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Monday, July 7th, 2014

China’s Heavy Investment in Ghana Ignites Debate

China’s growing interest in Africa has resulted in huge capital flows into the continent. From multibillion-dollar investments in oil and minerals, to the influx of thousands of merchants, laborers and cheap consumer goods, China’s economic and political reach is redefining Africa’s traditional ties with the international community.

China’s trade with Ghana has now eclipsed that of the U.S., one of Ghana’s principal trading partners. However, widespread illegal gold mining activities by Chinese merchants and businessmen in Ghana have drawn media attention and ignited debate about China’s heavy investments and growing interest in Ghana. The nature of Chinese investments with Ghana does not favor Ghana’s industrialization in terms of both capacity and jobs.

This CAI paper investigates the emerging economic relationship between China and Ghana to determine if this engagement is creating a shared prosperity for both countries.

The genesis of Sino-Ghanaian relations

Relations between Ghana and China date back to 1960 when the two countries first established diplomatic contact. Since then Ghana has provided substantial diplomatic support to China, which China reciprocated with material financial support for Ghana’s development.

For instance, Ghana’s first President, Kwame Nkrumah, lobbied for the People’s Republic of China’s reinstatement in the United Nations (UN) and also supported China during the China-India war in 1962. The countries have had growing diplomatic and economic relations ever since. For much of the last century, Ghana relied heavily on commodities for foreign exchange, but it was from 2000 that China’s interest in Ghana in terms of investments and trade grew strongly, alongside China’s quest for natural resources to feed economic growth.

Chinese loans and grants

According to Fitch Ratings, China’s Export-Import (ExIm) Bank lent $67.2 billion to Sub-Saharan Africa between 2001 and 2010, overtaking the World Bank’s lending of  $54.7 billion. China handed out $7 billion in grants to more than 30 countries in Africa as its quest for natural resources has come in exchange for building roads and railways, and nurturing a market for Chinese products.

Ghana’s discovery of oil in commercial quantities in June 2007 has further rekindled investor enthusiasm in the country. In 2010, Ghana signed a series of multibillion dollar deals with China to finance infrastructure projects and transform its economy through gas and proposed oil-driven industrialization. The Ghanaian government signed a total of $13 billion in agreements with the China Development Bank and the China ExIm Bank, representing 33 percent of Ghana’s gross domestic product (GDP) in 2012. The deals included a $3 billion China Development Bank facility for the Western Corridor gas commercialization project, a $9 billion deal with the China ExIm Bank for road, railway and dam projects, and a $250 million deal for rehabilitation of the Kpong water works.

But are the terms and conditions of these Chinese loans good for Ghana’s industrialization? According to a report released by the United States (US) Government Accountability Office, Chinese firms and materials are to make up about 60 percent of the content used under these agreements, which will be bid competitively among Chinese firms. Even though the report further indicated that Ghanaian workers constitute the majority of labour hired by Chinese contractors under these projects, local contractors and manufacturers are hugely sidelined, a condition which cripples their global competitiveness and also undermines the purpose for contracting these loans. Chinese companies are involved in sectors such as agriculture, construction, energy, fishing, manufacturing, and telecommunications.

There are questions about whether Ghana can afford to service so much Chinese lending. Ghana recently benefited from a debt relief program under the Highly Indebted Poor Countries (HIPC) initiative of the International Monetary Fund (IMF) and the World Bank. According to the IMF, huge soft loans from China deepen worries that progress made under the HIPC initiative may be eroded, and increase corruption among public officials. Ghana’s total public debt at the end of December 2012, stood at $18.8 billion, equivalent to 49.4 percent of GDP, and up from $ 15.4 billion at the end of 2011. The IMF and the UK have rightly warned that cheap Chinese loans to African governments may undermine efforts towards democratic and accountable administrations, and risk driving countries that have only recently benefited from debt relief back into debt. Ghana has not been able to stay out of debt, despite HIPC interventions and heavy US investments in the country.

Read the rest of this article on Ghana Web

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