The COVID-19 crisis is likely to have a devastating effect on Africa. As of June 2020 the number of cases is surprisingly small, which may reflect inadequate testing or an early stage of a much worse epidemic. But what is clear is that the economic impact of the worldwide epidemic will bring the most severe recession that Africa has experienced for decades. The World Bank’s Global Economic Prospectsforecasts per capita GDP growth to be sharply negative in 2020 and near zero in 2021, two lost years in which poverty and unemployment will certainly rise. On the external side, African countries face diminished export opportunities both in terms of volumes and prices. Countries that had appeared to be in good shape with their external debt sustainability will strain to meet their obligations. This situation in turn will put strain on the relationships among China (the largest official lender), traditional Western aid donors, and African countries. In this crisis environment China will need to work more closely with the traditional institutions or risk exacerbating its economic tensions with the West.
China’s pre-virus lending and debt relief
Pre-COVID-19 China’s cooperation with the traditional institutions was actually fairly good, though often informal. China has emerged as a major funder of economic infrastructure, mostly power generation and transport infrastructure (expressways, rail, ports). While China’s effort lacks transparency, the China African Research Initiative (CARI) at Johns Hopkins University maintains a data base on Chinese official loans to African governments and para-statals. It shows about $15 billion per year of lending in recent years. The Chinese financing is loans not grants; some loans are concessional at a 2% interest rate, but more common are commercial rates – variable at, for example, LIBOR + 350 basis points. Most infrastructure loans are for 15 years, with usually 5-6 years grace. These terms are less generous than the limited funds available from the World Bank’s concessional window, but at much better terms than these countries could get from private markets. Chinese lending has been concentrated in 15 populous countries that are spread all around the continent. They are also quite diverse in terms of governance, with authoritarian countries such as Angola, Ethiopia, and Egypt; and democratic ones such as South Africa, Ghana, and Nigeria. Pre-virus, these countries were viewed by the International Monetary Fund (IMF) as having sustainable debt, with a few notable exceptions such as Zambia and Zimbabwe. In the past, China had assisted countries in debt distress through extending the term of loans, but rarely with cuts in interest rates or haircuts on principal. China’s debt assistance has been in parallel to Western initiatives such as the Heavily Indebted Poor Country (HIPC) debt relief, but China has been reluctant to formally join the Western institutions such as Paris Club or the OECD-Development Assistance Committee, since they define themselves as clubs of advanced industrial democracies and membership would constrain Chinese lending to follow multilateral rules and norms.
A new wave of African debt crises?
With the global recession, debt that had seemed manageable is now unsustainable. Of China’s 15 big clients in Africa, eight are in or at high risk of debt distress according to the IMF. In response, the G20 has called for a moratorium on principal and interest payments for all official debt for 77 developing countries. China joined this declaration, the first time that it participated in debt relief from the inside rather than working in parallel. Thirteen of China’s 15 big clients in Africa are included in this relief (Egypt and South Africa are not included in the G20 initiative as their incomes are too high), so this is a substantial contribution from China. However, the moratorium is just a small first step. It does not provide any reduction in the net present value of debt: interest will accrue and will be payable, along with principal, after December 31, 2020. There is a slight chance the global recession will be brief and the recovery strong, in which case this modest initiative may be sufficient. But it is much more likely that global recovery will be prolonged and that many countries will need debt reduction through a combination of lower interest rates, longer repayment periods, and/or haircuts.
It is likely that the traditional Western donors will insist that China participates formally; otherwise there is a risk that debt relief from the West simply repays Chinese loans. African countries that need debt relief to free up resources for social spending will also expect China to participate. It will be a challenge for China to manage this. There is already grumbling on social media that China is going to have to foot the bill; plus Chinese banks are in weak positions with excessive non-performing loans and a still weak economy. Meanwhile, the big problem with debt relief is not going to be China, it’s going to be the private sector. The World Bank debt statistics show that 31% of Africa’s external debt is held by private bondholders, nearly twice China’s 17% share. Normally private creditors are expected to participate in debt relief through the London Club. It used to be relatively easy administratively in that the creditors were a few big international banks. But now the creditors are myriad bondholders, including big institutional investors but also vulture funds and individuals. In the recent case of Argentina, many private bondholders held out for full repayment, suing Argentina in Western courts and seizing assets.
In this situation it makes sense for China to work more closely with the IMF and the Paris Club. It is unlikely that a go-it-alone strategy will yield a better economic outcome for China; plus, much of its effort is aimed at making friends and earning goodwill. If China is the obstacle to smooth debt relief and a resumption of growth in Africa, then not only is China unlikely to get repaid, it will have made enemies along the way. While relations between China and the US are very poor at the moment, hopefully these two giants can cooperate on debt relief and financial aid for Africa.