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Chinese President Xi Jinping and Zambian President Edgar Lungu at the Great Hall of the People. Chinese President Xi Jinping and Zambian President Edgar Lungu after a signing ceremony at the Great Hall of the People, March 30, 2015, Beijing, China (AP photo by Feng Li).

‘China Must Be Stopped’: Zambia Debates the Threat of Debt-Trap Diplomacy

Tuesday, Dec. 18, 2018

Zambia, like several African countries, is inching toward a debt crisis, sparking discussion about whether China is to blame. With debt-servicing payments already crowding out development spending, ordinary Zambians are feeling the pinch—and their patience with the government’s coziness to Beijing, and with China's so-called "debt-trap diplomacy," is beginning to wear thin.

LUSAKA, Zambia—Sitting in the lobby of a Lusaka hotel last month, James Lukuku was feeling energized.

The leader of Zambia’s Republican Progressive Party, a fringe opposition group, Lukuku had gained notoriety in recent months as one of the most outspoken critics of Zambia’s relationship with China—a bond he and others say is characterized by increasingly reckless borrowing that puts Zambia’s sovereignty at risk. The 37-year-old made headlines in September when he staged a one-man protest in Lusaka, the capital, holding a sign that equated China to Hitler while wearing a T-shirt with the words “Donald Trump Help” scrawled in red and black magic marker.

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Now, it seemed, his fellow Zambians were getting the message. The day before, Nov. 5, hundreds of residents of Kitwe, a city in the mineral-rich Copperbelt, had rioted after rumors surfaced that the government was poised to offload the state-owned timber company to a Chinese entity. Protesters, many of them local sawmill workers worried they’d soon be either out of a job or employed by foreigners, engaged in running battles with police, burned tires, and attacked and looted Chinese shops. More than 100 people were arrested.

Listen to Jonathan W. Rosen discuss this article on WPR’s Trend Lines Podcast. His audio starts at 27:25.

The rumors, it turned out, weren’t true; shares of the company, known by its acronym ZAFFICO, were indeed being sold, though by being listed on the national stock exchange, rather than through a direct handover to foreigners. But that didn’t seem to matter. The mere mention of ZAFFICO’s sale played into anti-Chinese sentiment that was already running high, in part because of other controversial deals signed between Chinese firms and Zambian state-owned companies. In a country long considered one of China’s most important footholds in Africa, Lukuku was adamant that Zambia’s 17 million citizens had finally had enough.

“People have started realizing that China must be stopped,” he said, pointing to his T-shirt, which had been professionally printed and read “#say no 2China.” “Chinese investment is benefiting individuals in the ruling party and not the general citizens. China wants to lend and lend and lend. But we’re getting into a situation where we won’t be able to pay those debts off.”

China’s big push into Africa, which has seen trade increase more than 20-fold since the turn of the century, has long attracted critics. Many bemoan the cheap Chinese imports that have driven locally manufactured goods out of markets. Others say the Chinese government is too eager to do deals with despots, and its companies import too many skilled workers while mistreating local hires.

But Lukuku’s emphasis on debt is telling. Zambia, he notes, was one of 30 African countries that had much of its debt wiped off the books in the mid-2000s as part of the Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives, which were jointly led by the International Monetary Fund and World Bank. Yet a decade later, the country is deep in the red again. At the end of 2017, Zambia’s external debt stood at $8.7 billion, higher than its pre-bailout peak. Overall government debt was 59 percent of gross domestic product, up from 21 percent in 2011, when the ruling Patriotic Front assumed power. The Zambia Institute for Policy Analysis and Research, a Lusaka-based think tank, warns that this level of debt is “in the territory of unsustainable.”

Zambia’s predicament is hardly unique. Today, roughly half the countries in Africa have outstanding public debt that exceeds 50 percent of GDP. As of August, the IMF had categorized six low-income African countries, including Zambia’s neighbors Zimbabwe and Mozambique, as suffering from “debt distress”—meaning they’ve already struggled to service the loans on their books. Nine others, including Zambia, were said to be at “high risk.”
James Lukuku, one of Zambia’s most outspoken critics
of China, Lusaka, Nov. 6, 2018 (Photo by Jonathan W. Rosen).

Africa’s worsening debt position is the result of many factors, including a fall in global commodity prices since 2014, low levels of taxation, and governments’ growing tendency to issue Eurobonds: foreign currency-denominated securities that typically bear higher rates of interest than loans from international financial institutions or bilateral development partners. But China’s role is also critical. Although the terms of Chinese financing are generally opaque, Johns Hopkins University’s China-Africa Research Initiative estimates that China provided $143 billion of loans to Africa between 2000 and 2017, with at least 80 percent coming from Chinese state institutions. The Jubilee Debt Campaign, a U.K.-based watchdog, reckons that African governments owe roughly 20 percent of their external debt to the Chinese state—well over half of all African sovereign debt that’s owed to foreign governments. At the 2018 Forum on China-Africa Cooperation, held in Beijing in September, Chinese President Xi Jinping announced a target of an additional $60 billion of investment and loans to Africa, which suggests the flow of financing is unlikely to diminish anytime soon.

Proponents of China’s lending model note that much of this money has gone toward building infrastructure, including the roads, bridges, ports and power plants that form the building blocks of Africa’s industrialization. But it also comes with hidden costs. Critics say the personalized nature of Chinese deal-making—which lacks the transparency demanded by the World Bank, the IMF and other lenders from the West—frequently involves kickbacks to corrupt officials and too often results in vanity projects that aren’t really needed. In many cases, governments commission Chinese firms for projects without competitive tenders, leading to work that is overpriced. At other times, Chinese entities, benefiting from scale and Chinese state finance, underprice their competition, sidelining local firms and delivering shoddy work because they’ve cut too many corners.

As the loans have piled up, Western officials have increasingly accused the Chinese government of setting “debt traps”: financing projects with high risks of default, with the ultimate aim of compelling states to relinquish strategic resources. In an October speech, U.S. Vice President Mike Pence railed against “Chinese debt-trap diplomacy,” arguing that the benefits of Chinese lending “flow overwhelmingly to Beijing.” Grant Harris, a senior Africa official in the Obama White House, has called Chinese debt the “methamphetamines of infrastructure finance,” writing that it’s “highly addictive, readily available, and with long-term negative effects that far outweigh any temporary high.” Concerned members of civil society within Africa frequently look to Sri Lanka as a worrisome potential precedent: Last December, after struggling to make repayments on the Chinese-financed Hambantota port—a pet project of former President Mahinda Rajapaksa that was shunned by other lenders—Sri Lanka’s government formally handed it over to China on a 99-year lease.

As of February 2018, according to government statistics, Zambia owed 28 percent of its sovereign debt to China—a figure that is likely higher, since Chinese deals sometimes go unreported and contracted debt that has not been disbursed is not included in official data. Zambia has not ceded any national assets yet. Yet ZNBC, the national radio and TV broadcaster, and ZESCO, the national power utility, have both helped guarantee their Chinese loans by establishing joint ventures with state-owned Chinese companies. Critics say these deals give China a dangerous degree of leverage over key national resources and may be a step toward ultimately signing assets over to China entirely.

They’re also easy for the media to sensationalize, and provide fodder for opposition politicians, who appear poised to exploit growing anti-Chinese sentiment ahead of Zambia’s next general election, to be held in 2021. For now, policy experts disagree on the extent to which Zambia’s Chinese debt poses a danger, as well as the country’s best bets for avoiding a full-fledged economic crisis. Nearly all agree, however, that government debt in Zambia, and across much of Africa, is rising far too quickly. With debt-servicing payments already crowding out spending on development, ordinary Zambians are feeling the pinch—and their patience with their ruling party’s coziness to China is beginning to wear thin.

“It’s difficult to see a light at the end of the tunnel,” says Trevor Simumba, a Zambian trade and investment expert and author of a recent study on Chinese lending to the country. “This is a government that doesn’t want to stop spending, and that’s a problem.”

“China wants to lend and lend and lend. But we’re getting into a situation where we won’t be able to pay those debts off.”

“Already we’re seeing social pressures,” he adds, citing the unrest in Kitwe. “This tension continues to grow—and if it’s not handled well, I don’t see any good things coming.”

Zambia’s ‘All-Weather Friend’

For visitors to Lusaka, a city of 2 million people where upscale boulevards lined with bougainvillea trees lie adjacent to gritty townships, the country’s growing Sinification is hard to miss. One need not even leave the airport: Among China’s largest, and most controversial, projects in the country is a futuristic $360 million terminal at Kenneth Kaunda International that’s slated to open next year.

In the city itself, it’s possible to spend the afternoon shopping for furniture at China Mall, dine on Henan stewed noodles or Sichuan hot pot, and spend the evening at the smoke-filled Great Wall Casino with crowds of Chinese men around the poker table. Chinese expatriates abound—on construction sites, at the front desks of city hotels, or lounging on the weekends at one of Lusaka’s glistening shopping malls. Last December, eight Chinese men were briefly drafted as reservists into the Zambian police force, though their commissioning was undone following a public outcry. Soon, Chinese could be driving taxis. A driver working for Zambia’s Uber-style ride-hailing app, Ulendo, tells the story of a Chinese client, recently arrived, who inquired about joining the company’s fleet.

Zambia’s links with China run deeper than those of most countries in Africa. Its first Chinese-built megaproject dates to shortly after it attained independence in 1964, when Zambian President Kenneth Kaunda sought a transport link to the sea that bypassed hostile white minority regimes in Zimbabwe and South Africa. While Western governments dithered, Kaunda and Tanzanian President Julius Nyerere secured a $400 million interest-free loan from Mao Zedong to build TAZARA, a 1,160-mile railway linking Zambia’s Copperbelt to Dar es Salaam on the Tanzanian coast. In exchange for its largesse, China garnered both countries’ diplomatic support: Zambia and Tanzania were among the 23 co-sponsors of the 1971 U.N. resolution that saw China replace Taiwan at the U.N. General Assembly and Security Council. “In Kaunda and Mao, you see the consummation of a great relationship,” says Sunday Chanda, a spokesperson for the Patriotic Front, citing a range of infrastructure projects that followed in the wake of the railway. “China has been an all-weather friend to Zambia.”

Yet the relationship has not been without controversy. In 1997, when Zambia’s second president, Frederick Chiluba, privatized the country’s copper mines, Chinese companies, along with their counterparts from Canada, Switzerland, India and South Africa, pounced—taking advantage of low worldwide copper prices and a lackluster Zambian economy to seize key mining concessions at a steep discount.

From the start, China’s first Zambian concession, in the town of Chambishi, was dogged by reports of labor abuses, including low pay and poor safety conditions. An explosion near the mine killed 46 Zambian workers in 2005, its first year of operations, and sparked further outcry when reports emerged that Chinese supervisors had run for cover immediately before the blast and failed to warn their Zambian staff of looming danger. In 2006, a salary dispute at the mine resulted in workers vandalizing equipment and beating up a Chinese manager; another Chinese supervisor retaliated by wounding several Zambians with a shotgun. Then, as now, anti-Chinese sentiment became a lynchpin of opposition politics. Michael Sata, who unsuccessfully contested Zambia’s 2006 presidential election, described the Chinese as “infesters” rather than investors, and accused his opponent of handing away Zambia’s sovereignty.

A woman mourns for after an explosion near a mine on
the outskirts of Kitwe, Zambia, April 21, 2005 (AP photo by Desmond Ngoma).

Yet five years later, when Sata won the presidency, his tone was strikingly different. China was no longer the boogeyman. It was now a critical source of project finance—one of many, it turns out, his Patriotic Front-led government would utilize as it went on an infrastructure-building binge. Encouraged by strong economic growth in the first decade of the century—a consequence, in part, of elevated global copper prices—Zambia inked deals for projects including highways, bridges, hospitals, water treatment plants, two 50,000-plus seat stadiums, the airport in Lusaka and another in the Copperbelt, and a 750-megawatt hydroelectric power plant. Much of this was funded by China: In 2016 alone, Zambia received $1.7 billion worth of loans from Chinese sources, including the state-owned China Exim Bank, the China Development Bank, and Industrial and Commercial Bank of China. Aided by prior debt relief, Zambia also turned to multilaterals, including the World Bank, as well as markets, issuing $3 billion worth of Eurobonds between 2012 and 2015.

Although many of these projects were needed, critics say the government took on too much debt too quickly. By the end of 2018, the ratings agency Fitch projects that external debt will reach 69 percent of GDP; in a typical low-income country, economists say that anything above 40 percent is risky. Zambia’s ability to repay has been hampered by stunted growth since 2014, when copper prices again took a hit. It doesn’t help that corruption appears to be rising, particularly since current President Edgar Lungu assumed power following Sata’s 2014 death. In one notorious episode last year, the Lungu government purchased 42 fire trucks for $42 million—reportedly a 70 percent mark-up—a deal Zambian civil society members say was designed to channel cash into the pockets of Patriotic Front cronies. In September, several European donors—already unnerved by Lungu’s growing crackdown on free expression—suspended aid after uncovering evidence of embezzlement in a program that provides cash payments to Zambia’s poorest citizens. By opening up new holes in the budget, this made Zambia’s fiscal situation even worse. It also further undermined investor confidence, leading to a depreciation of Zambia’s currency, the kwacha, and driving its bond yields above 16 percent, making borrowing even more expensive. Zambia’s Eurobonds have been among the worst performing in 2018 of any emerging market country.

The economic impact is already significant. Local businesses report that it’s becoming harder to access finance. Curious new taxes are also appearing. Some of the proposed levies, on weather reports and boreholes, are almost comically dubious. Zambia’s 2019 budget allocates more money to debt service payments than to health and education combined—areas where the government has already struggled to manage its cash flow. Civil servants routinely report delayed wages, and health facilities struggle to stock essential medicines. In October, Vespers Shimuzhila, a fourth-year student at the University of Zambia, was killed after police lobbed tear gas in her room following protests near the campus over unpaid meal allowances. The authorities credited students’ accounts the following day, but Shimuzhila’s fellow students say that if she hadn’t been killed, they might never have paid up.

Debt Traps, Bailouts and Playing the Political China Card

While it’s increasingly clear that Zambia, like other countries in Africa, is inching toward a crisis, the severity of that crisis is less obvious, as is the degree to which China is to blame. Chinese lending, even many critics concede, has done a lot of good for the continent. In addition to driving infrastructure development, economists point out that Chinese financial flows are often countercyclical, meaning they tend not to dry up like private capital during economic downturns. Interest rates on Chinese loans are also generally far lower than rates of commercial loans like Eurobonds. Lubinda Haabazoka, president of the Economics Association of Zambia, says his most pressing concern is how Zambia will repay its Eurobond principals, the first of which is due to mature in 2022. “With Eurobonds, you don’t play around when payments are due,” he says. “These are strictly commercial—not like Chinese loans that have been extended by connected individuals. Chinese debt can easily be renegotiated, restructured, or refinanced.”

While it’s increasingly clear that Zambia is inching toward a debt crisis, the degree of Chinese culpability is less obvious.

Yet others argue that Chinese loans come with certain characteristics that make them particularly worrisome. Where Haabazoka sees flexibility in Beijing’s style of lending—in which deals are often made behind closed doors in state houses or government ministries—Simumba, the trade and investment consultant, sees several red flags. Not only does this provide local officials with easy avenues for corruption, he says; it also leads to white elephant projects that don’t make economic sense. Simumba cites the new Lusaka airport terminal—built without a competitive tender and designed to accommodate an unlikely 10-fold increase in traffic—as a prime example of the latter.

For projects that are necessary, he and other critics say, the Zambian government has signed deals at costs that are exorbitant, in part to facilitate kickbacks. In 2017, authorities commissioned a 321-kilometer highway from Lusaka to Ndola, one of three main cities in the Copperbelt. It is now under construction by the state owned China-Jianxi Corporation for $1.2 billion—double what the Engineering Institute of Zambia suggests it should cost and reportedly the most expensive road on a per-kilometer basis in the region. “The highway to Ndola was badly needed,” says Laura Miti, executive director of Alliance for Community Action, a Lusaka-based NGO that focuses on accountability in the public sector. “But even when the government is implementing projects that are required, the motivation always seems to be accumulating wealth. The chain of patronage—of people needing to make money from every project—is long.”

Simumba concurs, noting that China’s failure to insist on loan recipients’ good governance, unlike its lending counterparts in the West, has a tendency to backfire. “The fact is that Chinese state-owned enterprises are a conduit for corruption in Africa,” he says.

China’s purported use of loans to secure strategic assets is similarly controversial—for both Zambians and Western governments eager to check China’s rising power. For the U.S. and its allies, this is especially true in maritime locations that are strategic to China’s expanding naval footprint. In an August letter to U.S. Treasury Secretary Steven Mnuchin, a bipartisan group of U.S. senators expressed concern over China’s “predatory infrastructure financing” and its attempt to “weaponize capital” in countries key to its alleged “String of Pearls” strategy in the Indo-Pacific. The letter highlighted China’s takeover of Sri Lanka’s Hambantota port and the possibility of similar acquisitions in Djibouti and Pakistan. Notably, it appears the U.S. will increasingly mimic China’s overseas investment strategy moving forward; the all-new International Development Finance Corporation, created as part of the BUILD Act passed by Congress in October, provides an initial $60 billion for both debt and equity investments in emerging markets.

China’s potential claims to assets in landlocked Zambia may be causing less alarm in the West, but in Zambia itself they’re at the crux of rising anti-Beijing sentiment. In the past year, ZESCO, the state electricity company, and ZNBC, the national broadcaster, have each created special purpose vehicles that give Chinese entities equity sakes in two hydroelectric power plants and a company tasked with digitizing Zambia’s airwaves, respectively. The London-based Africa Confidential reported in September that ZESCO was in talks with a Chinese firm about a takeover of the entire company—a claim that created a local media frenzy, and contributed to an atmosphere of distrust that helped fuel the rioting in Kitwe two months later. Zambia’s government called the reports a gross mischaracterization. Technically, its claims that it has not pledged any public assets as collateral on Chinese borrowing are correct. But Chinese state-owned companies are indeed slowly shearing off slices of Zambian state-owned firms, which does increase Beijing’s leverage over Lusaka.

To what extent, then, is Zambia actively ceding its own sovereignty? The answer may depend, in part, on the evolution of its debt—how deeply, in the coming years, it falls into distress, and whether it’s ultimately bailed out by the IMF, or China, or left alone to suffer the consequences of its ruling party’s recklessness.

For now, the first option—an IMF bailout—doesn’t look promising. After more than two years of stalled negotiations, the fund recalled its representative to Lusaka in August, reportedly at the request of the Zambian government, on the grounds he was “spreading negative talk” among donors.

A new $360 million terminal under construction at Kenneth Kaunda International Airport in Lusaka,
built by the state-owned China-Jianxi Corporation, with loans from China Exim Bank,
Nov. 4, 2018 (Photo by Jonathan W. Rosen).

Haabazoka, of the Economics Association of Zambia, believes that China will eventually come to the rescue—possibly by offering to restructure Zambia’s Eurobonds as part of a bid to prove its lending isn’t predatory. With so many countries in similar straits, however, others call this wishful thinking. Indermit Gill, a professor of public policy at Duke University and an expert in emerging market finance, cautions that China may become increasingly tight-fisted moving forward due to its own shrinking current account surplus and cooling domestic economy. While it could still step in to help Zambia and others avoid a crisis, he says, the best outcome for everyone, in the long run, might be to allow Africa’s debt-ridden economies to default. “The real issue here is that these countries, because their slates got wiped clean by past debt relief, were able to go back and borrow on the market,” he says. “If they somehow get bailed out again, it will create another massive moral hazard. In a sense, I think it could be good for them to have a good old-fashioned debt crisis.”

But the human cost of this across Africa would be high: rising unemployment, overburdened health sectors and the erasure of many gains made during the continent’s last decade and a half of robust growth. In Zambia, a deepening economic crisis would also entail more scapegoating of China. Following the Kitwe riots, the atmosphere in the Copperbelt remains tense. In late November, according to South Africa’s Financial Mail, a weekly magazine, Chinese road construction projects in the region were at a standstill. Many Chinese residents had reportedly left the country as tensions simmered.

Patriotic Front leaders, meanwhile, accuse opposition figures of stoking xenophobic sentiment. Lukuku, who compares China to Hitler on grounds that its “invasion of African markets” parallels the Nazi attempt to conquer Europe, denies this, saying he has nothing against the Chinese on a personal level. He even spent six months in China on a study tour, he says, and was well-received there as a foreigner. Still, his tone and language evoke comparisons to the nativist rhetoric of his favorite foreign leader, Donald Trump, whom he admires for standing up to China and contributing to “world peace and world justice.” He even proffers a seemingly “birtherism”-inspired conspiracy theory, common among opponents of Lungu, that the president was born in neighboring Malawi and should therefore be ineligible for office.

Zambia’s main opposition leader, Hakainde Hichilema, who was detained last year on treason charges, has also emerged as an outspoken China critic. Authorities charge that he deliberately stoked the Kitwe riots by spreading rumors of ZAFFICO’s sale and accuse him of sacrificing Zambia’s stability for political expedience. “When you discredit the Chinese you discredit our infrastructure development, which is the winning formula for any election in Africa,” says the Patriotic Front’s Chanda. “All this anti-China sentiment is just a scheme ahead of the 2021 elections.”

While Chanda may have a point—xenophobia, after all, has proven a winning political strategy elsewhere—the arguments of Zambia’s opposition are not without substance. Their growing Sino-skepticism is also shared by many ordinary citizens, though few agree to speak on the record because the topic is so touchy.

During a recent visit to the tree-lined campus of the University of Zambia, located on Lusaka’s outskirts, students were eager to discuss the killing of their peer, Vespers Shimuzhila, who died in her dormitory room following the October protests over unpaid meal allowances. They angrily recalled how police fired more than 10 tear gas canisters into her room, which eventually caught on fire. They also insisted that Shimuzhila’s death and the government’s deteriorating finances were linked, and that Zambia’s financial strain was undermining higher education and dampening their hopes for the future.

When the discussion turned to China, though, most preferred to remain silent. “The topic of China here is very sensitive,” one said. “You might comment, and then the next day you find you’re no longer enrolled as a student.”

Jonathan W. Rosen is a journalist reporting from Africa. His work has been published by National Geographic, The Atlantic, The New York Times and many other outlets.

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