African borrowers must unite to seek the best deals from China and the West
At the spring meetings of the IMF and the World Bank, alarms were raised about the ability of low- and middle-income countries, including in Africa, to weather the combined storm of the fallout from Covid-19 and the the Russian-Ukrainian war, alongside continued vaccine hoarding, new sanctions and global supply chain challenges.
In managing this complex storm, the role of China has been mentioned several times, notably by the European and American officials of the IMF and the World Bank respectively, Kristina Georgieva and David Malpass.
Malpass was particularly scathing, saying that “China remains outside the Paris Club, the main institution where debt restructuring talks take place.”. This comment reinforced a dominant narrative that since China is “on the outside”, the country does not offer debt relief or restructuring, and that this harms the economic stability of African countries.
However, most African policymakers know that this inference is factually incorrect. China engages in debt relief as well as restructuring. Analysts in my firm have calculated that in the period 2000-2018, China canceled the debt of at least 20 African countries, which is equivalent to 1.5% of all loans taken out across Africa from China, and in some cases like Zambia more than other bilateral lenders. . Rhodium Group’s analysis in 2019 revealed 40 cases in which China had renegotiated or restructured debts, including from several African countries.
So if China is “out”, how does this cancellation or restructuring happen? Would there be better outcomes for African debtors if China joined other creditors?
The World Bank or others seeking to be in the room with China is a classic case of wanting to control the negotiation with the borrower – in this case, the African government.
On the other hand, China is much less interested in the positions of other creditors. Why?
China’s approach to lending
The first reason is how Chinese loans are agreed in the first place. Although I am simplifying to some extent, this generally falls into two categories.
First, loan agreements are entered into directly with governments, tied to a specific project (such as a rail, road or energy project) with standard terms.
China expects the refund to be increased from the country’s tax base, and often the country’s tax base increases endogenously due to the project (i.e. it is a public good). Thus, variables such as the pace of economic growth (and therefore Covid-19 or other shocks) matter a lot to Chinese lenders in terms of repayment projections, rather than specific debt volumes or even policy reforms. interior. It is a feature of Chinese loans that political reforms, which are seen as interference in internal affairs, are not necessary for the loans to go ahead.
The second way Chinese banks provide loans is through a specific vehicle – a “bankability” structure. This comes into play when a government faces borrowing constraints – such as a lack of credit rating, arrears or even sanctions. Such governments are the equivalent of the “unbanked”. In such cases, Chinese banks are flexible and can agree to set up “escrow accounts”, into which payments either from the project itself (such as a toll road) or from another resource (such as products sold to China) can be paid.
Some interpret these accounts as a form of conditionality, but this is inappropriate from the perspective of borrowers. I will never forget a conversation with a very jubilant senior African government official who had just completed an escrow-based negotiation. According to him, the new agreement was fantastic for his country and its citizens. This would ensure that money would not be wasted – and would instead be spent directly on badly needed infrastructure.
Another form of analysis
These two types of loan agreements significantly affect the way Chinese banks analyze debt challenges.
Overall, African loans constitute a tiny portfolio of China’s banks’ overall domestic and external debt. However, due to the two types of agreements, Chinese loans are quite spread across the continent. Excluding the top 10 African borrowers, Chinese lending since 2000 has averaged $1 billion each. Chinese banks also tend to use standard grace periods, long maturities and relatively low interest rates to avoid defaults, and do not differentiate, as multilateral banks do, the terms for countries with different income levels.
If, for example, an African borrower has a problem, the first action Chinese lenders will take is to examine their own portfolio to see how they can handle the challenge. Of course banks hope to avoid default – and it is certainly easier to do so if there is an escrow account – but as we see from the evidence of 2000-18, banks end up extending or Write off limited amounts from their portfolio.
This is how China has earned a reputation as a bilateral debt negotiator. Chinese banks don’t need other creditors in the room to make these decisions, assuming (respectfully) that borrowing governments can be trusted, just as China was when it borrowed from China. other countries like Japan.
Chinese banks also do not expect to be responsible to other creditors for the loans they provide – each lender must know its own means, and the borrowing government has the sovereign responsibility to decide whether or not to share information on the debt with all parties, even his own. citizens.
What does all this mean? And why is it important now? It goes back to the spring meetings. While it is crucial for China to recognize the key spending challenges facing African countries and other low- and middle-income countries, the idea that China and other creditors must come together to negotiate with every borrower one by one should be considered a red herring by borrowers.
Indeed, an often overlooked fact is that in Paris Club negotiations, borrowers are not even in the room for the final discussion. After a presentation of his file, the borrower leaves and a French representative carries out a diplomatic shuttle to inform the borrower of the result. China joining such an antiquated colonial deal is highly unlikely to lead to better development finance for Africa.
That said, China is not a perfect lender. Much can be done to improve the terms and conditions of Chinese lending and even its debt relief and restructurings for African countries.
Borrowers should coordinate
There is a great disparity in treatment and volumes. But that doesn’t mean creditors have to coordinate. He suggests borrowers coordinate — to exchange experiences and be in the room together. Indeed, it is a model that borrowers could consider vis-à-vis all creditors – the Paris Club, the IMF, the World Bank and China included.
In 2019, UN Deputy Secretary General Amina Mohammed used the phrase “overthrowing orthodoxy”. Today, we Africans must overturn orthodoxy to reposition borrowers. Our experience with China can help.
Hannah Ryder is CEO of Development Reimagined, an African-led international consultancy based in China.