Just $1.9 billion.
According to a recent report published by Boston University`s Global Development Policy (GDP) Center, that’s the number of new loan commitments made from China to African countries in 2020. That’s a startlingly low figure, particularly in the context of the fact that, according to the same database, between 2000 and 2020, Chinese financiers made loan commitments worth $160 billion to African countries – that’s an average of $8 billion annually.
So why such a huge drop, and what does this mean for the future? Is this era of Chinese lending to Africa over?
Based on conversations with several Chinese and African stakeholders, there are two key reasons for the drop.
First and foremost, the most obvious reason for the 2020 drop was the impact of COVID-19 in China. The pandemic essentially eliminated travel by leaders and other dignitaries to and from China, usually crucial for surveying and brokering new financial agreements. The evidence for this is twofold. First, the $1.9 billion was the result of just 11 new loan agreements with eight countries (Uganda, Ghana, DRC, Mozambique, Burkina Faso, Madagascar, Rwanda, and Lesotho) and one regional organization (African Export-Import Bank or Afreximbank). In comparison, there were 43 loan agreements in 2019 and 66 in 2018, and an all-time high of 144 projects in 2016.
Second, of the eight 2020 borrowing countries, only Ghana was a previous top ten borrower of Chinese loans (between 2000-2020, the top recipients of Chinese loans were Angola, Ethiopia, Zambia, Kenya, Egypt, Nigeria, Cameroon, South Africa, Republic of Congo, and Ghana). In other words, the countries China usually lends to didn’t manage to secure agreements in 2020. Clearly, the number of deals was cut short as COVID-19 took hold in China and spread out.
But there is another reason for the drop: Since at least mid-2019, the external pressure on African governments to reduce debt levels has been rising, from organizations such as the IMF, credit rating agencies, as well as non-governmental organizations such as the Jubilee Debt Campaign. Much of this pressure has been unwarranted and indicates bias. For instance, in 2019, 64 countries around the world had public debt over a threshold of 60 percent of GDP, but only a third of these were African. However, at the time, the IMF and World Bank classified 12 of the 64 countries as being in debt distress; the only unifying feature of these 12 countries was that they were all African.
Due to this pressure, and despite huge remaining infrastructure gaps, African governments have become reluctant to take on new debt. The increased expenditures necessary to manage the health and economic impacts of the COVID-19 pandemic have been used as a means to further cement international narratives of “African debt risk,” despite many African countries having managed the pandemic very well.
The evidence for this reasoning – and Chinese lenders in 2020 at least remaining skeptical of these international narratives – is that the 11 loan agreements were not made with countries with low-debt ceilings. In fact, all eight countries, apart from Uganda, at the time were either classified as having moderate or higher levels of debt distress by the IMF. Ghana, which received the most loans from China (three projects) in 2020 was labelled as being in a high level of debt distress (and still is). Nevertheless, our understanding is that even in 2019, other African countries were concerned about the debt distress label, and thus sought to promote other financial structures to meet infrastructure gaps, such as Public Private Partnerships (PPPs).
So if these two factors – COVID-19 and narratives of African debt distress – are the two primary reasons for the drop, what does this mean for the future?
First, contrary to some other analysis, the 2020 drop does not signify that China is changing the way it lends to Africa by focusing on smaller projects. The average size of the loans in 2020 was fairly stable. Overall, the loans were $172 million on average in 2020 versus $234 million in 2019 and $178 million in 2018. And specifically for the eight countries over the period 2016-2020, there was only a drop for Madagascar and DRC (versus their 2019 loans). The Afreximbank loan, the one regional project loan in 2020, was also fairly “normal” at $200 million – building on a 2019 loan of $75 million and two separate loans of $500 million and $350 million in 2018. Indeed, in 2018 there was also a $300 million loan to the African Finance Corporation (AFC) and in 2017 a $250 million loan to the African Trade and Development Bank (TDB). The drop therefore provides no evidence that the “era of big lending” from China (if there ever was one) is over. In terms of project size, the status quo remains.
Second, the drop suggests that the appetite for Chinese financing in Africa is strongly dependent on African demand, rather than other factors such as China’s domestic financial situation. Although the recent Forum on Africa-China Cooperation (FOCAC) in 2021 in Dakar signaled that Chinese lenders are open to exploring alternative financing means such as PPPs and expanding Foreign Direct Investment (FDI) if requested by African counterparts, the same documents also reiterated that China remains open to providing concessional loans. Indeed, in a tweet in April 2022, the director general for Africa at the Chinese Ministry of Foreign Affairs wrote, “Will China stop lending to Africa? Our answer is a NO.”
The fact is cheap, concessional loans are badly needed for infrastructure in Africa, particularly to spur efficient cross-border logistics under the newly established African Continental Free Trade Area (AfCFTA). The alternative is a vicious cycle of debt servicing with no economic return. China, as a development partner, understands these dynamics.
To borrow a Chinese idiom, African countries must avoid 临渴掘井 – “digging the well while thirsty.” To do so, African governments will need to maintain the confidence to continue to put forward proposals to China, including online or through ambassadorial representatives in China, and withstand poorly evidenced pressures to cut budgets. Only then will the $1.9 billion rise back up again.