By Muhammed U. Hong
Nearly six decades ago, the practice of external borrowing for many developing countries could be linked to two major International Financial Institutions (IFIs): The World Bank and the International Monetary Fund (IMF). These institutions became the most significant source of finance for many third-world economies, particularly in Africa, where countries owe both institutions a large portion of their external debts. However, towards the end of the 1990s and the beginning of the 2000s, the IMF experienced a decline in lending activities in the region.
The institution was becoming almost irrelevant as most countries were reluctant to borrow from it due to its policies and programs, notably the Structural Adjustment Program, which worsened economic and social conditions rather than improving them. As a result, the IMF’s reputation was severely damaged, and countries began to seek alternatives.
In the last two decades, China emerged as a major bilateral lender, gaining prominence for its infrastructure and economic development projects in African countries through three of its most prominent institutions: The China Exim Bank, China Development Bank, and China Agricultural Bank. This led to the rise of many other private sector entities that helped cater to the fiscal needs of developing countries.
Between 2013 – 2022, African countries’ total external public debt stock, as reported by the World Bank’s International Development Association (IDA), rose from US$109.63 billion in 2013 to US$223.74 billion in 2022. China disbursed loans over the same ten-year span, increasing from US$24.11 billion in 2013 to US$62.89 billion in 2022. As of March 2022, 34% of Africa’s total external debt was owed to multilateral creditors, such as the World Bank’s IDA and the International Bank for Reconstruction and Development (IBRD), while 23% was linked to bilateral creditors, including China and Germany. Private creditors, like Bondholders from the United Kingdom, accounted for the remaining 43%.[1] Only a modest portion of Africa’s total external debt stock is owed to China.
External or foreign borrowing is not inherently negative for countries, including African ones. It is widely understood that virtually no country can sufficiently fund its budget by relying solely on its yearly revenue. Thus, governments resort to public debt to fulfil fiscal obligations, especially when running a deficit or intending to spend more than their revenue. In Africa, external borrowing has served as a necessary tool to fund critical domestic infrastructure projects that aim to generate developmental and social gains.
However, the criteria for borrowing—such as the type of debt, its purpose, repayment terms, currency of repayment, and borrowing conditions—play a crucial role. One key metric that lenders assess is the Public Debt-to-GDP ratio, which indicates what a country owes in relation to what it produces and thereby reflects its ability to repay the debt. The higher the Debt-to-GDP ratio, the greater the risk of default. The World Bank established that a threshold of 64% for emerging markets (such as African countries) and 77% for developed economies is where public debt may begin to impact economic growth negatively. [2]
Interestingly, some of the world’s leading economies, including Japan, the United States, and the United Kingdom, have the highest public debt-to-GDP ratios—241%, 114%, and 79%, respectively—while African nations such as Cabo Verde, South Africa, and Nigeria have ratios of 117%, 47%, and 20%. [3] This demonstrates that African countries adhere more strictly to their public debt-to-GDP limits than their Western counterparts. Nonetheless, high public debt does not necessarily indicate weak economies, as some countries can rely on other sources of revenue to offset their liabilities.
So, why does Africa find China more attractive as a lender than IFIs? The World Bank and IMF initially offered loans with favourable terms to African countries in need but came with high interest rates and stringent conditions. African governments were often required to implement reforms designed by these institutions, and the loans were subject to strict environmental, social, and governance standards. Not all African countries were willing or able to comply with these requirements, which diminished their appetite for loans from IFIs and increased their interest in China’s concessional loans, which had fewer conditions. Their “no strings attached” model made Chinese loans more accessible and did not require adherence to governance or environmental standards while offering prospects for debt moratoriums.
For example, new data shows that China’s total lending to Zambia stands at $5.05 billion, equivalent to 30% of Zambia’s external debt. About 80% of China’s loans come from low-interest, concessional finance from China’s development banks, like the China Exim Bank, with the remaining $948 million held by commercial entities such as ICBC and Huawei.[4] However, there are widespread reports of opacity in Chinese lending practices. African governments have been largely silent about whether loans are used for capital or recurrent expenditures, which makes it difficult for citizens to determine the health of their countries’ debt paths.
This lack of transparency raises concerns about inflated project costs, kickbacks, or the financing of white elephant projects ahead of crucial elections. The China-Africa Research Initiative (CARI), a Washington-based team of independent researchers, is one of the few reliable sources for data on Chinese loans, as it gathers information from loan contracts, interviews, and its global network.
Why do some believe Chinese loans are different from IFI loans and are designed to trap low-income countries into surrendering their natural resources?
Public-private partnership (PPP) arrangements and the Build-Operate-Transfer (BOT) model, in which Chinese firms manage projects without fully taking over, have been common in Chinese contracts. However, African countries have begun to default on their loan commitments, leading China to adopt the more controversial resource-backed lending model. This model has been used in Africa as a fundamental way to finance many economic and social infrastructure projects like railways, telecoms, mining, construction, power, etc.
The principle behind the resource-backed lending or resource-financed infrastructure (RFI) model, as they call it, is to allow the borrower country to commit its future revenues derived from the sale of its natural resources to pay for loans provided by the Chinese creditors. Under the RFI model, Chinese lenders have financed an average of 71 projects per year in Africa, at an average value of US$ 180 million since 2010. Between 2000 and 2019, only 26 per cent of Chinese lending in Africa has been tied to the future revenue from natural resources, with Angola taking a sizeable portion of 18 per cent alone. The remaining 8 per cent is evident in loan commitments of US$ 500 million made to Nigeria for its Abuja light rail project in 2012 and 2011 to finance new phases of its airport projects and the Lekki Port’s Free Trade Zone. Others have been used for the US$ 475 million loan in 2011 for the Addis-Ababa light rail project, and in Egypt, for a US$ 1.2 billion loan for their light rail projects.[5] The primary risk of the RFI model is that commodity prices are volatile, which could undermine debt sustainability.
According to CARI, in 2019, Chinese borrowings to African governments began classifying the countries that were perceived as ‘less risky’ due to concerns about debt sustainability. This is because most countries borrowing heavily from China have been identified to have histories of IMF bailouts, making new such borrowings from China unsustainable. CARI examined the situation in 17 African countries that are either in debt distress or at high risk of debt distress due to the high lending volume, which has forced China to address the issue of debt sustainability.
Countries like Ethiopia, Mozambique, the Democratic Republic of Congo and Djibouti were all denied fresh loans in 2019. Others like Kenya, Cameroon and Zambia were given relatively small loans. Angola, the continent’s largest borrower of Chinese loans, with an average of US$ 4 billion per year between 2010 – 2018, experienced a decline to about US$106 million in 2019. This is despite securitising Angola’s future revenue from its oil exports. Nigeria, which surpasses as the continent’s largest crude oil exporter with a history of debt sustainability since 2000, had only been granted a loan commitment of around US$500 million. [6]
The issue of debt sustainability gained further attention during the COVID-19 pandemic, leading to widespread calls for debt relief. China responded by offering debt relief packages (debt cancellation) and an (undisclosed) deferment of interest payments due to the pandemic. In 2020, China joined the G20 to create the Debt Service Suspension Initiative (DSSI) framework to alleviate the economic suffering imposed by the Coronavirus pandemic on African countries. By the following year, China was reported to have suspended debt worth over US$1.3 billion for 23 countries, out of which 16 are African countries.[7] In a similar vein to tackling the Coronavirus pandemic, the IMF was also reported to have approved $500 million to cancel six months of debt payments for 25 countries, with 19 of them in Africa – which is almost one-third of what China had been able to offer to African governments.[8]
According to Jubilee Debt Campaign UK, now referred to as Debt Justice, a UK campaign organisation to end exploitation of debt by more affluent countries, China remains the largest suspender of debt with a whopping $5.7 billion in debt repayment). [9] The China Development Bank – which is a major lender to African countries – had also since 2021 provided US$1.168 billion in debt relief to these countries as a way of cushioning the impact of the pandemic.[10]
What makes China engage in “debt-trap diplomacy” with its African borrowers? — An allegation that Chinese firms intentionally lend to financially irresponsible governments that will be unable to repay loans to take possession of assets.
Many unsubstantiated claims about the Chinese takeover of major state assets in developing countries exist. The most cited case for reference is the Hambantota port in Sri Lanka. The Sri Lankan government secured 2007 finance from China’s Export-Import (EXIM) Bank to develop the port. In 2015, however, Sri Lanka had to arrange a bailout from the IMF even though the Chinese loans only accounted for some 10% of the debt. The government sought to raise cash by privatising state-owned assets, including a significant stake in Hambantota port. Then, a Chinese company got wind of it and successfully bided and bought 70% of the shares. The Sri Lankan government used the proceeds to pay for Chinese loans and other debt services. [11] However, no definitive evidence suggests a similar practice is prevalent in Africa.[12]
Ultimately, it is hard to think that Chinese loans to Africa are meant to inextricably trap them for their rich oil and other natural resources. Over the past decades, Africa’s growing need for infrastructure has led China to fill the void created by Western financial institutions, offering easier access to capital with fewer stipulations.
Although the African continent has managed its debt well, there are still significant risks and challenges associated with Chinese loans, particularly in governance and transparency. It is also true that China’s approach to lending has evolved from being more lenient to becoming more cautious, especially in response to concerns about debt sustainability. This is why it tries to mitigate the risk of defaulting by primarily resorting to the resource-backed financing model, and this has only been linked to a meagre percentage of all its loan commitments to the continent– with the exception of Angola. While resource-backed lending seems pragmatic, it is not necessarily predatory or equate to an intent to exploit or trap countries, especially given China’s history of debt relief. China’s participation in debt relief efforts is consistent with its broader strategy of maintaining long-term relationships with African countries rather than exploiting them.
Africa must halt the practice of raising money at the Eurobond markets—where a range of investors trade bonds—because these bonds come at steep commercial rates and are subject to the dictates of the international financial markets. African countries must also be discouraged from seeking bailouts from financial institutions like the IMF and World Bank to offset existing loans, which excessively pile up debts that lead to unsustainable liabilities.
African governments must ensure prudent financial management while refraining from depleting their foreign currency reserves to pay high interest on those loans. The utilisation of these loans for their intended purposes, whether in infrastructure, social or economic, is crucial for Africa to foster sustainable development, bolster its revenue growth, and improve the quality of life for its citizens. Loans that yield commensurate economic benefits.
Muhammed U. Kong wrote via muhammedu.hong@gmail.com.