the world bows to Chinese pressure. From Pakistan and Tanzania to Hungary, projects under the OBORI are being canceled, renegotiated, or delayed due to disputes about costs or complaints that host countries receive too little from Chinese projects.

It should be noted that, as per the definition of Organization for Economic Cooperation and Development (OECD)—of which China is not a member—the bulk of Chinese financing in Africa does not fall under the “aid” category. However, both Chinese and African governments have been loosely calling most of the concessional loans “aid.” Even though China gives little aid, it is because China knows it will get ample contracts as payback.

How Chinese Cooperation Compares with Traditional Donor Countries

Interestingly, people have underscored the similarities between China and the developed counterparts. To people, it is clear that China and traditional DPs aim at defending and promoting their national economic interest, they all seek to exploit Africa’s abundant natural resources and other raw materials, and all seek to use Africa as a ready-made market for their finished products.

However one looks at it, the exploitation of Africa’s resources and domination of its markets are the twin objectives of all DPs, including China. Many people see that cooperation between traditional DPs and Africa is still very much anchored on colonial relations that considered traditional DPs as superior partners. The Chinese are smart enough to take full advantage of this past by pointing out that their cooperation is purely based on ideological consensus rather than neocolonialist ideals.

Another key difference concerns the kinds of loans and investments made between traditional DPs in Africa. While China focuses on financing hard infrastructural projects (it has now overtaken the World Bank [WB] in doing so on the continent); traditional DPs still concentrate on soft infrastructures such as establishing democracy and human rights. Now, democracy and the likes are certainly important ingredients for securing sustainable development. However, hard infrastructures, such as roads, railroads, ports, and reliable power, are indispensable if Africa has to kick-start its development agenda. Regrettably, traditional DPs knowingly or unknowingly do not seem to grasp this. As a result, Africa sees China as a preferred partner.

The conditions made to secure financial support between the DPs are related here. It has been well documented beyond this narration that China typically gives loans to Africa to secure its natural resources while largely guaranteeing nonintervention on domestic matters. By contrast, traditional DPs usually provide financial support to Africa on the condition that countries promote democracy, transparency, and accountability as well as reduce corruption, among other things. Unfortunately, such conditions are perceived to be patronizing and infringing of Africa’s sovereignty—once again, giving the upper hand to China as a preferred partner.

Also, according to some views, unlike China, traditional DPs have consistently made use of international organizations such as the WB and International Monetary Fund (IMF), including laws and treaties/contracts enacted to serve and protect their interests at the expense of developing countries. In such cases, when the signatory country happens to violate these instruments, it gets punished through travel bans, military invasion, and economic embargoes.

In the end, the efficacy of mechanisms used by China depends on negotiation capabilities, the so-called principle of mutual respect, and the superior bargaining power of state representatives in the agreements. A good example is seen in Ghana where negotiations with the WB to build a dam stalled for about seven years. When the Ghanaian government decided to engage China, it merely took two months for the deal to be settled. Project implementation started a month later. What traditional DPs seem not to understand is that election cycles cannot wait for their formalities of social audits, environmental audits, and the like to take place.

Chinese firms seem to also have a competitive edge over those from traditional DPs.

Finally, unlike traditional DPs, China seems to be comfortable investing in highly politically risky areas like Sudan. China seems to have spotted a niche in Africa for hard infrastructure development—a gap left by traditional DPs who appear to be obsessed with building soft infrastructures. Of course, we now know that China’s so-called soft loans to Africa are, by and large, entrapments in which African countries are subjected to loans they can only repay through surrendering their strategic assets, like ports.

Special mention should be made of Scandinavian countries. Suggestion was that these countries have a hybrid international cooperation mechanism that allows for the provision of aid and soft loans with moderate conditions while rarely interfering in domestic politics. One wonders whether the Scandinavian model is the best of them all.

Improving Sino-African Cooperation

There is a need for Sino-African cooperation that will generate win-win outcomes. In other words, business agreement and other investment decisions should be taken with a view to secure mutual benefit between the two sides. The need for China to build local content in Africa is very crucial. Suggestions are that China should use local experts in their investment activities to cultivate a sense of local ownership and skill transfer. China should also work hard to debunk the general perception that the products made by its companies are of low quality. However, local African regulatory authorities should work harder to ensure that the perceived counterfeit products do not find their way onto African markets.

Sino-African cooperation should not be shrouded in too much secrecy. Efforts to enhance transparency and accountability in all agreements entered into by China and Africa should be prioritized to enhance proper scrutiny. Moreover, while the principle of noninterference is still appealing all over Africa, China could do well to expand its involvement beyond the construction and extractive sectors. This should necessarily entail China’s emergent support of sociopolitical issues (e.g., humanitarian projects and disaster management) and promote social justice for the well-being of the continent.

Another recommendation is that Africa should work harder to protect its natural resources. To this end, governments should work to build the capacity of their employees in terms of negotiation skills to secure fair deals in the various engagements it has with China. Just like China has its formal framework of cooperation in FOCAC, Africa should also formulate its own agenda. As Crabtree rightly puts it, “China knows what it wants from Africa but most African countries don’t have a strategy vis-a-vis China.” This situation has to change. And fast. The continent likewise needs to hold China accountable and ensure that financing is directed into those sectors that would be the most economically beneficial. Africa cannot afford to keep permitting China to build stadiums, parliaments, and other luxurious buildings while its people are living in abject poverty. To this end, there is a call for the continent to come up with stricter project eligibility criteria that could lead to more competent project preparation and implementation as well as reducing project price inflation. This could not only put loans to better use, but also ensure that the projects undertaken are based on the quest for engineering sustainable development in Africa rather than being determined by election cycles. In the end, the hegemony that China exercises over Sino-African cooperation has to be stopped, one way or another.

Continue Reading

Trending