How COVID-19 will change China and Africa’s economic relationship

Children wearing face masks stand listening to their friends outside their shelters, amid the spread of the coronavirus disease (COVID-19), in Liberte 6 Baraka district of Dakar, Senegal May 2, 2020. REUTERS/Zohra Bensemra - RC2GGG93NMAL
  • China rarely agrees to debt write-offs.
  • African countries are important to China’s long-run development agenda.
  • Debt write-offs may be necessary if both want to benefit from the changed world economy, post-coronavirus.

The COVID-19 pandemic and related measures have brought the world economy to a shuddering halt. In April the price of a barrel of oil on the New York Mercantile Exchange reached minus $37.63; airlines are not alone in shedding tens of thousands of staff. The GDP of China, the engine of world growth, shrunk by 8.6% in the first quarter of 2020. Low-income countries, ordinarily at the mercy of commodity prices, tourism and the volatility of remittance flows – through no fault of their own – find millions of their citizens, and by extrapolation all of us, are at risk of both the pandemic and also economic havoc.

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Ethiopia’s Nobel Prize-winning Prime Minister Abiy Ahmed compelled creditor countries to heed the fact that 64 countries spent more servicing external debt in 2019 than on health, leaving them unprepared for a pandemic. Almost half of those are in sub-Saharan Africa; his own country, for one, spends almost half of its revenue from exports servicing debt. The pandemic has, moreover, reduced those revenues at the same time as increasing public health-related expenses. Experts say low-income countries “can either pay foreign creditors or allow more of their citizens to die”.

G20 Finance Ministers have agreed a temporary freeze on the debt repayments of the world’s 76 poorest countries. However, creditor nations such as China and Saudi Arabia typically act outside of multilateral debt relief frameworks. The default negotiation club for sovereign creditors is the Paris Club, the members of which are also mostly OECD members. When agreeing debt relief for a poor country facing a liquidity or solvency crisis, Paris Club members usually rely on advice from the World Bank and International Monetary Fund. Troubled developing country debtors can ultimately benefit from substantial debt relief, subject to a typically contentious reform agenda.

External government debt service costs in Ghana, Ethiopia and Zambia.
Countries are spending a growing proportion of their revenues on servicing debt.

China as independent sovereign creditor

Since the late 1990s, and recently under the umbrella of the Belt and Road Initiative, China has become a significant lender to low-income countries. Its approach to aid and investment is foremost a function of its own development experience. As a low-income country in the 1980s, China itself renegotiated some of its foreign-invested agreements. As creditor today, China has only a loose affiliation with the Paris Club. It usually renegotiates troubled loans bilaterally. Typically this produces an extension of a grace or repayment period, including a temporary freeze on repayments. A debt stock write-off is seldom on the table. For China to date, led by its two key policy banks, the China Export Import Bank and China Development Bank, the principal should be repaid, in business principle.

One reason for China’s strictness may be earlier research suggesting that different types of Paris Club relief lead to different economic outcomes. Debt stock relief is found to enhance economic growth and a change to repayment terms to induce greater fiscal prudence and better prospects of long-run debt sustainability. This trade-off may lie at the heart of identifying a balance between the two approaches. Another reason could be that China as creditor is not a single lending agency but in fact something of a labyrinth of lending entities. China may even need something of its own “Dongcheng Club” to instigate greater transparency among and between its own international creditors, with Dongcheng being the Beijing district hosting a cluster of the relevant government agencies.

In other words, China joining the G20’s debt repayment freeze is both consistent with its past practice – in offering a repayment freeze where justifiable; but unique – China seldom participates in multilaterally-agreed sovereign debt discussions. The latter has led to hopes that the extreme circumstances induced by COVID-19 may encourage China to go beyond a freeze on repayments and, Paris Club-style, to more magnanimously offer something closer to a debt write-off. Its past behaviour would suggest that is unlikely.

China promised an “innovative and pragmatic” approach to cooperation with Africa

A year after China launched the Belt and Road Initiative in 2014, Chinese Premier Li Keqiang made his first visit as premier to Africa. Speaking at the African Union, Li emphasised China’s offering of ‘innovative and pragmatic cooperation’, highlighting the fact that China as cooperation partner would not be a traditional player within the global development status quo. One recent investment-level example is the 2019 bauxite-for-infrastructure deal forged between China and Ghana.

COVID-19 nonetheless, has comprehensively interrupted the status quo. Moreover, while China itself remains doggedly on track to realize a long-standing goal of eradicating absolute poverty by 2021, hope for achieving that goal elsewhere has diminished. Low-income African countries face elevated poverty and an economic backward step that will be challenging to recover from.

A new window for an innovative and pragmatic African approach to China?

African countries are important to China’s long-run development agenda, and vice versa. Not only is Africa home to important new energy and technology-related minerals, but it is also home to the largest share of the world’s youth – tomorrow’s markets.

China is the world’s second largest economy and an industrial superpower. Moreover, when China agreed loans to construct the Mombasa-Nairobi railway, there was little related international interest or supply chains. More recently, neighbouring Tanzania has been better positioned to negotiate between a slew of potential rail investors. These trends may accelerate in the shadow of COVID-19.

The backdrop to China’s Belt and Road Initiative is ongoing economic and demographic change in China. Far from marking the death of the initiative, supply chain shocks from COVID-19 may speed up the related relocation of selective industrial capacity. African countries working strategically and proactively with China and other investors may position themselves for a timely win-win. But their prospects for such cooperation will be diminished if left to bear the weight of crushing post-coronavirus debt overhang.

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