Managing debt is a balancing act of possible risks and benefits. While borrowing money is one practical way for governments to boost their economies, the equilibrium can easily be thrown off-kilter – especially for low-income countries.
In the 1980s, several compounding factors caused debt across Africa to nearly double in a matter of years, reaching over $270bn. Meanwhile, Africa’s debt-to-GNI ratio rocketed from 49 percent in 1980 to 104 percent in 1987. Debt relief programmes – such as the Heavily Indebted Poor Countries Initiative (HIPC Initiative) and the Multilateral Debt Relief Initiative – were also developed, and subsequently provided $99bn to erase the debts of 36 countries – 30 of which were African.
Over the course of the following decades, African debt was successfully tapered off, but the continent’s fortunes took a turn for the worse in 2012. In fact, according to the World Bank’s 2018 Africa’s Pulse report, average public debt as a percentage of GDP in sub-Saharan Africa rose from 37 to 56 percent between 2012 and 2016. By 2018, 40 percent of sub-Saharan African countries were at high risk of debt distress – double the proportion recorded just five years earlier. With a growing share of these debts being owed to China – a country critics have accused of extending unsustainable loans – fears are mounting that a new debt crisis could be just around the corner.
With a growing share of African debt being owed to China, fears are mounting
that a new debt crisis is just around the corner
Lending a hand
Africa’s last debt crisis was spurred by a spending spree in the 1960s, during which the continent’s newly independent countries – supported by a strong commodities market – poured money into infrastructure projects and industries aimed at encouraging economic growth. Unfortunately, the hopes that had been pinned to these projects came crashing down in the 1980s.
The problems were myriad: a global recession had taken hold; developed countries’ interest rates were spiking; the flow of capital from abroad was declining; and commodity prices had witnessed an unprecedented drop. Worryingly, some of these issues can still be found in Africa’s current financial climate, such as commodity price shocks, which cause government revenues to decline, and a depreciation in local currencies against the US dollar, which makes foreign currency loans more expensive to repay. But what is more notable than the similarities is one stark difference: the composition of the continent’s debt.
Mma Amara Ekeruche, a research associate at the Centre for the Study of the Economies of Africa, told World Finance: “In the [1980s], most of the lenders were multilateral creditors – the World Bank, the IMF – but now we’re seeing bilateral lenders like China playing a more significant role.”
In its 2018 Africa’s Pulse report, the World Bank stated that there had been a “clear downward trend” for multilateral lending, while loans from new bilateral creditors had increased, especially among non-Paris-Club members (the Paris Club being a group of major creditor nations, including the US, the UK, Japan and many more, that coordinates lenders in cases where countries can no longer repay their debts). Market-based borrowing also increased as a new source of financing in both lower-middle-income and low-income countries. The World Bank believes this poses a significant threat: “Although international bond issuances allow countries to diversify their investor base and complement multilateral and bilateral financing, large (bullet) repayments from 2021 [onwards] constitute [a] significant refinancing risk for the region.”
According to the Jubilee Debt Campaign, a charity that calls for the debts of developing nations to be written off, as much as 20 percent of African governments’ external debt is owed to China. Meanwhile, 35 percent is owed to multilateral institutions. This transition away from traditional concessional sources of financing and towards less stringent lenders – China, in particular – has raised concerns about debt sustainability.
In 2018, Masood Ahmed, President of the Centre for Global Development and former leader of the HIPC Initiative, described the dangers of Africa’s changing debt composition to the Financial Times: “While debt ratios are still below the levels that led to [the] HIPC [Initiative], the risks are higher because much more of the debt is on commercial terms with higher interest rates, shorter maturities and more unpredictable lender behaviour than the traditional multilaterals.”
It’s a (debt) trap
Over the past couple of decades, China has funnelled more and more money into sub-Saharan Africa. From 2012 to 2017, Chinese loans to nations in the region grew tenfold to more than $10bn per year, according to the ratings agency Moody’s. In 2001, Chinese loans totalled under $1bn.
According to estimates by the China Africa Research Initiative (CARI) at Johns Hopkins University, loans from the Chinese Government, banks and contractors to African governments and state-owned businesses totalled $143bn between 2000 and 2017 (see Fig 1). Angola was the country with the most debt owed to China, with loans of $42.8bn disbursed over this period. Moody’s research shows that interest payments to Chinese creditors already account for more than 20 percent of revenue in Angola, Ghana, Zambia and Nigeria. In 2018, Chinese President Xi Jinping pledged to finance Africa with a further $60bn, matching the previous $60bn offer the country made three years earlier.
Xi vowed the loans would be put towards infrastructure development projects, including green development and environmental protection: “China’s cooperation with Africa is clearly targeted at the major bottlenecks to development. Resources for our cooperation are not to be spent on any vanity projects, but in places where they count the most.”
Yet, the decision to double down on lending for infrastructure megaprojects across the continent – including in countries at high risk of debt distress – has spurred accusations that China is taking part in ‘debt-trap diplomacy’, with low-income countries in danger of becoming locked into debt due to its unsustainable loans. The main concern about Chinese lending centres on the lack of information available – the opacity of the costs and terms of Chinese loans makes it difficult to know just how risky they are.
The opacity of the costs and terms of Chinese loans makes it difficult to know just how risky they are
According to CARI, there is no official Chinese data on loans, while Chinese banks seldom publish information about specific financing agreements. The country is not a member of the Organisation for Economic Cooperation and Development (OECD), so it does not participate in the OECD’s Creditor Reporting System. China also operates outside of the Paris Club. As Ekeruche told World Finance, this means “the possibility of China being asked to offer debt relief in cases where countries are faced with a debt crisis is very low”.
While Moody’s noted that China’s loans to African countries will help to address the persistent financing gap, its report found that “the lack of transparency over the conditions attached to Chinese lending, and a lack of reform and governance requirements compared with those required by multilateral official creditors, may limit the long-term benefits”.
Playing the long game
China’s increasing presence in Africa comes amid a push to advance its Belt and Road Initiative (BRI). The BRI will act as a new Silk Road, developing a trading route that stretches from China, across Asia and into Eastern Europe and Africa. Although 37 African countries have signed onto the project since it was proposed in October 2013, research by CARI found that lending levels across the continent had not increased as a result of the BRI: “If Xi is using the BRI to marshal a confluence of economic and strategic gains in Africa, increased Chinese loan totals have not been a key factor.”
The Centre for Global Development, a US-based non-profit, published a report in 2018 warning that Chinese lending as a result of the BRI was raising the risk of debt distress “significantly” in eight countries, including one in Africa: Djibouti. In Djibouti, public external debt rose from 50 to 85 percent of GDP between 2014 and 2016. According to CARI, the Chinese Government extended around $1.3bn worth of loans to Djibouti over the 10 years to 2017. The outcome of the precarious situation in Djibouti may have political, as well as economic, consequences.
Writing for Foreign Policy magazine, Mark Green, Administrator of the US Agency for International Development, said: “In Djibouti, public debt has risen to roughly 80 percent of the country’s GDP (and China owns the lion’s share), placing the country at high risk of debt distress. That China’s first and only overseas military base is located in Djibouti is a consequence, not a coincidence.” Furthermore, in late 2018, Reuters reported that two prominent US senators had also voiced concerns about the prospect of China gaining control of the port terminal in Djibouti.
A similar situation occurred earlier in the year, when Sri Lanka signed a 99-year lease to China for a port in the city of Hambantota after it was unable to repay its loans. The New York Times reported that the move gave China “a strategic foothold along a critical commercial and military waterway”.
US officials have condemned such moves, with former US Secretary of State Rex Tillerson accusing China of “predatory” lending behaviour. “The US pursues [and] develops sustainable growth that bolsters institutions, strengthens rule of law and builds the capacity of African countries to stand on their own two feet,” Tillerson said in a 2018 speech at George Mason University. “This stands in stark contrast to China’s approach, which encourages dependency using opaque contracts, predatory loan practices and corrupt deals that mire nations in debt and undercut their sovereignty.”
Chinese officials have rejected these claims. Lu Kang, a spokesperson for China’s Ministry of Foreign Affairs, said African leaders had supported loan agreements with “no political strings attached”. An editorial in the Chinese tabloid Global Times struck a similar chord of contention: “In terms of cooperation with China, African countries know best. Western media deliberately [portrays] Africans in misery for collaborating with China… While western media [describes] Africa as a burden, China creatively positioned the continent as the new opportunity for the world economy.”
Despite these concerns, Annalisa Prizzon, a senior research fellow at the Overseas Development Institute, told World Finance that only a small number of the countries that have been identified as being at high risk of debt distress owe a large component of their debts to China. These include Djibouti, the Democratic Republic of Congo and Zambia. The rest of the African countries at the highest risk of slipping into a debt crisis were found to have a relatively low proportion of Chinese loans.
While certain African countries have vulnerabilities, Prizzon said: “All in all, there is no debt crisis looming in the continent.” In fact, Prizzon believes it is important to empower countries to make informed decisions about their financing positions: “My perspective is that each lender brings its own challenges – China, even the multilateral development banks, the more traditional bilateral lenders, as well as the international sovereign banks. To a certain extent, the ability to scrutinise the contractor lending its conditions remains a… responsibility of the borrower.”
While borrowing from China poses risks – especially to countries with commodity-backed loans, such as Angola – the infrastructure gap faced across Africa is a pressing issue that many see as the key to unlocking economic growth. Notably, some of the infrastructure projects that stalled during the debt crisis of the 1980s are the same ones that are being propped up by loans today.
Ekeruche believes China has become a major player in the financing of infrastructure projects at a time when others are shifting away from them. Data from the OECD’s Credit Reporting System shows that the vast majority (88 percent) of loans from bilateral creditors such as China fund infrastructure projects (see Fig 2). By comparison, 59 percent of funding from multilateral lenders goes towards infrastructure projects, with the rest divided between public sector reform, social welfare, budget support and economic activity.
The World Bank’s 2010 Africa’s Infrastructure: A Time for Transformation report put the cost of addressing Africa’s infrastructure needs at around $93bn per year, but suggested it could be a valuable investment: “Infrastructure has been responsible for more than half of Africa’s recent improved growth performance and has the potential to contribute even more in the future.” The report conceded, however, that Africa’s infrastructure networks “increasingly lag behind those of other developing countries” due to missing regional links and stagnant household access.
Accepting Chinese loans comes with conditions – namely, allowing China to increase its presence in Africa
Joining up the continent’s 54 countries is no mean feat. As Cobus van Staden, a senior researcher at the South African Institute for International Affairs, wrote in a 2018 paper entitled Can China Realise Africa’s Dream of an East-West Transport Link?, the continent’s greatest asset – “the sheer size and diversity of its landscape” – is also the biggest barrier to development. Put simply, the lack of transport links makes it difficult to move goods from one country to another, which drives up costs, increases traffic and opens the door for corruption. Just 15 percent of African trade occurs within Africa, van Staden noted.
According to van Staden, China has already helped establish more road and rail links, and the BRI poses a potential long-term solution for an east-to-west transport system. Accepting Chinese loans, however, comes with conditions – namely, allowing China to increase its presence on the continent. “Africa will have to ask hard questions about debt, sovereignty and foreign-power influence,” van Staden wrote. “The recent case of Sri Lanka losing control of a Chinese-financed port is already raising worried discussion in Africa.” Despite this, he concluded that Africa would “arguably see it as a small price [to pay] for a long-cherished dream”.
In the balance
While Africa as a whole does not face an impending debt crisis, the rising burden in several countries is certainly worrying. As of 2018, 24 of the continent’s 54 countries have surpassed the IMF’s 55 percent debt-to-GDP threshold, signifying they are highly vulnerable to economic changes.
In a paper on managing Africa’s rising debt written for Global Economic Governance Africa, Ekeruche joined a number of authors in calling for countries, lenders and development finance institutions, such as the African Development Bank, to take “concerted action” to counter unsustainable debt in the region. “This is critical given the insufficient budgetary resources of African countries to finance the region’s vast development agenda,” they wrote.
With debt becoming a growing burden on government revenues, Ekeruche told World Finance that another important factor to consider is the opportunity cost of loan repayments – in other words, identifying which sectors are missing out on funding. “In Nigeria, for instance, 60 percent of our government revenues go towards debt servicing,” Ekeruche said. “To contextualise this, imagine that an individual making £1 [$1.27] pays £0.60 [$0.76] to creditors.
“I think that critical development sectors are being underfunded as a result of the large amount going towards servicing debt. Education and health sectors are critical sectors for us, particularly since we have a very young population. Failure to pay sufficient attention to these sectors will have long-term consequences.”
The African debt crisis of the 1980s and 1990s is still a fresh wound. In the coming years, countries across sub-Saharan Africa will face tough decisions over the opportunities and risks associated with taking on more debt. With countless factors to consider – from the critical infrastructure gap to Chinese influence – the balancing act has only just begun.