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Rising African debt causes Belt and Road dilemma for China
In late November, Zambia became the first African nation to default on its sovereign debt when it missed a $42.5m eurobond repayment. Although the country had been struggling with its $12bn external debt load for some time, the onset of Covid-19 aggravated pre-existing financial pressures.
Zambia last issued a eurobond in 2015, after which its debt started spiralling out of control. Much of that was down to Chinese loans used to finance the country’s infrastructure projects as part of Beijing’s sweeping Belt and Road Initiative (BRI). Eurobond investors have now sought greater clarity from Zambia’s government over the nation’s Chinese debt obligations.
Joyce Karanja, Website Officer of the IBA African Regional Forum and a partner at Bowmans – Coulson Harney in Nairobi, says that ‘analysts have raised concerns with the debt renegotiations by China, considering that debt arrangements with African countries are shrouded in secrecy and it is not clear what China will want in return.’
The effort and goodwill that has been provided by China has been criticised, which is an indicator of the dilemma that the country finds itself in
Website Officer of the IBA African Regional Forum
The outbreak of Covid-19 has had a very real and detrimental impact on BRI activity in general. According to China’s Ministry of Commerce (MOFCOM), in the first eight months of 2020, the business turnovers of Chinese overseas contractors fell by 12.6 per cent year-on-year while the number of new contracts signed by those contractors among BRI countries fell by 24.4 per cent.
In addition to Zambia, many other African countries have been identified by the International Monetary Fund and the World Bank as having a high risk of ‘debt distress’, which could lead to default, as a result of the pandemic. ‘The Covid-19 pandemic added fuel to a public debt crisis that was already facing many African countries and which was made harder by a weakening of most African currencies,’ says Karanja.
For example, in September, the Kenyan Parliament’s Transport Committee recommended that the country’s government renegotiate the terms of its loan from China Exim Bank, which was used to fund the $4.7bn Mombasa-Naivasha Standard Gauge Railway (SGR).
‘No one is actively talking about African governments’ own culpability in all of this,’ says Nankunda Katangaza, Vice-Chair of the IBA African Regional Forum and a partner at Hook Tangaza in London. ‘It’s almost as if they are incidental to this vicious cycle of lending and borrowing which led to them becoming highly indebted countries again, a few short years after previous debt was partly forgiven, largely forgiven or restructured.’
‘Those governments absolutely must be held accountable by their citizens for their reckless actions in taking out such enormous debts when they knew they had only just been forgiven,’ adds Katangaza.
She cites the example of Zambia, which had its debt written off in the mid-2000s under the Heavily Indebted Poor Country Initiative – where rich lending nations extended some debt relief to the most indebted poor countries – only to immediately pursue additional debt, buoyed by a ‘stable outlook’ sovereign credit rating from Fitch.
In April, the G20 leading economies announced a debt service suspension initiative (‘DSSI’) to help poor countries cope with the fallout of the Covid-19 crisis. However, it does not apply to private sector creditors to whom Africa’s debt is significant.
China, for its part, signed up to the DSSI pledge but initially excluded hundreds of large loans made through its BRI. Some observers have suggested that its subsequent support for debt relief in those African countries that request it – including relief on Angola’s $20bn debt to various Chinese entities over and above what was promised under the DSSI – reflects a growing sensitivity around concerns over its so-called ‘debt-trap diplomacy’ with BRI projects.
In 2019, Moody’s warned that African countries rich in natural resources – such as Zambia – or with strategically important infrastructure such as ports and railways – Kenya, for example – could lose control over important assets in negotiations with Chinese creditors in the event of default.
‘Chinese loans have been vital in funding several important African infrastructure and other projects including via the BRI,’ says Pieter Steyn, Co-Chair of the IBA African Regional Forum and a partner at Werksmans Attorneys in Johannesburg.
Steyn notes criticism that the terms of these loans are not disclosed publicly. However, he adds that to date there hasn’t been an incident in Africa similar to that of Hambantota port, which was leased to China for 99 years by agreement with the Sri Lankan government.
African governments are not powerless when it comes to renegotiating loan terms. For example, Tanzania suspended the construction of the China-funded $10bn Bagamoyo port project in July 2019.
China’s approach, meanwhile, has been to deal with commercial loan repayment issues on a case-by-case basis while forgiving interest-free loans. For example, it allowed Ethiopia to defer repayments on the loan provided for the Addis Ababa-Djibouti railway.
‘China faces the same dilemma as any other creditor when it comes to the risks of default and whether to agree to debt cancellation or renegotiation,’ says Steyn. ‘However, unlike private creditors, loans by state actors like China play an important role in their foreign policy strategies.’
Although China is Africa’s largest single creditor, the events of 2020 have presented the country with a choice between furthering its own international and commercial interests and cultivating its image as a good actor on the world stage.
‘The effort and goodwill that has been provided by China has been criticised, which is an indicator of the dilemma that the country finds itself in,’ says Karanja.
China’s economy recorded a growth rate of 4.9 per cent in Q3 compared to the same quarter in 2019. But its predicted growth for the year is only 1.9 per cent, leading to increased pressure at home to allocate more resources domestically rather than on risky foreign investments.
China’s policy banks are now more cautious in their lending while the county’s fragmented development financing system now places far greater emphasis on improving due diligence and risk assessments with BRI projects.
With sustainability of financing for large BRI infrastructure projects already a challenge, Chinese capital is expected to be mobilised more in the future towards IT and tech projects connected to the Digital Silk Road, a tech-focused subset of the BRI.
A World Bank study in 2019 concluded that the largest obstacles to successful investment in BRI infrastructure were policy impediments such as import tariffs, and that these could be overcome by improving the investment climate through deep trade agreements.
Perhaps unsurprisingly, China has indicated it’ll ‘favourably consider’ joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, after the Trump administration withdrew the US from the Agreement’s predecessor.