The infrastructure gap in most African Countries coupled with lack of domestic finance has created a ‘market for finance’ available to African governments. This has attracted Chinese development finance to get infrastructure projects under way. China has emerged as a major financier of African infrastructure leaving the recipient countries trapped in unsustainable loans. Chinese lending has some negative implications on the African countries as it contributes to debt accumulation. One key area of debate amidst the COVID-19 pandemic relates to the debt risks associated with developing countries’ external borrowing and the role that China has played as a leading creditor.
China has been issuing loans to African countries and the majority of them are directed to road and energy infrastructure linked to China’s Belt and Road Initiative (BRI). These loans have accumulated into debts that present immediate and long-term financial pressures for African governments. The estimated amount of loans issued to African governments by China between 2000 and 2017 is USD 143 billion. Countries such as Angola, Kenya and Republic of Congo, now have massive debt obligations owing more than $7 billion to China. Angola is the most indebted country with an estimated debt of $25 billion.
The massive debt obligations to China by African countries are worrisome given that they are also heavily indebted to the Paris Club Creditors. Furthermore, the countries are further exposed to borrowing than ever due to the COVID-19 pandemic. These countries are already in need of an additional financing of about $154 billion to respond to COVID-19 which will eventually lead to debt accumulation.
There is little transparency on how China conducts financing to the recipient countries. China finances through private companies and commercial financiers such as the EXIMBANK, ICBC, the Bank of China and other non-financial entities. Chinese lending is also associated with the controversial resource backed lending model in which the borrowing country commits future revenues to be earned from its natural resources exports to pay loans secured from Chinese. As a result African countries have lost vast mineral resources to such terms and conditions tied to Chinese lending.
Following these negative implications of the Chinese lending there is need to enhance roles for Parliamentarians for them to have an oversight on development finance. This will enable an assessment of the risks associated with the terms and conditions of loans provided before African countries sign in. African countries should have legislative measures to address the Chinese models so as to protect their natural resource base. For instance the mega project such as the belt and road initiative(BRI) which are viewed as ‘debt trap’ to the BRI countries.
Apart from addressing the Chinese model there is also need to reform the International Financial Architecture so as to reach a consensus on debt relief measures. There has to be a further formal coordination between the China and the Paris Club creditors towards assisting African countries in avoiding the debt accumulation. African governments need to be sensitized so that they become cautious in their borrowing especially shifting to Non-Paris Creditors which can possibly push them into heavy indebtedness.
Notably, China is playing a role towards debt management in Africa. Chinese lenders have provided at least $12.1 billion in debt relief in 2020/21. China took part in the launching of the Debt Service Suspension Initiative (DSSI) and has since provided G20 DSSI to 23 countries in 2020 .Through its FOCAC framework, China pledged to cancel the debt of relevant African countries in the form of interest free government loans that were due by the end of 2020. China has been cooperating with the G20 on debt relief which resulted in launching the Common Framework for Debt Treatments Beyond the DSSI where countries can apply for debt relief beyond DSSI terms. Chad, Ethiopia and Zambia are the three countries that have applied this framework. China is also providing ad-hoc debt relief through its commercial banks outside G20. China has also made contributions of US$8million to the IMF’s Catastrophe Containment and Relief Trust (CCRT).
AFRODAD with its mandate to contribute to finding sustainable solutions to Africa’s debt related challenges, published the African Borrowing Charter with principles that speak to responsible borrowing. It is currently conducting researches to assist in advocating for transparency in Chinese loans issued to African countries. AFRODAD has also strengthened its capacity through its three portfolios that focus on debt management.
Author: Tryphine Tshuma, Intern at AFRODAD, International Public Finance. For feedback, write to [email protected]