Getting out of the Chinese debt trap
The world’s poorest countries – including many in Africa – will face $35 billion in debt service payments in 2022. According to the World Bank, about 40% of that total is owed to China.
Across the African continent, the economic impacts of the coronavirus pandemic have increased rates of extreme poverty and inequality. Since the beginning of 2022, the situation has worsened further, due to the ripple effects of soaring inflation and interest rates following the Russian invasion of Ukraine. Fuel and food shortages have driven prices up. Urban unrest is on the rise and African governments are having to make tough economic choices as their budgets get tighter.
Across the continent, progress towards the United Nations Sustainable Development Goals is in jeopardy, and low- and lower-middle-income African governments that do not produce energy are struggling to repay their loans.
During the Covid pandemic, the G20 has assisted 31 of the 36 eligible African countries with its Debt Service Suspension Initiative (DSSI). Created in May 2020, the DSSI has helped countries focus their resources on fighting the pandemic and saving the lives and livelihoods of millions of the most vulnerable people before it expires at the end of 2021. Starting in 2022, it was replaced by the G20 Common Framework for Debt Treatment.
As the world’s second largest economy after the United States and the main lender for many African states, China has an important role to play in such initiatives. Beijing is still trying to keep a low profile and renegotiate its terms on a bilateral basis – although it backed Angola’s early call for G20 action on an initiative that would fulfill what the DSSI has provided. The challenge is to encourage more consistency and confidence in such initiatives, as Chinese officials view them as too Western.
China’s loans to Africa peaked in 2016
Contemporary views on Chinese lending to Africa remain colored by the rapid expansion of Chinese finance from the early 2000s to resource-rich African states, and oil producers in particular. The reality is that much of China’s lending has evolved and is neither inherently predatory nor problematic for African partners – and China increasingly prefers to do business with states it considers better managed. .
In fact, as commodity prices and growth rates declined from 2015, Chinese lending to Africa fell dramatically, from a peak of $29.5 billion in 2016 to 7, $6 billion in 2019. The socio-economic impact of the pandemic has worsened this situation.
If China has drawn criticism, it is often due to a lack of transparency in its investments, particularly those in Kenya and Zambia. This reputation has not been helped by the opaque loan agreements imposed by China’s state-owned banks, forcing borrowers to repay them first. This could lead to cuts in key areas of social spending, with direct impacts on African communities.
Over the past two decades, Chinese finance has contributed to an infrastructure boom in many African countries. Angola, for example, was able to undertake rapid reconstruction of its infrastructure after the conflict, with the construction of new roads and bridges across the country. New financing models are being developed: in Kenya, the new Nairobi highway was built using a $600 million build-operate-transfer model that sees ownership revert to the national government after a concession period 30 years old.
Chinese companies have helped African countries build and upgrade more than 10,000 km of railways, about 100,000 km of highways, 1,000 bridges and 100 ports, as well as power plants, hospitals and schools.
China’s involvement in African debt has varied considerably from country to country and over time. Although in recent years this involvement has been framed in the context of the Belt and Road Initiative, it has been mostly uncoordinated and unplanned, with credit being offered by competing lenders with ties to different elements of the Chinese state.
In recent years, amid reports of the poor quality of some of China’s past loans, authorities in Beijing have sought to better control new development loans and have imposed new sustainability requirements. At the same time, African countries have sought to diversify their sources of supply for infrastructure contracts beyond China. Loans are now generally given on a smaller, more manageable scale.
With the introduction of its Global Development Initiative in September 2021, there are signs that China is moving towards a “new development paradigm”, emphasizing the provision of foreign direct investment flows rather than loans and emphasizing support for small and medium-sized enterprises. enterprises, investments in human capital and green development.
A paper drawing on the expertise of Chatham House experts in Africa, Asia and global economics and finance will be released ahead of the G20 summit in Bali in November 2022. It examines seven African countries the World Bank considered in 2020 as being the most over-indebted or at risk of over-indebtedness due to their Chinese stock – Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia, Kenya and Zambia. Two countries – Ivory Coast and South Africa – have received new loans from China and are not in trouble.
The document observes that a lack of transparency about the nature of the terms agreed upon by these African governments has led to intense domestic criticism and international accusations that China seeks to control strategic assets.
In fact, in Angola and Zambia, China may have accidentally fallen into its own debt trap in excessive and uncoordinated loans.
Zambia has become the first pandemic-era defaulter of 2020 and is seeking relief from $17 billion in external debt. Following the holding of general elections in August 2022, Angola and Kenya will also seek additional debt relief, but both may also seek more funds from the private commercial market due to the slow progress of the G20 Common Framework, which is flagged as a concern by China.
The seven countries most indebted to China are actively seeking to reduce this financial dependence on Beijing in the future.
China has a central role to play in finding effective solutions to the over-indebtedness of these and other African countries. Improved coordination and cooperation among creditors in China and other parts of the world could enhance the positive impact of multilateral initiatives, such as the Common Framework, which aims to bring China and India to the negotiating table alongside the IMF, the Paris Club group of creditor countries and private creditors.
So far, Chad, Ethiopia and Zambia are the only African countries to have signed on to the framework since its launch in 2020. Although China is wary of the IMF, if African states collectively encourage Beijing to commit under the common framework, it could be improved to provide debt relief to African countries that are having difficulty repaying their loans.