As Africa continues to grapple with the fallouts of Covid-19 pandemic, new damming statistics have emerged that indicates the high economic costs and heavy toll this fight will exact on developing economies. World Bank predicts Sub-Saharan Africa to fall into its first recession in 25 years as a consequence of the coronavirus outbreak. An April 2020 report of the International Monetary Fund (IMF) projects Africa’s economic growth to contract by 1.6 percent this year amid tighter financial conditions, sharp decline in key export prices and severe disruptions in economic activities linked to the pandemic. To make matters worse, African businesses and households were already suffering liquidity challenges even before the virus gained a toehold on the continent.
Many African countries depend on commodities for export earnings. Oil is the biggest source of foreign exchange, accounting for substantial amount of exports and government revenue for many sub-Saharan African countries. But the recent collapse of oil prices has thrown African economies, especially oil producing nations such as Nigeria and Angola with their disproportionately high reliance on the fuel for revenue, into a distress. African oil exporting countries are expected to see their budget deficits double this year, given expected lower government revenues and higher health and social spending needs related to the pandemic. Furthermore, dwindling remittances, an imploding tourism sector, and plummeting commodity prices, with the exception of coffee, has served to compound the pain.
Amidst these developments, African countries have urged international organisations such as IMF, World Bank and European Union to support its calls for a moratorium on all external debt and some debt write-offs, in order to ease the burden of dealing with the coronavirus crisis. In such trying times, multilateral and bilateral financial institutions needs to work together with commercial creditors in Africa, especially to defer loan payments and give African economies the fiscal space it needs. Akinwumi Adesina, the President of the African Development Bank has rightly echoed the essence of African calls for debt relief by stating, “I am calling for temporary forbearance, not forgiveness.”
Rise of African debt problem
Following a period of decline in 1980s and 1990s, the African continent’s productivity started growing since 2000 onwards across countries and sectors, registering an average real annual GDP growth of 5.4% in that decade. But following the 2008 financial crisis, the debt scale of African countries started to increase significantly due to superimposition of multiple factors such as falling commodity prices, intensified fiscal deficit, and falling international demand. A 2019 World Bank Economic Prospects report warned that unsustainable accumulation of external public debt has become a gradually worrisome development in past few years.
Due to a low interest environment, especially since the end of the financial crisis, low and middle income countries kept on accumulating debt without much concern for repayments. For developing nations keen to address their infrastructure deficit, this presented an attractive option at that time. But now, the problem of stacking up debt has become acute, especially in Sub-Saharan Africa.
Public debt as a percentage of GDP has doubled in more than a quarter of sub-Saharan African countries like Angola, Cameroon, Equatorial Guinea, and Nigeria. From 2010-2018, average public debt increased by half from 40 to 59% of GDP, thereby making sub-Saharan Africa the fastest-growing debt accumulating region in the world.
African calls for debt relief and responses by stakeholders
In order to cope with the economic fallouts of the coronavirus crisis, African finance ministers made an impassioned appeal for a US$ 100 billion stimulus package, of which US$ 44 billion will go towards debt relief for all African countries. Also, an addition of US$ 50 billion might be needed for the building back process in 2021 with a continued stay on interest payments.
Anticipating the growing burden on poor economies and in response, key stakeholders, including the IMF and World Bank, and sovereign governments like France – have all pushed for moratorium on debt payments, to give African economies the breathing space it needs. The IMF executive board also approved debt service relief to 25 IMF member-countries, 19 of which are from Africa.
Moreover, in a virtual meeting on 15 April , the Group of 20 (G-20) economies agreed to a minimalist formula of debt relief for the 76 poorest economies: a suspension of official debt obligations till 2022. The next day, Chinese Finance Minister Liu Kun commented, “China supports the suspension of debt repayment by least developed countries and will make its necessary contributions to the consensus reached at G-20.” This has been a significant development given growing speculation and anticipation over how China will respond to African calls for debt relief.
Chinese participation in essential
In recent years, the question of China’s debt financing in Africa has been a source of various debates, research, theories and much hue and cry. Following the financial crisis, with an expansion of debt financing needs, the debt scale of African countries increased. This development coincided with a period of China-Africa bonhomie with the emergence of China as a major financer of African infrastructure. The simultaneous development of these two trends has made China the main object of concern and accusation by academic and policy circles.
It is important to note that no matter how much debt relief these international institutions provide, without Chinese participation, widely-believed to be Africa’s single largest creditor, such efforts are bound to fall flat. This is simply due to the sheer magnitude of debt owed to China alone. According to Jubilee Debt Campaign – a United Kingdom-based charity which campaigns for the cancellation of poor countries’ debt – nearly 20% of African government external debt is owed to China. Various accounts estimate Chinese loans to be more than US$ 140 billion in Africa alone. This has become a major cause for consternation due to their reported opaqueness.
However, as a counter, Beijing contends that, China is, in fact, not the largest creditor. Multilateral financial institutions and private lenders own 35 and 32 percent, respectively, of Africa’s debt. Therefore, it is not feasible for China to alone carry the substantial financial loss, unless similar forgiveness is given by other lenders to African countries. But if there is a continental move for debt relief, then China would have no other choice but abide to debt relief calls or risk dampening its international reputation. Moreover, China is facing other areas of push-backs, not least given the allegations of the maltreatment of Africans in China during the Covid pandemic, and calls for China to pay reparations for its role in the spread of the virus. The situation has blown into a multidimensional political crisis and only time will tell if China will be able to demonstrate world leadership by acknowledging its failure to be transparent on the Covid-19 crisis.
What’s China likely to do?
Insofar as the question of debt relief goes, it appears unlikely that China will provide any long-term direct loan forgiveness for a substantial bulk of the loans, as it needs to make economic and financial returns on its investments. Neither is China going to treat the entire debt stock at a continental level. Rather, China is more inclined to work bilaterally with borrowers on a case-by-case basis. All the cases will be individually assessed and carefully scrutinized before any new terms of agreement is reached.
While there are few instances of China cancelling debts of low-income countries, majority of these cancelled debts comprised a small category of Chinese lending – i.e. interest free, foreign aid loans that had reached maturity without being paid off. Deborah Brautigam, Director of China Africa Research Initiative at Johns Hopkins University, points out that, “In Africa, interest-free loans today averages US$10 million and make up less than five percent of Chinese lending.” With only such small portions of Chinese lending under consideration for debt relief will inevitably further complicate Africa’s debt situation.
But it is no secret that China has a very transactional view of foreign policy. Time and again China has been accused of taking advantage of poor, vulnerable economies by offering cheap, unsustainable loans only in exchange of providing lucrative national assets as collateral. Recent reports by Wall Street Journal suggesting that Chinese leaders have asked officials from Zambia, to provide collateral – in this case Zambian copper-mining assets, in exchange for economic help, reinforces the inherent undercurrents below the glassy calm surface of China-Africa ties.