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The Flip Side of Foreign Investment in Sub-Saharan Africa

Sub-Saharan Africa is caught in the crossfires of an increasing hostile geopolitical standoff. In the West, the United States and the European Union have introduced new initiatives aimed at growing foreign direct investment (FDI) in the region, including the US’s African Growth and Opportunity Act and the EU’s Global Gateway initiative. Meanwhile, these measures come in direct competition with China’s expanding influence in the sub-continent over the last decade, with the Eastern power spending up to $1 trillion on its Belt and Road Initiative, mainly through granting loans and investment for infrastructure projects. As for sub-Saharan Africa itself, however, the desire to boost incomes and standards of living in the impoverished region has at times both benefited from and been handicapped by a growing dual for global power.

On the one hand, competition between the two sides’ investment packages would undoubtedly yield some benefit for the sub-Saharan African region that such packages are attempting to cater to. In Ethiopia, for example, China is currently building up to 70 percent of the African country’s roads, while the IMF recently issued Senegal a $1.8 billion loan to help counteract vital issues such as terrorism and climate change. In total, FDI in Africa as a whole reached a new height of $83 billion in 2021, with such investment being allotted towards real-world problems that may strongly benefit the region’s standard of living. Furthermore, competition between the West and China has led to the latter charging sizably lower interest rates and much more favorable terms to developing economies than the more profit-responsive West would, granting many sub-Saharan countries access to investments that they otherwise wouldn’t have been able to afford. Just as competition between producers usually ends up benefitting the consumer, it’s plausible to assume the same is the case when the producers of investment are East and West, and the consumer is sub-Saharan Africa. Nonetheless, while growing foreign investment may sound like a surefire way to success in the short-term, they may have ended up more or less hurting the subcontinent in the long run by burying it in debt.

That’s because generous foreign investments in Africa often failed to generate sufficient returns in tax revenue to pay back these loans, leaving the impoverished borrowing country indebted to the lending country, which recurrently tended to be China under its Belt and Road Initiative (BRI). In Djibouti, for example, the BRI saw foreign inflows of up to 75 percent of Djibouti’s GDP in infrastructure investment, yet in the process has grown the developing country’s external debt share of GDP from 50 percent to 85 percent. The same process can be seen in other sub-Saharan African countries: China now owns 72 percent of Kenya’s external debt, and has amassed 30 percent of Ethiopia’s newly issued external debt. This doesn’t, however, excuse the West in the process. Among the IMF’s ten largest debtors includes four sub-Saharan African countries: Angola, South Africa, Nigeria, and the Ivory Coast. In fact, the Debt Justice organization estimates that Western private lenders own up to three times as much external debt in Africa than China does, although China’s newfound title as Africa’s largest bilateral lender should close the gap between the two percentages insofar as it further lends under lofty terms.

In total, sub-Saharan Africa’s external debt, as a share of its GDP, has grown from a little over 11 percent in 2010 to over 24 percent in 2022. 21 countries in the entire continent are in or are at risk of “debt distress,” and Africa owes over $640 billion to external creditors as of 2021. Of course, not all investments are created equal, and some funding opportunities in sub-Saharan Africa may certainly have proven much more profitable than others. Nonetheless, growing foreign investment in the region is at least worthy of a second glance: behind the headlines of generous payments and loans from wealthy nations lies the need for developing countries to pay them back, an arduous task that may be doing sub-Saharan Africa as much harm as good.


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