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«      Working Paper Series            #2011-005 Assessment of Effectiveness of China Aid in Financing Development in Sudan  ...»

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We are aware of the fact that it would be interesting to benchmark the results on the Chinese aid projects against the non-Chinese aid projects implemented in Sudan. But due to practical problems related to inadequate availability of accurate and reliable data and information it is somewhat problematic to cover all these issues in this paper. So, we leave that for more in-depth future study when adequate, accurate and reliable data and information are available. Moreover, the focus on the role of China aid, loans and grants in financing development in Sudan is important in view of the fact that Sudan was not receiving aid from most traditional donors (except for emergency, and humanitarian, aid) during the period 1997-2007; but it became an oil exporter in 1999 and its economic relationship with China has intensified and as a result China become not only the major investors in Sudan's oil sector and main trade partner for Sudan but Although the 100 percent share being attributed to China in the indicators is questionable, but it is worthy noting that the 100% implies that the contribution and share in some indicators are completed attributed to Chinese aid, development assistance, loans and grants to the selected projects, whereas Sudan government and other donors have no contribution and share in some indicators. For instance, other Arab donors contributed to capital and finance only in Merowe dam, and they have no contribution in other selected projects. For all other seven selected projects, China is the only donor or partner contributed to implementation of these projects, in all of these seven selected projects. Because of the shortage of domestic capital these projects are either completely or largely financed by Chinese aid, development assistance, loans and grants.

Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 13 _______________________________________________________________________________________________________

also the major donor offering aid, development assistance, loans and grants to Sudan. Therefore, we limit our assessment and analysis in this paper to compare the key characteristics and features of Chinese aid, loans and grants offered for the implementation of the selected projects in Sudan over the period (1997-2007). The managers of the selected projects indicate several key characteristics and features of Chinese aid loans and grants offered for the implementation of the selected projects in Sudan over the period (1997-2007). We find that for instance, the Chinese aid is by nature of such contracts is characterized by being unconditioned (political), focused on developmental issues and committed to easy process (Merowe dam project). We find that different from other donors Chinese aid concentrates on comprehensive development issues to achieve multi purposes (e.g. Merowe Dam Project). Chinese aid not only significantly contributed to capital and finance but also significantly contributed to construction or implementation of civil works, provision of mechanical equipments, provision of human capital and capacity building by offering internal and external training for Sudanese. In addition, the Chinese are characterized by flexibility (Al Fula Power Plant project), offering acceptable prices and making equipments available (Dongla –Wadi Halfa Electricity project) and the Chinese machines, equipment and raw materials are characterized by being: cheapest, suitable and simple for maintenance (Elgaili - Garri 2 project). In addition, the Chinese is characterising by being the only partner completely financing the implementation of the project by offering fund in the form of grant (Merowe Karima Friendship project), in the form of loan (White Nile Grid Project) and in the form of loan focusing on partnership (50%) and based on mutual benefit or entirely commercial relations (Khartoum refinery project). In addition, the Chinese is characterising by being also the only source of raw materials and inputs used in the implementation of the project (White Nile Grid Project) and by offering facilitation of initiating the bridge project until completion (Merowe Karima Friendship project).

Our findings in this paper imply that the Chinese aid, loans and grants seem to be allocated or utilized in their targeted or assigned objectives for the implemented projects in Sudan. The Chinese aid, loans and grants offered to the selected projects are effective because they can be perceived as complementary to local resources to help infrastructure development "to close investment-saving gap". But the effectiveness of the Chinese aid, loans and grants offered to these projects is somewhat undermined by the Chinese conditionality of tied aid. For instance, our results find a link between the offer of the Chinese aid, development assistance, loans and grants upon satisfaction of specific conditionality requirements. For instance, in the opinion of the mangers of these projects, the Chinese aid, development assistance, loans and grants has been extremely importantly tied to trade in oil and export of Sudanese oil to China (75%), tied to the implementation of these projects by the Chinese companies (75%), tied to the purchase of machines, equipment and raw materials from China (88%), it is moderately tied to investment in oil (63%) and to utilization of Chinese inputs and labour (63%) and slightly tied to the purchase Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 14 _______________________________________________________________________________________________________





of other Chinese goods and services (38%)- See Table 7 below. Therefore, Our findings are consistent with the stylized facts in the literature which implies that the Chinese aid and development assistance to poor countries is also usually ‘tied’ to oil, purchase of the Chinese goods and services, generally by the Chinese companies, utilizing the Chinese inputs and labour, undermining the effectiveness of the Chinese aid to poor countries, this implies that China aid to Sudan is tied to trade, FDI and the importance of oil to Chinese economy.

–  –  –

Based on the above results of the positive impacts of the Chinese finance for all the selected projects, it is also useful to examine the negative impacts of the Chinese aid and loans to Sudan.

We limit our assessment of the negative impacts to available data on the negative impact of the increase in total loans and debt to Sudan as a result of the robust and increasing intensification of China and Sudan economic relations over the period (1997-2007). We find that the increase in the inflow of Chinese loans on the one hand, has some positive impacts by financing development projects in Sudan, but on the other hand, we realize that it has a negative impact by increasing Sudan external obligations and debts and therefore, undermines the effectiveness of Chinese aid to Sudan. Table 8 below shows the increase in Sudan's total debt and debt to China during the period (1999-2007), for instance, Sudan's total debt increased from US$ 8863099 in 1999 to US$ 8239843.371 in 2007. In particular, Sudan's debt to China increased from US$ 7738 in 1999 to US$ 1157697062 in 2007. The share of China in Sudan's total debt increased from 0.9% out of Sudan total debt in 1999 to 13.45% out of Sudan total debt in 2007. Hence, our results in this section confirm the second stylised fact which implies that China aid, development assistance, grants and loans caused mixed positive and negative impacts for Sudan during (1997

–  –  –

Apart from the debate on the mixed impacts of China aid, grants and loans to Sudan, we find that the robust and increasing intensification of China and Sudan economic relations implies opportunities for financing development in Sudan. In particular, despite a long period of economic sanctions, Sudan was able to grow thanks to special economic relations with China which relaxed the development finance constraint. From the perspective of the new approaches to financing development our findings from the case of Sudan imply that even when a country is facing binding political and economic sanctions, it can still be able to finance a high growth strategy if it is endowed with natural resources and a partner that is in need for such resources.

Furthermore, from the perspective of the new approaches to financing development our findings from the case of Sudan imply that the Chinese aid, loans and grants to the selected projects is effective because it goes beyond the conventional approach by focusing not only on humanitarian assistance and financial aspects but also offering new model of development by focusing also on sustainable development aspects. Therefore, China aid to selected projects can be perceived as complementary to local capital and resources that not only significantly contributed to capital and finance, but also significantly contributed to provision of human capital and capacity building by offering training and so enhancing sustainable developmental issues in Sudan.

6. Conclusion and Policy Recommendations This paper fills the gap in the Sudanese literature and discusses the effectiveness of Chinese aid, loans and grants for financing development in Sudan using new primary data collected through interviews at the micro (project) level in Sudan in 2009.

We verify the first stylised fact on the significance of China in financing development in Sudan as China's share increased greatly from 17% in 1999 to 73% in 2007 out of total loans and grants offered to Sudan. We confirm the second stylised fact that China aid, grants and loans offered to Sudan caused mixed positive-negative impacts; the positive impact is offering alternative complementary source of finance to complement domestic capital and financing development projects, the negative impact is increasing Sudan debts to China from 0.9% in 1999 to 13.45% in 2007out of Sudan total debts. We find that the effectiveness of China aid to Sudan is undermined by offering aid tied to trade, FDI and importance of oil to Chinese economy. We find that despite the recent global economic crisis the inflow of Chinese aid and development assistance continues to Sudan over the period (2008-2009), this implies that China has maintained offering tied aid to maintain its access to oil in Sudan.

We find that the robust and increasing intensification of China and Sudan economic relations imply opportunities for financing development in Sudan. In particular, despite a long period of economic sanctions, Sudan was able to grow thanks to special economic relations with China which relaxed the development finance constraint in Sudan. From the perspective of the Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 16 _______________________________________________________________________________________________________

new approaches to financing development our findings from the case of Sudan imply that even when a country is facing binding political and economic sanctions, it can still be able to finance a high growth strategy if it is endowed with natural resources and a partner that is in need for such resources. Furthermore, from the perspective of the new approaches to financing development our findings from the case of Sudan imply that the Chinese aid, loans and grants are effective because they go beyond the conventional approach by focusing not only on humanitarian assistance and financial aspects but also offering new model of development by focusing also on sustainable development aspects. Therefore, China aid to selected projects can be perceived as complementary to local capital and resources that not only significantly contributed to capital and finance, but also significantly contributed to provision of human capital and capacity building by offering training and so enhancing sustainable developmental issues in Sudan.

Based on our findings discussed above, the major policy recommendations include improving the effectiveness and increasing the benefits from the Chinese aid and development assistance to Sudan with priority given to financing particularly projects contributing to poverty reduction and sustainable and balanced development projects in Sudan. Further to putting special emphasis on capacity building, transfer of technology and knowledge. In addition to consideration of future sustainable debt level by reducing the potential risk of increasing Sudan's debt obligations and reducing contracting new Chinese commercial loans with large interest rate.

Further to reducing reliance on Chinese tied aid to Sudan, and encouraging China to confirm commitment to the Paris Declaration to cease from offering tied aid to Sudan. In addition to improve the institutional framework and arrangements to increase the benefit from Chinese aid, development assistance, loans and grants to Sudan.

Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 17 _______________________________________________________________________________________________________

References Abulagasim, S. A. (2007) "Sudanese Chinese economic Cooperation and its Impacts on Development of Electricity Sector in Sudan: the case study of Garri Electricity Project," Unpublished M.Sc. Research, Sudan Academy of Administrative Science, Development of Higher Level Fellowship Programme, batch 18, 2007.

Ali, A.A.G., Malwanda, C., and Sliman, Y. (1999) “Official development assistance to Africa:

An overview,” Journal of African Economies, vol. 8, no. 4: 504–27.

Alesina, A., and D. Dollar (2000): "Who Gives Foreign Aid to Whom and Why?” Journal of Economic Growth, 5 (1): 33-63.

Burnside,C., and Dollar, D. (1997) "Aid, Policies and Growth" Policy Research Working Paper No. 1777, the World Bank, Washington, D.C. 1997.

Cassen, R et al. (1986), "Does Aid Work?" Clarendon Press, Oxford.

El-Sayed, O. I. (1998) " Chapter 8: Loans and Foreign Aid" in Sudan Economy, Second Edition, pp. 395-418.

Griffin, K. (1970) “Foreign capital, domestic savings and economic development”. Oxford Bulletin of Economics and Statistics, vol. 55: 99–112.

Hansen, H. and Tarp, F. (2000) "Aid Effectiveness Disputed". In Tarp, F. (Ed.) (2000)"Foreign Aid and Development: Lessons Learned and Directions for the Future," Routledge London and New York.

Mavrotas, G.and McGillivray, M. (Eds.) (January 2009) "Development Aid: A Fresh Look", Palgrave Macmillan Studies in Development Economics and Policy.



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