This latest debt cancellation reflects the pressure China is under in the international debt debate. But what does it really mean?
In mid-August, the Chinese Ministry of Foreign Affairs surprised the whole world by making a announcement series. Wang Yi, the head of Beijing's diplomacy, has promised major debt relief for some of the world's poorest countries. This announcement was made at the ministerial meeting of Forum for China-Africa Cooperation.
Besides increasing food aid to the mainland, Wang pledged to no longer demand reimbursement concessional loans that had recently matured but which 17 African states had been unable to repay.
The outstanding balance of unpaid loans granted mainly by the Chinese Ministry of Commerce (or, less frequently, by the Export and Import Bank of China) should therefore be canceled.
Details regarding the beneficiaries and the lines of credit have not yet been released. However, for Africans, this is good news, even if it was somewhat expected.
Mr. Wang's statement came at a good time, given the sentiment crescent of imminence a debt crisis which threatens many developing countries, a number of which are on the African continent. The combined public and private external debt of African states increased more than fivefold between 2000 and 2020. Chinese public and private creditors represented 12% of the continent's $696 billion external debt in 2020.
The continent’s average debt-to-GDP ratios exceeded 50% before the pandemic. According to the latest African Economic Outlook from the African Development Bank, the Africa's debt-to-GDP ratio will hit 70% this year. In February 2022, 23 African countries were either over-indebted or at risk of being so.
The recent economic meltdown and reversal of the Rajapaksa family diet in Sri Lanka rocked countries like Ghana and South Africa. These events have rekindled fears that panicked markets will soon question the solvency of African sovereign states.
Ghana and South Africa are particularly worried about entering the vicious cycle of rating downgrades by rating agencies and increasing trade imbalances. Other fears include worsening pressures on national currencies and the risk that bondholders will seek to pull out of African markets, accelerating financial instability.
Africa will accept any relief measures available to it in such circumstances.
The last debt canceled by China at the end of 2020 was 113 million and involved several countries. Hence the need not to overestimate the cancellation of the debt.
Beijing's announcement was already largely embedded in the strategy of many African central banks, with interest-free Chinese loans often being cancelled. Moreover, it is generally accepted that when China extends such lines of credit, they are rarely repaid in full.
Beijing was certainly not counting on countries like Burundi, Congo or Mozambique to pay off these debts. And she has regularly rescheduled loans to African states worth billions of dollars, over the past 20 years.
Furthermore, the impact of China's latest initiative on Africa's overall debt profile should be limited. Beijing's move will not reduce the rise in sovereign yields (interest on bonds), nor will it ease the downward pressure on exchange rates that so many African states have suffered last year.
This does not mean, however, that Wang Yi's wishes were unworthy. For some countries, this series of Chinese cancellations could have consequences. Five states accumulate most African debt to China: Angola, Ethiopia, Kenya, Nigeria and Zambia. Any cancellation of outstanding balances could effectively help rebalance their liabilities by allowing them to avoid overreliance on Beijing.
For the poorest countries in Africa – like Madagascar or Niger – cancellations of even $50 million would really affect their ability to pay for basic services.
But, overall, the political stakes of the latest developments are undoubtedly more important than their financial impact.
This is a stark illustration of the fact that Beijing's debt relief proposals were made with great fanfare, unlike previous cancellations. This reflects the pressure that China feels it is under in the international debt debate.
The Trump administration has accused China of tricking developing countries into extending credit to debtors Beijing knows are insolvent, such as (former) US Vice President Mike Pence. declared it in 2018.
China is using so-called “debt diplomacy” to expand its influence…offering hundreds of billions of dollars in infrastructure loans to governments in Asia and Africa, Europe and even America Latin.
China deliberately engineered these “debt traps” to force poor African states to vote like it in the UN General Assembly, support its positions on Taiwan, or acquire valuable real estate in Africa. likely to be turned into military bases. At least that is what is said.
The Biden administration has been less direct in its claims about Chinese diplomacy over the debt trap. However, it too put Beijing on the defensive by accusing it of keep African states on a leash thanks to its power as a creditor.
In addition, the flagship initiatives of the World Bank and the International Monetary Fund have been heavily influenced by allegations that China promotes systems shadow accounting in relation to public finances and is reluctant to accept the conventions of the betting club intended to facilitate debt restructuring.
Although African debts to private creditors – especially bondholders – have increased much faster over the past decade than credits extended by Beijing, the international perception is that China is singularly intransigent in helping to resolve the resurgence of a debt crisis in Africa.
Beijing tries to defend itself
China's public relations problem therefore has real-world consequences and embarrassment. Although Wang, the foreign minister, condemned a “zero-sum Cold War mentality” in his comments on debt relief promised to 17 African countries, his retort was also clearly meant to score geopolitical points.
His desire to get China out of the defensive position it finds itself in is equally evident in the recent concessions made by Beijing to help Zambia, a country in default of payments to restructure its debts. Chinese concessions played a key role in securing a zambia debt deal which could set a precedent for Beijing in how it works with other donors on providing similar aid to other countries. The agreement with Zambia was concluded under the G20 common framework for debt treatment, which also requires the establishment of an International Monetary Fund program to benefit from effective relief.
This mixture of concessions and defensive reactions is explained by the feeling that the irresistible Chinese rise which has opened many doors for it on the continent in recent years, has somewhat faded. The downgrading of ambitions for Xi Jinping's New Silk Roads initiative (including the reduction lines of credit granted to African states, as Beijing prioritizes its internal goals) leaves many people on the continent perplexed.
It was the same for the previous decision to allocate only $10 billion in special drawing rights to Africa through the International Monetary Fund, when it is clear that China has little need to use its quota of 38 billions of dollars.
Ignoring African Priorities
The cancellation announced by Wang Yi of the unpaid credits, in any case, had little chance of being repaid in full, therefore appears for the moment as an inexpensive political maneuver allowing China to re-establish deep ties with the African sovereign states and to highlight their mutual goodwill. In the short term, that might be the case.
However, fundamentally, Beijing's decision does little to change Africa's growing indebtedness. In this context of the geopolitical positioning of China and the United States, nothing really indicates that the world powers or the international financial institutions will finally attack the Systemic Drivers of African Debt Resurgence. In this sense, China's recent announcement is unfortunately only a return to the status quo.
Harry Verhoeven, Senior Research Fellow at the Center on Global Energy Policy, Columbia University
This article is republished from The Conversation under Creative Commons license. Read theoriginal article.