By Liam Gibson
As interest rates climb higher and the global economy sags toward recession, developing nations in debt distress are stumbling under the weight of some $237 billion due to foreign creditors, according to Bloomberg bond data.
Sri Lanka may have been among the first to buckle, but Kenya and others are finding it hard to keep their footing, too.
Kenyan officials said last month they would ask China to extend the repayment period on $5 billion worth of loans, with an incoming cabinet minister telling parliament that the debt is “choking” Nairobi’s economy.
China now holds the financial fate of much of the Global South in its hands, accounting for almost 40% of the bilateral and private-creditor debt payments the world’s poorest countries are due to make this year, according to World Bank Group President David Malpass.
Nowhere is this more evident than in East Africa, where China has leveraged lopsided loans for geopolitical gain.
Vanity projects that were supposed to bring China’s infrastructure miracle to the continent have ballooned into costly white elephants, like the railway between Nairobi and Mombasa that was financed by Beijing’s $5 billion loan.
China’s announcement in August that it would forgive 23 interest-free loans granted to 17 African countries only illustrates just how tight its grip on East African sovereign debt has become.
Foreign Minister Wang Yi’s stony silence on just how much had been forgiven and to which countries speaks to the secrecy of Chinese lending and the opacity that makes its debt traps so intractable.
Interest-free loans made up less than 5% of China’s developmental financing between 2001 and 2017, according to the AidData research center at the College of William and Mary.
Chinese financiers, meanwhile, lent over $153 billion to African public-sector borrowers over the past two decades, according to research by Johns Hopkins University’s China Africa Research Initiative. Only $3.4 billion of interest-free debt was canceled over that period.
Preoccupied with its own domestic debt crises, China is unlikely to clean up its debt mess in Africa anytime soon.
East Africa, home to some of the world’s most indebted countries, needs alternatives fast.
Tiny Djibouti carries proportionally more Chinese loans than any other nation. Its total debts to China equate to around 43% of its gross domestic product. It also hosts, coincidentally, China’s only overseas military base.
Ethiopia, Africa’s second-most populous country, is struggling with $13.7 billion in Chinese debt, according to data compiled by the Global Development Policy Center at Boston University.
A Finance Ministry official said last year that the Export-Import Bank of China was withholding an additional $339 million in agreed credit due to the country’s debt struggles.
Addis Ababa is now seeking debt relief via a Group of 20 common framework committee, which China is co-chairing. Progress has stalled, however, due to concerns over Ethiopia’s ongoing civil war.
Southern neighbor Kenya is laboring under $82 billion in debt, a third of which is owed to China. The loans Nairobi took out from the Export-Import Bank of China to finance the railway to Mombasa carry terms of 15 to 20 years, but officials say decades more time will be needed for repayment, given that the line is unlikely to be profit-generating even after 50 years.
Zambia defaulted in 2020 after a 10-fold rise in its debt load from 2006, in large part due to borrowing to finance Chinese-led infrastructure projects. Debt restructuring talks have made little progress since due to the hesitant participation of Chinese state bank creditors, but recent breakthroughs set the stage for the International Monetary Fund to approve $1.3 billion in new support in August.
Rather than help resolve their insolvency by supporting restructurings that would require it to write off some of the debt owed, Beijing prefers to extend the maturity of loans to troubled borrowers on a bilateral basis. It has, though, been secretly granting emergency loans to a few particularly distressed borrowers, including Pakistan and Sri Lanka, according to AidData.
This merely kicks the borrower’s inevitable balance of payments crisis further down the road and deepens dependency on China. Such Band-Aid solutions did not halt Sri Lanka’s fiscal hemorrhage this year and will hardly stop the bleeding in Africa, either.
While China has posed as a self-styled lender of last resort, international institutions have been moving in to help where they can. The IMF has restarted injecting funds into Pakistan and is working on firming up a preliminary turnaround plan for Sri Lanka. It is also moving ahead with a debt reduction scheme for Somalia and reengaging hyperinflation-plagued Zimbabwe, which has not borrowed from the fund in over two decades.
The spreading troubles with Chinese loans speak to the importance of transparency, accountability and fairness in global lending, and what we have seen so far could be just the tip of the iceberg.
Around half of all Chinese loans to Africa remain hidden, according to estimates by AidData, which has the world’s largest data set on China’s development financing.
Multilateral lenders are now pushing recipient countries harder to disclose the terms of their debts to China. Yet the international community must not only hold Beijing to task for exploitative lending practices but also take stock of how we got here.
The lure of unconditional Chinese credit proved irresistible only because development finance to the Global South had become woefully inadequate. Institutions and governments must ensure ample credit remains accessible to African nations, going forward.
They must also better communicate the advantages of the established lending model and demonstrate how loan conditionalities offer guardrails against fiscal train crashes, offramps to Chinese debt dependency and pathways to sustainable development over the long term.
Liam Gibson is the Taipei-based founder of Policy People, an online platform for think tank professionals.