Will China create another African debt crisis?
After more than a decade of unprecedented growth in Chinese finance, Africans are increasingly concerned about rising debt levels.
Oleg Elkov – iStock / Getty
This is the 106th article in the series The Chronicles of China.
Read the articles here.
Before the “Africa Rising” narrative gained traction, the debt crisis in Africa was one of the main topics in development economics. In the 1980s, most African countries were in an unsustainable debt situation. According to economists Joshua Greene and Mohsin Khan, Africa’s total external debt has risen from $ 8 billion in 1970 to $ 174 billion at the end of 1987. As a share of exports of goods and services, Africa’s debt has grown from 73% in 1970 to 322% in 1987. In the mid-1990s, the international community felt the need for a coordinated approach to Africa’s debt problems, and the International Monetary Fund (IMF) and the World Bank launched the Poor Countries Initiative heavily indebted (HIPC) to reduce external public debt. debt of poor countries. Africa’s debt burden was a major obstacle to economic development and poverty reduction.
Faced with rising commodity prices and China’s growing demand for commodities, most African countries experienced a turnaround from the early 2000s. This was the start of the “Africa Rising” story. While Western scholars and media have always been skeptical of China’s growing footprint in Africa, it was hard to ignore the impact of Chinese trade, investment and financial flows on African economies. China has become the largest market, source, investor, builder and donor for Africa. In one of his reports, the The World Bank has also recognized the massive development the opportunity that Chinese infrastructure financing offered to African countries. Chinese infrastructure in Africa was largely financed by loans from the Chinese EXIM Bank or the Development Bank of China, often known as “infrastructure for resources” loans because they were tied to exports of China. resources. Countries like the Democratic Republic of the Congo and Angola, which were rebuilding after a long civil war, have welcomed Chinese finance due to their inability to mobilize resources for reconstruction from Western financial institutions. Chinese loans have helped finance railways, airports, roads, bridges, energy infrastructure, football stadiums, hospitals, presidential residences, etc. in most African countries. China has also invaded Africa as part of its Belt and Road Initiative (BRI). So far, 49 African countries have signed memoranda of understanding with the Chinese government.
After more than a decade of unprecedented growth in Chinese finance, Africans are increasingly concerned about rising debt levels. Chinese foreign loans to African countries swelled, but there was very little data on the actual amount of loans and the terms on which those loans were made. As a result, there are few scholarships on Chinese Overseas Loans. According to the China Africa Research Initiative database, which tracks China’s loan commitments, the Chinese government, banks and entrepreneurs have signed loan commitments worth 148 billion dollars with African governments and their public enterprises. Angola is the largest recipient of Chinese loans, with US $ 43 billion loan commitments signed over 18 years. China is one of the top bilateral lenders in 32 African countries and has overtaken the World Bank as the continent’s top lender. Researchers like Horn, Reinhart and Trebesch say that a substantial portion of China’s overseas lending goes unreported and that China’s “hidden” debt problem is particularly severe in a handful of neighboring Asian countries and resource-rich African countries. This type of opacity poses immense threats to African countries, which generally have weak institutions and poor governance structures.
China is accused of providing unsustainable loans to unprofitable infrastructure projects in Africa to trap them in debt. According to analysts like Christoph Trebesch, African governments will remain in debt to China for decades and a series of defaults will occur in the future. Africans are also less enthusiastic about engaging with China today. Unlike in the past, African governments are more skeptical of Chinese money, and some are even renegotiating the terms of past agreements. For example, the President of Tanzania, John Magafuli, severely criticized his predecessor for accepting China’s unfavorable terms and canceled the US $ 10 billion loan for the construction of a port at Mbegani Creek in Bagamayo. Many activists in Kenya, Zambia, Tanzania and Nigeria are questioning the terms of Chinese loans and demanding disclosure of credit terms. Angola, once the star child of Chinese oil-for-infrastructure loans, now faces unsustainable external debt. Falling oil prices have further exacerbated Angola’s vulnerabilities. Estimates suggest that Angola owes China more than $ 20 billion and that the country recently renegotiated its loans with China, but as is usual Chinese practice, details of the renegotiation have not been released. made public.
While some academics like Deborah Brautigam have argued that the problems associated with Chinese loans in Africa are overblown and that it may not be difficult for African countries to get debt relief from China, it is clear that China’s lending practices are unfavorable for most African countries. The loan process is not transparent. As a result, Chinese loans escape public scrutiny. In many cases, even the exact loan amount is not known. Given the weak negotiating capacities of most African governments, many African countries are now stuck in long-term loans on unfavorable terms. Some of the projects financed by Chinese loans also did not generate sufficient returns.
Sino-African relations are at a crossroads. Until recently, China was seen as a friendly country that was willing to share its development experience with African countries and help Africa’s economic transformation through infrastructure development. However, now most African governments have doubts about Chinese loans. As observed above, many African countries are heavily indebted to China and the burden of their debt has the potential to completely derail their development trajectories and push the continent into deeper poverty. Most African countries were severely affected by the fall in commodity prices in 2014, but the recession induced by the COVID-19 pandemic pushed it into its first recession in 25 years. The World Bank estimates a -3.3 percent growth in sub-Saharan Africa. Will this be the end of Sino-African bonhomie or will China grant massive debt relief to Africa? As part of the G20 Debt Service Suspension Initiative, China suspended principal repayments and interest payments for 40 countries in sub-Saharan Africa from May 1, 2020 to December 2020. Countries like the ‘Angola, who have borrowed heavily from the China Development Bank on commercial terms, derived a lot from this and are negotiating with China bilaterally. African countries need greater and longer-term debt relief from China to survive the socio-economic consequences of the pandemic.
As Africa faces a new debt crisis and associated development challenges, China is in an advantageous position. It has the potential to leverage its power over indebted African countries. But in doing so, he runs the risk of further damaging his global profile at a time when the country is under criticism for its inability to report the COVID-19 pandemic and its military attack on India in the midst of a pandemic. Many countries are also slowly trying to diversify their supply chains to reduce their dependence on China. At this point, would China allow a further deterioration of its global image by creating another African debt crisis or will it give up or restructure its loans to Africa? Given that Chinese loans to Africa pose less of a threat to China’s economic health, and given the immense human costs of the previous episode of the African debt crisis, the latter seems more likely.