Africa has a question for Beijing: will you forgive us our debt?

LAGOS  (Capital Markets in Africa) — Chinese state banks have poured billions into the continent as part of the controversial belt and road infrastructure scheme. But it is unclear how Beijing will respond to calls for debt relief amid the economic fallout from the Covid-19 pandemic.

African states expect a devastating impact on their economies this year from the Covid-19 pandemic and are appealing for relief from repayments on billions of dollars in outstanding debt to cope. Most of those appeals involve China, the biggest lender to the continent, but it is unclear how Beijing will respond.

Angola, Zambia, Sudan and the Republic of Congo (Brazzaville) are among those seeking relief, arguing they need to reallocate funds to health care and equipping hospitals to fight the coronavirus, which has infected over 3.5 million people worldwide. Africa was largely spared in the early days of the outbreak, but cases as of Sunday had jumped to more than 44,000 and 1,771 dead.

Yun Sun, a fellow with the Africa Growth Initiative at the Brookings Institution in Washington, said Beijing was unlikely to take a unilateral approach to debt forgiveness.

“Rather than outright relief, postponement of loan payments, debt restructuring, and debt/equity swap are more likely in China’s playbook,” said Sun, who is also co-director of the East Asia programme and director of the China programme at the Stimson Centre. She said the most likely loans to be forgiven would be zero-interest ones.

As the virus itself starts to spread further on the continent, the economic havoc it has caused elsewhere in the world has already hammered African economies.

The plunge in oil prices hit producers such as Angola, Nigeria, the Republic of Congo, Equatorial Guinea and South Sudan, while tourism-dependent nations such as the Seychelles and Mauritius face recessions. Zambia, Botswana, the Democratic Republic of Congo, South Africa and Zimbabwe are all counting the cost of a drop in demand for commodities they produce.

On March 26, African nations called for a US$100 billion rescue package, including a US$44 billion debt write-off, from the Group of 20 largest economies, which includes China. The World Bank estimates that Africa in 2018 had a total debt of US$584.3 billion to outside lenders.

So far, the International Monetary Fund has approved US$500 million to suspend debt repayments for six months in 25 countries, 19 of them in Africa. In mid-April, the G20 agreed to a moratorium on bilateral loan payments by low-income economies.

When asked how it would treat loans to African countries, China’s embassy in Nairobi referred to a statement on April 16 by foreign ministry spokesman Zhao Lijian.

“China will, in accordance with the consensus of the G20 on debt relief, help the poorest countries concentrate their efforts on fighting the epidemic and supporting economic and social development,” he said in the statement.

Scott Morris, a senior fellow at the Centre for Global Development think tank in Washington, said Beijing needed to take a leading role in the debt talks, noting the G20 agreement depended critically on China’s participation, given its leading creditor role.

“It is good news that the basic commitment articulated in the G20 statement has China’s support,” Morris said, but added that Beijing’s approach to the moratorium itself “is a bit uncertain” along with key details such as which categories of loans would be included. Tt standstill arrangement was a precursor to more difficult discussions around deeper debt relief, where some write-downs of debt in Africa and elsewhere would almost certainly be necessary, he said.

In April, the IMF projected that Sub-Saharan Africa’s economic growth would contract by 1.6 per cent this year, the worst reading in 50 years, as countries imposed lockdowns, curfews and border closures to contain the spread of Covid-19.

Jibran Qureishi, regional economist for East Africa with South Africa’s Standard Bank, said China would likely provide debt relief to African nations because of broader considerations.
“Beijing for political reasons would want to be flexible and I don’t think they would want to lose influence in Africa,” Qureishi said.

French President Emmanuel Macron on April 15 added his voice to the call for debt relief from China for African countries, telling Radio France Internationale, “I do not doubt that Chinese President Xi Jinping will make a major gesture”, whether to substantially reduce or cancel African debts.

China does not publish its overseas lending data, but figures from the China Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies in Washington indicate the country advanced more than US$143 billion to 49 African governments and their state-owned companies between 2000 and 2017.

London-based Jubilee Debt Campaign, which is pushing for loans to the poorest countries to be cancelled, estimates China holds about a fifth of the total debt in Africa.

Beijing has poured billions into the continent over the past decade as part of its Belt and Road Initiative, building motorways, ports, dams and railways as part of efforts to expand its trading links, and influence, around the globe.

A number of governments, mostly in the West, have criticised the belt and road scheme as creating debt traps for developing economies.

On April 22, a group of US Senators, including China critic Ted Cruz, wrote to Secretary of State Mike Pompeo and Secretary of the Treasury Steven Mnuchin, saying additional IMF and World Bank support for economies hit by Covid-19 and holding belt and road debt must not result in a situation where “the US and other Western taxpayers would be in essence bailing out Chinese financial institutions and enabling China’s debt-trap diplomacy”.

Beijing has in the past dismissed such debt-trap allegations as baseless, saying it is helping Africa grow while other countries are abandoning the continent.

Angola holds about 30 per cent (US$43.15 billion) of the total debt owed to China in Africa. The oil-rich nation sells about two-thirds of its crude oil to China, but with lower oil prices, the country will be forced to pump more to repay loans. The country’s official external debt stood at US$58 billion last year and is expected to jump to US$85.4 billion this year, according to the IMF.

The other top destinations for Chinese loans in Africa include Ethiopia (US$13.8 billion), Kenya (US$8.9 billion), Zambia (US$8.6 billion) and Sudan (US$6.5 billion) – all extended between 2000 and 2017.

Morris at the Centre for Global Development said China’s historical approach to restructuring debt had been ad hoc, working through foreign policy channels to pursue debt rescheduling or debt reductions depending on the country and type of loan.

He said this approach would doom any multilateral effort, where collective action calls for common rules of the road.

In the past, China has mostly canceled interest-free loans that had reached maturity, but this makeup less than 5 percent of Africa’s outstanding debt to China, according to Deborah Brautigam, a professor of international political economy at the Johns Hopkins School of Advanced International Studies.

Interest-free loans from China’s government were smaller in size and they were not managed by policy banks or state-owned commercial banks, said Bradley Parks, executive director of AidData, a research lab at the College of William and Mary in the US state of Virginia.

They were directly overseen by the central government -through the Ministry of Commerce – and Beijing had previously forgiven these types of debts “en masse”, Parks said.

China in 2018 canceled US$78 million owed by Cameroon, Botswana’s US$7.2 million, and US$10.6 million owed by Lesotho. The previous year it canceled US$160 million owed by Sudan. Last year, it restructured debt owed by Congo-Brazzaville, helping the country unlock US$449 million in additional loans from the IMF.

But Parks said most of the debt African countries owed to China was related to concessional and commercial loans from Beijing’s so-called policy banks – China Eximbank and China Development Bank – and state-owned commercial banks.

“These banks are laser-focused on getting repaid – with interest. They almost never forgive loans, although they will consider easing repayment terms on a case-by-case basis,” Parks said. “It’s very unlikely that these banks will issue a blanket waiver on loan repayments for all African borrowers”.

Africa’s debt had taken on a geopolitical significance and there was much political capital at stake, said Martyn Davies, managing director for emerging markets and Africa at Deloitte & Touche in Johannesburg, South Africa.

“The vacuum left by Western countries – a disengaging United States and an increasingly inwardly focused EU – will allow China to increase its standing in the region,” he said.

“I do think, however, that there will be greater sensitivity and awareness to risk from China’s policy banks through its [Belt and Road] lending practices.”

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Source: South China Morning Post