China’s African debt cancellation is not about refinancing
In mid-August, the Chinese Foreign Ministry made the news with a announcement series. Wang Yi, Beijing’s top diplomat, has promised major debt relief for some of the world’s poorest countries. The announcement was made at the ministerial meeting of Forum for China-Africa Cooperation.
Besides increasing food aid to the mainland, Wang pledged to no longer demand a refund concessional loans which in the recent past had come due but which 17 African states had failed to repay.
Outstanding loan balances issued primarily by the Chinese Ministry of Commerce (or, less frequently, the Export-Import Bank of China) should therefore be canceled.
Details on beneficiaries and lines of credit have yet to be released. But from an African perspective, it was good news – if somewhat expected.
Wang’s proclamation was timely given the growing sense of impending debt crisis which threatens many developing countries. This includes a number on the African continent. The combined private and public external debt of African states increased more than fivefold between 2000 and 2020. Chinese public and private lenders counted for 12% of the continent’s $696 billion external debt in 2020.
That of the mainland average debt-to-GDP ratios exceeded 50% before the pandemic. The African Development Bank’s latest African Economic Outlook forecasts that Africa debt to GDP ratio at 70% this year. In February 2022, 23 African countries were either in debt distress or at risk of being so.
The recent economic crisis and the reversal of the Regime of the Rajapaksa family in Sri Lanka shaken countries from Ghana to South Africa. The events have fueled fears that panicked markets will then question the creditworthiness of African sovereigns.
Ghana and South Africa are particularly worried about a vicious circle of downgrades by rating agencies and growing trade imbalances. Other fears include worsening pressures on national currencies and the chances that bondholders will seek to exit African markets. These would accelerate financial instability.
Africa will accept whatever assistance it can obtain in such circumstances.
The last time China canceled debt in Africa, at the end of 2020, it canceled US$113 million for various countries. This underscores the need not to overdo debt cancellation.
Beijing’s announcement was already largely integrated into the strategy of many African central banks. Chinese interest-free loans are frequently cancelled. And it is widely believed that when China extends such lines of credit, they are rarely fully repaid.
Beijing was certainly not counting on countries like Burundi, Congo or Mozambique to service these debts. And he has regularly rescheduled billions of loans to African sovereigns over the past 20 years.
Furthermore, the impact of China’s latest decision on Africa’s overall debt profile should be limited. Beijing’s gesture will not reduce the rise in sovereign rates (bond interest). Nor will it alleviate the downward pressure on exchange rates that so many African states have been under. lived last year.
This does not mean, however, that Wang Yi’s wishes were unworthy. For some countries, this series of Chinese cancellations could have an impact. Most of Africa’s debts to China are owed by five states: Angola, Ethiopia, Kenya, Nigeria and Zambia. Any removal of outstanding balances could usefully help rebalance their liabilities away from overreliance on Beijing.
For Africa’s poorest countries – say, Madagascar or Niger – cancellations of even US$50 million would make a significant difference in their ability to pay for basic services.
But overall, the political significance of the latest developments is likely to outweigh their financial impact.
This is poignantly illustrated by the fact that Beijing’s debt relief proposals were accompanied with great fanfare, unlike previous cancellations. This reflects the pressure that China feels it is under in the international debt debate.
The Trump administration has accused China of tricking developing countries into extending credit to debtors that Beijing knows lack the creditworthiness to repay them. As then-Vice President Mike Pence Put the in 2018
China is using so-called “debt diplomacy” to expand its influence…offering hundreds of billions of dollars in infrastructure loans to governments from Asia to Africa to Europe and even India. Latin America.
Such “debt traps” are deliberately created so that China can force poor African states to vote with it in the UN General Assembly, support its positions on Taiwan, or acquire valuable real estate in Africa that can be converted into military bases. Or so the narrative goes.
The Biden administration has been less direct in its allegations of Chinese debt trap diplomacy. But it too has put Beijing on the defensive, accusing it of hold African states on a barrel through its creditor power.
In addition, World Bank and International Monetary Fund Flagship Initiatives have been heavily influenced by allegations about China’s encouragement of parallel public finance accounting and his reluctance to accept Paris Club conventions to facilitate debt restructuring.
Despite the fact that African debts to private creditors – especially bondholders – have grew much faster over the past decade than the debts owed to Beijing, the international perception is of singular Chinese intransigence in helping to resolve Africa’s resurgent indebtedness.
Beijing tries to push back
China’s public relations problem therefore has real-world consequences and leaves it in a dilemma. Although Foreign Minister Wang sentenced a “zero-sum Cold War mentality” in his comments accompanying promised debt relief for 17 African countries, his rebuttal was also clearly intended to score geopolitical gains.
His desire to get China out of the defensive position it finds itself in has also shown itself in Beijing. recent concessions to help Zambia, a recurring defaulter restructure its liabilities. Chinese concessions played a key role in obtaining a debt agreement for zambia it potentially sets a precedent for how Beijing could work with other lenders on similar aid for other countries. The Zambian agreement was concluded under the G20 Common Framework for Debt Treatmentwhich also requires an International Monetary Fund program to receive effective relief.
This mix of concessions and denials is contextualized by the fact that the sense of inevitable Chinese ascendancy that in recent decades has accompanied Beijing’s overtures to the mainland has waned somewhat in recent years. Downgrading the ambitions of Xi Jinping’s Belt and Road Initiative (including greatly reduced lines of credit for African States as Beijing prioritizes national goals) has puzzled many on the mainland.
So did the previous decision to allocate only $10 billion in Special Drawing Rights to Africa through the International Monetary Fund, while China has little obvious use for its $38 billion quota.
Ignoring African Priorities
Wang Yi’s announcement to cancel loan balances that would likely not be fully repaid anyway thus appears at this time to be a low-cost political move for China to reaffirm its deep ties with the African sovereigns and to emphasize mutual goodwill. In the short term, that might be the case.
But fundamentally, Beijing’s decision does little to change Africa’s growing indebtedness. Amid the geopolitical posturing of China and the United States, there are still few signs that world powers or international financial institutions will finally come to grips with the systemic drivers of African debt resurgence. In this sense, China’s recent announcement is, unfortunately, business as usual.