OPINION: How should China manage Africa’s “debt bomb"?
Among the regions affected by Covid-19, Africa happens to be one of the lesser-affected continents. Incomplete statistics show there are more than 40,000 confirmed cases in African countries, a startling difference compared to the 1.26 million cases and 200,000 cases reported in the United States and many European countries, though this may be attributed to poor screening capabilities in Africa. That said, Africa was not spared from the economic shocks caused by the pandemic. Due to how underdeveloped its economic strength, industrial structure, and healthcare standards are compared to developed countries, they are severely hit when the effects of the global economy kick in.
In early April, United Nations Economic Commission for Africa estimated the country’s GDP growth to fall from 3.2% to 2% under the impact of the Covid-19 pandemic this year, and the losses of major oil-producing countries in Africa may be as high as US$ 65 billion. Furthermore, African Union predicts the total overseas direct investment of African countries will fall by 15%, while total value of imports and exports will fall by 35%. Nearly 20 million people will be unemployed. The African governments’ income is an even more concerning issue, with governments expected to experience a 20% to 30% loss, or US$ 500 billion. Among them, the oil-producing countries were the most affected. Take Nigeria, Africa ’s largest oil exporter, for an example. Nearly 80% of the government’s revenue comes from exporting oil. When formulating this year ’s budget, Nigeria ’s default oil price was US$ 57 per barrel. However, the price has since fallen to US$ 20 per barrel only, which greatly weakens the country ’s budget.
To counter the pandemic, African governments had to fork out an additional US$ 130 billion to the cause, which further overwhelms many of its countries that are already in debts. At the recent G20 meeting for finance ministers, many countries have agreed to provide temporary debt relief to support the world ’s poorest countries in their fight against the pandemic, suspending the request to repay debts of up to US$ 12 billion and related interest involving 77 countries, 40 which are sub-Saharan African countries.
Africa’s situation today largely relates to the jarring amount of debt raised by its many countries in recent years. In international bonds alone, there are currently 21 countries in Africa participating in the issuance of international bonds, 11 countries more since a decade ago. The issuance of international bonds in 2018 alone raised US$ 27.1 billion, the most in a decade. Additionally, since African countries are actively borrowing outwards, the median debt-to-GDP ratio in Africa has risen from 33% in 2013 to 52% in 2016. Excessive external borrowing has brought a heavy economic burden to Africa. The interest and other debt issuance related expenses in Africa increased from 5.9% of government revenue in 2015 to 11.8% in 2017. Coupled with the fact that some international bonds issued by African countries are 5 to 10 years long, it is expected that the economic share of bond issuance and interest rate expenditure in the country will continue to rise.
The question now is if Africa can request their creditors to reduce or cancel debts as they have done so in the past?
In 1996, hoping to help the world ’s poorest countries reduce their external debt to a manageable level, the International Monetary Fund (IMF) and the World Bank established the Heavily Indebted Poor Countries (HIPC) to help governments of relevant countries exercise normal governance. On June 11, 2005, an eight-nation group consisting of the United States, Canada, Britain, France, Germany, Italy, Japan, and Russia reached an agreement in London and decided to exempt 18 poor and heavily indebted countries from the World Bank, IMF, and African Development Bank for a total debt of US$ 40 billion. Likewise, China reduced the debt of African countries substantially. On November 5, 2006, the Chinese government exempted any US$ 10 billion debts due in 2005 from all African countries (39 countries) that established diplomatic ties with China.
However, Africa’s current debt structure is more complicated than what it was in the past, to the extent that it cannot be resolved by the IMF, the World Bank, or an individual country ’s announced debt relief. According to a 2018 study by the non-governmental organization Jubilee Debt Campaign, 32% of African countries’ debts are borrowed between countries (such as Chinese loans to Kenya), and another 32% are borrowed from private markets (such as banks or national bonds purchased from investment funds), the remaining 36% are debts borrowed from the IMF, the World Bank and other international organisations. Since the role of private institutions is more important than ever, even if the G20 and IMF do not require African countries to repay their debts short term, private market creditors would still recover their debts.
Considering the difficulties in exempting private debts, Africa is more likely to seek further debt relief from international development organisations and sovereign countries. Due to the pressure of debt relief in African countries, there’s a likelihood China will suffer the biggest loss out of all this. In recent years, China has been an important source of funding for African countries. Incomplete statistics from overseas institutions show Africa’s current debts (incl. private debts) to China are as high as US$ 145 billion, and the interest to be repaid in 2020 alone is US$ 8 billion high. Since the first Covid-19 outbreak in China, we have noticed several African countries requesting China to waive their debts out of China’s obligation towards them. If that is the case, should China continue lending huge sums of money to Africa following the pandemic? And how should China deal with the current existing US$ 145 billion debt? China is faced with a dilemma at the moment. If it continues to provide loans, it may never be able to recover the money, yet if it refuses to do so, it will risk affecting the huge loans, investments and geopolitical ties it has spent building with Africa over the years, which in turn disrupts the Belt and Road Initiative (BRI).
Considering the huge impact that the pandemic has on the global economy and the possibility of a long-term downturn in international oil prices, many African countries may find it difficult to get themselves out from the debt trap. How then, should China face this "bottomless pit" of debt trap? Should China consider economic interests, resource security or geopolitical interests when lending and investing in Africa? How can China better manage the balance between the three? It is a challenge that constantly requires careful weighing and a meticulous decision-making process on China’s end.
As geopolitical relations between China, United States and Europe may sour further after the pandemic, China is unlikely to back out of the ties it has formed. The most realistic approach for now would be to readjust the BRI’s “digression” on a global geopolitics and geo-economic level, replace the dominant model of “major state-owned enterprises + huge funds + huge financing” (See ANBOUND’s strategic report The Belt and Road Initiative: Formation, Development, and Digression), and introduce more marketisation in China’s participation in private capital to diversify the structure of Africa’s debt to China. This takes into account of both market and geopolitical interests. Like it or not, the inevitable truth is Africa's "debt bomb" will blow up at some point, though if China adjusts its structure, the damages can be mitigated to a certain extent.
China has become an important part of Africa’s international debts and dealing with Africa’s huge external debt will be a crucial issue for the country. It will have to "sacrifice" certain economic considerations for its geo-interests to keep Africa's "debt bomb” under control.