China in the driving seat amid calls for African debt relief
JOHANNESBURG/BEIJING/WASHINGTON (Reuters) – Support for debt relief is growing to help the world’s poorest and most indebted countries – most of them in Africa – deal with the economic devastation caused by COVID-19. But there is a big question mark: China.
A two-decade lending spree has propelled China to the top of Africa’s list of creditors and any comprehensive debt deal, including write-offs, would force Beijing to play a leading role and swallow the losses, according to analysts.
“China is in the driver’s seat,” said Scott Morris, senior fellow at the Center for Global Development (CGD), a Washington think tank. “But it’s going to be very painful for the creditors, and I’m not sure they’ve accepted that.”
Beijing is likely to approve a temporary freeze on debt payments for African countries as part of an agreement expected by the Group of 20 (G20) major economies this week, two sources familiar with the process told Reuters.
Broader debt relief is the obvious next step, but China is unlikely to lead that charge, analysts say, despite the potential opportunity to bolster 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.
“We are aware that some countries and international organizations have called for debt relief programs for African countries, and we are willing to explore the possibility of this jointly with the international community.”
“A RISING POWER”
Unlike major Western countries that have provided debt relief in the past, much of China’s debt to Africa is on commercial terms. And China itself is still an emerging economy with a per capita income of $10,153 in 2019, below 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 it’s only a recent…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. It is highly unlikely that we will see 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 signaled little appetite for moving beyond its well-worn playbook of bilateral negotiations with indebted partners.
“We cannot respond to every request for debt relief without 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 lead to moral hazard.”
Analysts say wealthy governments that see their own economies heading into recession are unlikely to devote significant resources to debt relief if they think the money will indirectly support Chinese creditors.
With around 12,500 cases of COVID-19 so far, Africa accounts for only a small fraction of the more than 1.7 million infections worldwide.
Nevertheless, African countries have suffered a disproportionate blow due to falling oil and commodity prices and weakening currencies, which are increasing the cost of servicing external debt.
(GRAPHIC: Sub-Saharan debt service – )
Their economies are expected to contract sharply this year and could lose 20 million jobs.
In the immediate future, the IMF and the World Bank are pushing for a moratorium on the payment of bilateral debt owed by the poorest countries in the world.
Last week, IMF chief 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 towards that.
NO BIG GESTURES
African finance ministers are calling for a $100 billion stimulus package, of which $44 billion would come from non-service of debt – bilateral, multilateral or commercial. They want part of the debt of Africa’s poorest countries canceled and the rest converted into long-term, low-interest loans.
That’s a big ask, experts say.
The Chinese government, banks and companies lent some $143 billion to Africa between 2000 and 2017, much of it for large-scale infrastructure projects, according to data from Johns Hopkins University. By some estimates, Chinese lending now dwarfs World Bank lending in Africa.
(GRAPHIC: Chinese loans to African governments and state-owned enterprises – )
The ODI estimates that loans from China account for 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 that they were consistently tougher than World Bank terms, especially for the poorest countries.
Chinese institutions offered fewer scholarships; grace periods on loans were shorter and the weighted average interest rate was higher – 4.14% compared to the World Bank’s 2.1%.
Beijing has long dismissed criticism, including from Washington, of its lending policy.
“For a long time, China has responsibly carried out investment and financing cooperation with African countries according to their will and needs,” the Chinese Foreign Ministry statement said.
While China has played a much-publicized role in Africa’s fight against the pandemic – with billionaire Jack Ma sending planes full of medical equipment – there is little indication of a similar grand gesture on the debt.
Beijing is used to working with troubled borrowers, but the process is often aimed at easing short-term pressure to secure eventual repayment.
(GRAPHIC: Chinese loans to Africa by lender – )
The New York-based research firm Rhodium Group, analyzing recent negotiations between China and its borrowers, found that debt forgiveness was relatively common, although the sums involved were often small and associated with substantial additional loans.
In Sudan, for example, China canceled $160 million in 2017, or 2.5% of the estimated $6.5 billion owed to it.
Ghanaian Finance Minister Ken Ofori-Atta said last week that China needed to do more. A Foreign Ministry spokesperson said China would engage its partners individually.
Experts say China’s ad hoc approach cannot work in the current crisis, but a coordinated move involving all creditors would force Beijing to open its books, something it has repeatedly resisted.
The Trump administration has in the past signaled its reluctance to support broad debt relief, given Africa’s heavy 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 void. But analysts say he could bristle at any process he deems Beijing has too much influence over.
“I fear that even if China sees this as an opportunity to seize leadership and exploit it, the United States could walk away from it,” said CGD’s Morris.
Written by Joe Bavier; Additional reporting by Yew Lun Tian in Beijing and Karin Strohecker in London; Editing by Alexandra Zavis, Carmel Crimmins and Gareth Jones