The governor of the Central Bank of Nigeria (CBN), reacting to calls by citizens to take drastic action against the free fall of the naira against ... the US Dollar, was quoted in a report saying: "Domestically, there has been zero dollar remittance to the country’s foreign reserve by the NNPC. Monetary policy alone cannot bear all the burden of the expected adjustments needed to manage all these difficulties. It’s our collective duty as Nigerians to shore up the value of the naira.’’
The good news is that while overall debt levels have generally risen, action requested by African governments from development finance institutions (DFIs) and multilateral lenders has meant that many African countries have been able to support their economies without taking on too much additional private debt. The IMF has also allocated Africa $33bn in special drawing rights (SDRs), providing an immediate liquidity boost without adding to the debt portfolio.
At the same time, the G20’s short-term crisis management tool – the Debt Service Suspension Initiative (DSSI) – has just ended, and its intended replacement – the “Common Framework for Debt Treatment beyond the DSSI” – has been implemented far more slowly than originally envisaged (so far only Chad, Ethiopia and Zambia have engaged with it).
The role of China over the last two decades
Over the last 20 years, China has become the continent’s largest source of development finance and now accounts for about one-fifth of all lending to Africa. This lending until recently was concentrated in seven strategic or resource-rich countries – Angola, Cameroon, Djibouti, Ethiopia, Republic of Congo, Kenya and Zambia – that peaked at $29.5bn in 2016 but fell back in 2019 to $7.6bn. Nonetheless, China’s extensive trade and investment links with the region, as well as the importance of some of the above borrowers, means it is an essential player in any African and global solution to excessive debt.
China’s involvement in African debt varies considerably between countries and over time. Although in recent years it has been framed in the context of the Belt and Road Initiative, it has for the most part been uncoordinated and unplanned and has been carried out by competing lenders with links to different elements of the Chinese state.
Rapid expansion in Chinese lending to resource-rich African states in the early 2000s, particularly oil producers such as Angola and the Republic of Congo, contributed to infrastructure development but was undermined by poor governance, forcing China to make further loans to buttress its African partners against the negative effects of resource dependence.
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The role of China today
In Kenya and Zambia, China’s lending for major infrastructure projects (such as Kenya’s Standard Gauge Railway) has been undermined by bloated concepts, poor planning, and a parallel very sharp rise in private sector debt.
Lack of transparency over the precise nature of the terms governments agreed to has led to intense domestic criticism and accusations that China is seeking control over strategic assets. China’s lending to Djibouti and Ethiopia does indeed have strategic or geopolitical goals, but the current situation is one in which leverage typically lies with the debtor rather than the creditor. More broadly, African “agency” is a key factor in the current debt situation.
As the poor quality of much of its past lending has emerged over recent years, the Chinese authorities have sought greater control over new development lending and required more attention to sustainability.
Loans are generally now on a smaller and more manageable scale than before and ambitious strategic visions of linking central Africa to the Belt-and-Road via integrated transport corridors appear to have been abandoned. With the introduction of the Global Development Initiative in September 2021, there are indications that China is moving to a ‘new development paradigm’, with a focus on supporting SMEs and human capital investments, green development, and an emphasis on FDI flows rather than loan financing.
This shift has been reinforced by China’s rethinking of its own domestic development strategy under the “dual circulation policy”, which puts more weight on domestic consumption as a driver for growth versus external demand as the latter has become less reliable.
At the same time, China is keen to preserve as much of the value in what has already been lent as possible and also sustain its reputation in the developing world which remains a core supporter for Beijing on many UN-led platforms.
The result is that China has very cautiously moved away from what in the past has been a strong preference for dealing bilaterally with problem debtors. The Chinese state does not want to be a rule-taker vis-à-vis the West on debt issues but increasingly appears to recognise that multilateral approaches (ideally on “an a la carte” basis) can help manage both the pressures on its African partners and its own challenges.
It therefore cautiously supported the DSSI for some African states when it was launched in April 2020 and similarly the Common Framework when it was launched in 2021.
What problems can we see?
However, the Common Framework’s very slow implementation reflects four specific problems linked to China’s role. First, is China’s uneasiness with the central and independent role played by the IMF in determining how much a country can afford to pay through its debt sustainability analysis (DSA).
Second is the concern of public and private sector lenders in the West over the lack of transparency in the total amount of debt African countries borrowed from China. Third is a difference of view between the Chinese authorities and Western governments on exactly how burden-sharing should be implemented between different types of official lending institutions, and fourth is differences between Chinese lenders and private sector lenders on the way in which any relief should be delivered (for example, the choice between maturity extension and reduced interest rates versus debt haircuts).
Slow but steady resolutions
Sustained efforts have been made over the past year to try and resolve these issues, but progress has been slow. A necessary condition for further progress is that African nations clearly want this and push for China and the West to reach a consensus on the implementation of the Common Framework.
A joint initiative should comprise three elements. First, a broad-based “G20 plus” dialogue, focused on building a stronger framework to deliver Africa’s longer-term external financing needs, building in part on the cooperation mechanisms created to deal with the immediate debt relief crisis with an emphasis on African voices.
Second, a high-level political understanding on strengthened cooperation between the West and China and other G20 lenders in relation to African debt and longer-term financing needs. Thirdly, a technical programme led by the G7/G20 Finance Tracks to address immediate problems in the Common Framework and related debt relief initiatives.
Such a package would not solve all the problems attached to multilateral debt relief – some, such as those that link to China’s role in the IMF and the size of its quota, cannot be addressed through an initiative centred on international debt alone.
Nor could it end competition between China and the West, and indeed within the West, over trade and investment links with Africa. This will continue, and it is in the interest of African borrowers that it does so too.
But it would ensure that African countries that have unsustainable debt can address this burden through a longer-term framework that could provide substantial benefits, not just for themselves but also for their lenders. 2022 provides a window of opportunity to reach an agreement on such a package and all sides would do well to take it.
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