China may reduce lending to Africa, countries feel trapped
China which has an increased economic and political presence in Africa, appears to be in a mood to scale back lending in Africa. The move has shocked the African countries which felt that they have been trapped by the possible move.
The development, as and when it would happen, should be seen in the context of worsening growth rate in the African region. The World Bank has recently reviewed downwards the economic growth outlook for Sub-Saharan Africa (SSA) to 3.3 percent in 2022 from the initial projection of 3.6 percent in April, due to the slowdown in global growth and the ongoing crisis between Russia and Ukraine.
Diplomatic analysts described it as a disturbing trend but added that China seems to be on the verge of changing its growth model. Charles Robertson, global chief economist at Renaissance Capital Ltd, clarified that China’s scaling back would slow growth in the region and “can’t be welcomed by most debt investors.”
In the early years of Chinese lending to Africa, just 25 percent of countries were at high risk of debt distress, with sovereign spreads higher than 1,000 basis points. That proportion has grown to 60 percent, he said.From 2000 to 2020, the top 10 African government which received Chinese loans, were Angola, Ethiopia, Zambia, Kenya, Egypt, Nigeria, Cameroon, South Africa, Republic of Congo and Ghana.
China’s presence in Africa
It may be noted that German insurer Allianz and its credit insurance subsidiary Euler Hermes had disclosed disturbing findingsin November 2020 itself. Over the coming decade, China may no longer be able to provide Africa with the same amount of funding, taking the form of loans, investment and trade, as in the past. China has a heavy debt burden, stated the Hermes. According to its 2020 report, the country’s share of overall debt owed to G20 countries increased from 45 per cent in 2013 to 63 per cent at the end of 2019. China has made significant investments in foreign countries to secure supply and promote its exports. What’s more, the country buys half of the world’s raw materials.
The authors of the report indicated that they “expect China to slow its international engagement over the next few years”. They argued that besides the trade war with the United States, two reasons are behind this shift.
First, the Chinese Communist Party’s decision, driven by President Xi Jinping, to change the country’s growth model to what it calls a “dual circulation” strategy. The idea is to prioritise its domestic market in order to reduce the country’s reliance on imports while maintaining its export market shares. This refocusing is expected to help reduce cash outflows.Second, the Chinese economic machine is set to continue to experience a systemic slowdown and see its pace of growth diminish from the 7% observed each year in the 2010s to somewhere in the range of 3.8% and 4.9% each year over the coming decade. This shift will further strain China’s overseas lending and investment activities.
According to the report, this disengagement would adversely affect the low and middle-income countries in particular. For instance, China has incurred significant losses on the loans it granted to multiple countries. It has become clear that several countries – mainly in Africa, including Angola, Ethiopia, the Republic of Congo and Zambia – are no longer in a position to repay the debt they owe China. Sri Lanka which faces worst economic crisis, has started restructuring talks with China now.
Chinese loans in Africa
The report further indicated that China would be much more selective about the loans it grants. It estimated that between 2021 and 2025, this cautious approach would deprive South Africa of 10.7billion US dollars, Kenya of 6.6billion US dollars, Angola of 5.2billion US dollars, Ethiopia of 4.7billion US dollars, Egypt of 1.3billion US dollars, Zambia of 1.1billion US dollars and Ghana of 0.9billion US dollars. Over a five-year period, these seven countries would lose a total of 30.5billion US dollars.This shortfall would be especially problematic for Ethiopia since close to 15 per cent of its external financing needs would be left uncovered.
Charles Robertson, global chief economist at Renaissance Capital Ltd said that China’s scaling back would slow growth in the region and “can’t be welcomed by most debt investors.” In the early years of Chinese lending to Africa, just 25 percent of countries were at high risk of debt distress, with sovereign spreads higher than 1,000 basis points. That proportion has grown to 60 percent, he said.
Nigeria’s external debt owed to China accounts for 83.57 percent of its total bilateral debt as of June 30, 2022, totalling 3.9 billion US dollars, a 12.7 percent increase from 3.5 billion US dollars in the same period last year, according to data from the Debt Management Office (DMO).
From 2000 to 2020, the top 10 African government recipients of Chinese loans were Angola, Ethiopia, Zambia, Kenya, Egypt, Nigeria, Cameroon, South Africa, Republic of Congo and Ghana, according to data from the Boston University Global Development Policy Centre. Analysts accused China of ruining the lives of millions of Africans which depended on China for infrastructural and over all development of their countries.