Support is increasing for debt relief to help the world’s poorest and indebted countries – most of them in Africa – cope with the economic devastation caused by COVID-19. But there is a big question mark: China.
A two-decade lending frenzy has propelled China to the top of Africa’s creditors’ list, and any comprehensive debt deal, including cancellations, would force Beijing to play a leading role and swallow losses, according to analysts.
“China is in the driver’s seat,” said Scott Morris, senior researcher at the Center for Global Development (CGD), a think tank in Washington, DC in the United States. “But it’s going to take real pain for the creditors, and I’m not sure they’ve accepted this.”
Beijing is likely to approve a temporary freeze on debt payments by African countries as part of a deal expected by the Group of 20 (G20) this week, two sources familiar with the process told Reuters.
Wider debt relief is the obvious next step, but China is unlikely to lead that charge, analysts say, despite the potential opportunity to polish its soft power credentials.
“The origin of Africa’s debt problem is complex and each country’s debt profile varies,” China’s Foreign Ministry said in response to questions from Reuters news agency.
“We are aware that some countries and international organizations have requested debt relief programs from African countries, and we are prepared to explore the possibility of doing so jointly with the international community.”
“A rising power”
Unlike the major Western countries that have granted debt relief in the past, China has lent Africa debt on trade terms. And China itself is still an emerging economy with a per capita income of $ 10,153 in 2019, lower than the average of $ 45,447 for the seven major economies, according to data from the International Monetary Fund (IMF).
“China is still a rising power, and this is only a recent one… entering as a major financial partner in Africa,” said Yunnan Chen of the Overseas Development Institute (ODI), a London-based think tank.
“It must also generate financial and economic returns on its investments. We are very unlikely to see a direct loan forgiveness for a large portion of the loans. “
With its own economy set to contract for the first time in three decades, China has shown little appetite to move beyond its well-established playbook of bilateral negotiations with over-indebted partners.
“We cannot respond to every request for debt relief without a detailed analysis,” said He Haifeng, director of the Financial Policy Institute of the Chinese Academy of Social Sciences, a government think tank.
“Some of the requests could cause moral hazard. “
Wealthy governments watching their own economies slide into recession are unlikely to devote significant resources to debt relief if they believe the money will indirectly support Chinese creditors, analysts say.
With around 12,500 COVID-19 cases to date, Africa accounts for a small fraction of the more than 1.8 million infections worldwide.
Nonetheless, African countries have been disproportionately affected due to falling oil and commodity prices and weak currencies, which increase the costs of servicing external debt.
Their economies are expected to contract sharply this year and could lose 20 million jobs.
In the immediate term, the IMF and the World Bank are pushing for a moratorium on the payments of the bilateral debt of the poorest countries of the world.
Last week, IMF Director Kristalina Georgieva said China was engaging “constructively” on the issue. A Chinese official told Reuters that Beijing was willing to work with borrowers on a bilateral basis and agreed that some countries should not be forced to repay their debt during the crisis.
The IMF is not currently pushing for a broader initiative, but experts say a payment freeze is a first step in that direction.
No big gestures
African finance ministers are calling for a $ 100 billion stimulus package, of which $ 44 billion would come from non-servicing debt – bilateral, multilateral or trade. They want some of the debt of Africa’s poorest countries canceled and the rest converted into long-term, low-interest loans.
It’s a big demand, say experts.
The Chinese government, banks and businesses lent some $ 143 billion to Africa between 2000 and 2017, largely for large-scale infrastructure projects, according to data from Johns Hopkins University. By some estimates, Chinese lending is now eclipsing World Bank lending in Africa.
ODI estimates that loans from China represent 33% of external debt service in Kenya, 17% in Ethiopia and 10% in Nigeria.
Chinese loan terms have generally been favorable, although a CGD study found them to be consistently harsher than those of the World Bank, especially for poorer countries.
Chinese institutions offered fewer grants, grace periods on loans were shorter, and the weighted average interest rate was higher – 4.14 percent compared to the World Bank’s 2.1 percent.
Beijing has long rejected criticism, especially from Washington, about its lending policy.
“For a long time, China has responsibly conducted investments and financial cooperation with African countries according to their will and needs,” the statement from the Chinese Foreign Ministry said.
While China has played a high-profile role in Africa’s fight against the pandemic – with billionaire Jack Ma sending planes laden with medical supplies – there is little indication of a similar big debt move. .
Beijing is used to working with distressed borrowers, but the process is often aimed at easing short-term pressure to secure eventual repayment.
New York-based research firm Rhodium Group, analyzing recent negotiations between China and its borrowers, found that debt cancellation was relatively common, although the sums at stake were often small and associated with additional loans. substantial.
In Sudan, for example, China wrote off $ 160 million in 201, or 2.5% of the estimated $ 6.5 billion owed to it.
Ghana’s Finance Minister Ken Ofori-Atta said last week that China must do more. A spokesperson for the Foreign Ministry said China will engage its partners individually.
Experts say China’s ad hoc approach cannot work in the current crisis, but a coordinated initiative involving all creditors would force Beijing to open its books, which it has repeatedly resisted.
The administration of US President Donald Trump has in the past signaled its reluctance to support broad debt relief, given Africa’s large borrowing from China.
U.S. officials did not respond to a request for comment.
Washington’s current absence from the conversation has left a leadership vacuum. But analysts say he can bristle with any process he considers Beijing to have too much influence.
“I fear that even if China sees this as an opportunity to seize leadership and exploit it, the United States may turn away from it,” said Morris of the CGD.