LONDON SCHOOL OF ECONOMICS (LSE)
Africa’s development aspirations have always rested on the possibilities and policies inherent in achieving rapid industrialisation. Africans believe that key interventions in industrial policy would lay the foundation for sustained growth, business and job creation. In contemporary China, African policy makers seem to have found a development partner whose interests, experiences and capacities match these continental ambitions.
And yet, a decade after celebrating the rising tide of Chinese finance into neglected areas such as infrastructure and its preliminary investments into the manufacturing sector, the talk has shifted to China as an obstacle stymieing development possibilities through unwieldy debt obligations that shackle African economies. Cutting through these rhetorically charged debates it is clear that the role of Beijing as creditor puts it in an unprecedented conundrum. This is exacerbated by the deleterious effect of Covid-19 on African economies, threatening the continent’s progress towards achieving industrialisation.
Africa-China Industrialisation Plan
The Chinese contribution to African industrialisation has been twofold, focused on underwriting infrastructure development through loans and providing investment into labour-intensive industry. Starting in earnest in the early 2000s, these initiatives have led to a massive expansion in transportation networks, port facilities and telecommunications infrastructure across the continent. Concurrently, Chinese investments in manufacturing plants in a diversity of locations from Ethiopia, South Africa, Senegal to Nigeria, Rwanda and Kenya have opened up new possibilities for export earnings that tap both regional and international markets. The launching of the African Continental Free Trade Area (ACFTA) in 2019 is meant to build on these developments by providing a coherent policy framework that liberalised trade by lowering tariffs across the region. The clustering of production sites along infrastructure transportation networks as seen in Ethiopia’s industrial corridor and Kenya’s projected LAPSETT corridor exemplified the critical role played by Chinese-lending and construction in support of industrialisation.
Africa’s Debt Crisis 2.0 and the Covid-19 Threat
Unfortunately, as these policy initiatives were gathering steam, the prevailing conditions which sustained high rates of lending for infrastructure development and seeded industrial expansion changed dramatically. The fall in commodity prices starting in 2014 hurt Africa’s resource-dependent economies earnings and, at the same time, weakened its ability to meet dollar-denominated debt payments. While much Western media attention was given over to African debt to China, in fact debt obligations to Beijing are only deemed to be serious in Djibouti, Republic of Congo, Ethiopia, Kenya and Zambia. That being said, China is the leading bilateral lender in 32 of 40 African countries and has even surpassed the World Bank ($62 billion) as the top lender ($64 billion) to the continent. China has loaned upwards of $147 billion to African governments between 2000 and 2018, accounting for 20% of the continent’s obligations while multilateral debt stood at 35% and private debt at 32%. All of these factors had an ominous ring to those who remembered the commodity price collapse and subsequent debt crises in the 1980s which produced anaemic growth and chronic under-investment in Africa for two decades.
On top of these concerns, the onset of the Covid-19 virus in late 2019 produced a risible shock to the global economy. China’s effective shut down of economic activity for months was followed in close succession by countries in Asia, Europe and the Americas. These conditions accelerated a further collapse in commodity prices, even bringing oil prices briefly into negative territory, but more worrying were the longer-term trends for Africa and the global economy. By April, the International Monetary Fund (IMF) was predicting that African economies would contract by -1.6% in 2020 while the Eurozone countries were expected to shrink to -7.5% and even the once-dynamic Chinese economy down to 1.2%.
It was in these dire circumstances that African governments petitioned the G20 countries to suspend debt payments – or even cancel them outright. Securing their agreement on a moratorium on payments for 40 African countries until the end of 2020, African representatives sought further assurances that G20 countries would provide a $100 billion stimulus package for beleaguered African economies. Notably, this decision by the G20 on the debt moratorium included China as a founding member and was based on terms agreed by the Paris Club. However, a significant portion of Africa’s debt at this time – unlike the period of the first African debt crisis when the NGOs campaigned for debt cancellation resulting in the Highly Indebted Poor Countries (HIPC) initiative – is bilateral, non-concessionary or commercial in origin.
In this context, China’s bilateral debt stands out and its efforts to date have been limited to suspending no-interest loans which, while laudable, represent less than 5% of its total debt stock. The more contentious decisions regarding concessional and non-concessional loans owed by African governments to Chinese policy and commercial banks remain unaddressed. The World Bank has been quick to point out that, with less than $4 billion of the total $14 billion in bilateral debt held by Paris Club members, ‘it will be critical to have broad and equitable participation of all official bilateral creditors to make a difference’. Moreover, as an ECPDM report made clear:
“Without substantial debt negotiation with China and Africa’s other creditors (commercial and multilateral) or alternative ways of accessing finance suggested by the AU’s Group of Special Envoys, it is not clear how African countries can raise the more than US$100 billion they need to address the economic and health impact of COVID-19.”
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ASSOCIATE RESEARCH FELLOW – ISPI AFRICA PROGRAMME
Arica’s growing public debt had sparked a renewed global debate about debt sustainability on the continent well before the COVID-19 pandemic. Africa’s allegedly unsustainable indebtedness is largely owing to the emergence of China as a major financier of African infrastructure, resulting in a narrative that China is using debt to gain geopolitical leverage by trapping poor countries into unsustainable loans. Although most Chinese loans have targeted large financing gaps in the development of Africa’s transportation and energy infrastructure, managing this new role as Africa’s creditor poses unprecedented challenges for Beijing. This has become even more evident during the COVID-19 outbreak. What is the nature of African countries’ indebtedness? Is China luring the continent toward the so-called “debt trap”? Would it be possible to restructure Africa’s debt? And how? And what prospects for Africa’s development trajectories?
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China cancels African loans but those amount to less than 5% of overall debt…
Published: 6:00am, 20 Jun, 2020
A new report, “Debt Relief with Chinese Characteristics”, was released on Thursday, a day after Xi met African leaders and promised to help them fight coronavirus. The report by the China Africa Research Initiative (CARI) at the Johns Hopkins University School of Advanced International Studies said that although Beijing had cancelled debt in the past, those had mostly been zero-interest loans which only accounted for less than 5 per cent of Chinese loans advanced to Africa.
The study said China had cancelled interest-free loans amounting to US$3.4 billion in debt in Africa between 2000 and 2019. But China’s overall lending to Africa stood at US$152 billion worth of loan commitments between 2000 and 2018. The zero-interest loans come from China’s Ministry of Commerce as part of intergovernmental economic and technical cooperation agreements and average about US$10 million per loan, according to the study.
“In almost all of the countries where Chinese debt was cancelled – aside from high-profile cases in Iraq and Cuba – the cancelled debt was limited to mature, interest-free foreign aid loans that had gone into default,” Deborah Brautigam, a professor of international political economy and CARI founding director, said in the study.
Other authors of the report include Kevin Acker, a research manager at CARI and Yufan Huang, a research assistant at CARI.
Despite growing criticism from Western countries, especially from the administration of US President Donald Trump, that China’s lending to Africa was creating debt traps, CARI said it did “not see China attempting to take advantage of countries in debt distress”.
“There were no ‘asset seizures’ in the 16 restructuring cases that we found. We have not yet seen cases in Africa where Chinese banks or companies have sued sovereign governments or exercised the option for international arbitration standard in Chinese loan contracts,” the study noted.
The report also concluded that there was no evidence of penalties on arrears. However, Chinese lenders preferred to address restructuring quietly, on a bilateral basis, tailoring programmes to each situation.
“The lack of transparency fuels suspicion about Chinese intentions. These patterns are likely to play out as Chinese lenders and African borrowers grapple with the impact of Covid-19,” Brautigam and her team said.
In April, the Group of 20 (G20) – 19 major nations and the European Union – agreed to suspend debt payments until the end of the year for the world’s poorest countries. Last week, Beijing said it would delay loan repayments for 77 low-income countries, including those in Africa, as part of the G20 programme.
Besides cancelling interest-free loans for Africa, Xi also urged Chinese financial institutions such as the Export-Import Bank of China and the China Development Bank “to conduct consultations with African countries on commercial sovereign loan arrangements”.
The study, however, noted that the G20 deal only addressed bilateral creditors. Many low-income countries held substantial amounts from private creditors.Bondholders accounted for 31 per cent of public and publicly guaranteed debt, while China accounted for around 17 per cent, and the Paris Club – a group of creditor nations seeking to address debt problems among developing nations – only 5 per cent in Sub-Saharan Africa in 2017, according to the World Bank.
However, some countries such as Kenya have raised concerns that the G20 deal has restrictive clauses that bar them from taking up loans in the period the moratorium is in place.
Kenya said it was negotiating with China bilaterally for debt relief. By late last month, only 22 out of 77 eligible countries had started the G20 debt relief process.