Soaring Sub-Saharan Debt Drives Wedge Between World Bank and Lenders

Africa’s Sub-Sahara region’s burgeoning debt is creating a wedge between the Bretton Woods Institutions and other lenders with China singled out for perpetrating a debt–trap that has soared by nearly 150% in the past 10 years, making the continent’s debt load unsustainable.

Soaring Sub-Saharan Debt is Becoming Unsustainable

Total external debt for sub-Saharan Africa jumped nearly 150% to $583 billion in 2018 from $236 billion 10 years earlier, according to World Bank data. Many now worry the debt load is becoming unsustainable as the average public debt increased from 2010-2018 by 40% to 59% of GDP.

In Zambia for example, government debt — including publicly-guaranteed obligations — is set to increase to 96% of GDP in 2020, according to the International Monetary Fund (IMF). The IMF is worried about rising debt in Africa, with about 40% of countries on the continent at distressed levels, Managing Director Kristalina Georgieva said in an interview with Bloomberg TV this past November.

“In some cases we are concerned, in others we see that investing is going to pay off over time,” she said, adding that “debt on its own is not bad, it is bad when it goes for the wrong things, and when it goes with a speed that the economy cannot handle … in cases where debt is dangerous — take Zambia — we do say, you need to really get a handle on your debt. In other cases, like Ethiopia, we say you do need to renegotiate some of your debt.”

Why is Sub-Saharan Debt Reaching Such Disastrous Levels?

Debt levels in the region have been rising as governments struggle to collect and grow revenue while increasing their budgets. South Africa’s ratio is projected to reach 81% of gross domestic product by 2028 and Kenya recently doubled its debt ceiling to match the size of the entire economy.

“We do advise Kenya to be somewhat more cautious in building debt, but we have seen good macroeconomic policies in Kenya,” Georgieva said. “Our program with the country, our engagement with the country, by and large, are just as positive.”

Presently, seven countries — Eritrea, Gambia, Mozambique, Congo Republic, Sao Tome and Principe, South Sudan and Zimbabwe — are in severe debt distress according to the IMF, while nine others including Ethiopia, Ghana and Cameroon are at high risk of debt distress.

It’s a problem across the low-income developing world but is particularly acute in the sub-Sahara region, where the fast-growing debt accumulation has outpaced other developing areas. The trend has been driven by a number of factors, including cheap money in more advanced economies so investors have been keen to seek yield in African countries promising up to 8% or 9% on Euro bonds, said the IMF managing director in a panel discussion at the World Bank in Washington, DC this mid Feb as reported by Quartz Africa.

Lack of Transparency, Bad Debt Management and Inability to Handle the Crisis

The IMF and World Bank are especially worried about the lack of transparency, weak debt management, and a lack of capacity in an increasing number of low-income countries.

“We are faced with a duality. Sophistication of lending instruments is going up. Multiplicity of sources is going up—and capacity to handle is falling behind,” says Georgieva.

Both the World Bank and IMF are jittery about the impact of China which, while still not the largest lender, has become a hugely influential source of capital in African countries that have few options due to their weak economic balance sheet. This is particularly true because China offers a convenient package of funding and execution through its state-owned enterprises for much-needed infrastructure projects across the continent. The problem, said World Bank president David Malpass, is the lack of transparency.

“One of the practical problems we’re dealing with right now is some of the new lenders, the non-Paris Club lenders—and so I guess when we say that, people should sometimes read China into that,” said Malpass. “They’ve escalated their lending, which is good in a way. We want more lending into developing countries. But…oftentimes their contracts have a nondisclosure clause that prohibits the World Bank or private sector from seeing what the terms of the contract are.”

Blaming the Asia Development Bank, European Bank for Reconstruction and Development, and the African Development Bank (AfDB), for “a tendency to lend too quickly and add to the debt problem of the countries,” Malpass added: “In the case of Africa, the African Development Bank is pushing large amounts of money into Nigeria, South Africa, and others without the strongest program to sustain it and push it forward.”
However Dr. Akinwumi Adesina, AfDB president says Malpass comments are “inaccurate and not fact-based.It impugns the integrity of the AfDB, undermines our governance systems, and incorrectly insinuates that we operate under different standards from the World Bank.”

The AfDB argues the World Bank has significantly larger operations on the continent of $20.2 billion in 2018 compared with the AfDB’s $10.1 billion.

China’s Aggressive Investment in Africa

China meanwhile is aggressively seeking investments and contracts around the world, and perhaps nowhere is this more visible than Africa, where Chinese companies have won contracts to build dams, roads, stadiums, airports and railways. In country after country, governments have borrowed heavily from China to pay for these projects.
China’s investments in Africa are central to President Xi Jinping’s signature Belt and Road Initiative (BRI) trillion-dollar program initiated in July 2019 to build infrastructure and extend Beijing’s influence around the globe, connecting at least 68 countries to Chinese trade routes. In 2019 it delivered a whopping $60 billion African aid package, further consolidating its robust economic influence.

According to the China-Africa Research Initiative (CARI), China is now the largest bilateral creditor in the region, accounting for 20% of Africa’s external public debt.

Typically, Chinese loans assume the form of cash for resources. In return for financing and building the infrastructure that poorer countries need, China demands favorable access to their natural assets, from mineral resources to ports. The recipient nations usually suffer from low credit ratings and have difficulty obtaining funding from the international financial market.

China, however, makes financing relatively easily available – albeit with certain conditions and less ‘paperwork’ than conventional sources. China’s ‘tied aid’ for infrastructure usually benefits Chinese companies, while its loans are in many cases backed by natural resources. Through this method China achieves the twin goals of economic penetration and strategic leverage.

America’s Response to China’s Growing African Presence

The Trump administration has accused China of engaging in predatory lending aimed at trapping countries in debt, acquiring strategic assets like ports and spreading corruption and authoritarian values.
US officials have condemned such moves, with former US Secretary of State Rex Tillerson accusing China of “predatory” lending behavior.

“The US pursues and develops sustainable growth that bolsters institutions, strengthens rule of law and builds the capacity of African countries to stand on their own two feet,” Tillerson said in a 2018 speech at George Mason University. “This stands in stark contrast to China’s approach, which encourages dependency using opaque contracts, predatory loan practices and corrupt deals that mire nations in debt and undercut their sovereignty.”

In Kenya, for example, reports indicate that its Government had used its prized port of Mombasa as collateral for a $3.2 billion loan, used to construct a 470-kilometer (292 miles) rail line between the seaside city and the capital Nairobi. In a leaked report linked to the auditor general’s office, Kenya was said to risk losing its port if it defaulted on the loan, with the Exim Bank of China taking over the port authority’s “escrow account” to regain revenues.
Djibouti, a strategically located state at the crossroads of Africa and the Middle East has become a crucial hub in China’s BRI and has accumulated a public debt worth around 88 percent of the country’s overall $1.72 billion GDP, with China owning the lion’s share of it, according to a report published in March 2019 by the Center for Global Development. Some reports even indicate that Beijing now holds over 70 per cent of Djibouti’s GDP in debt.

Sadly, with all these China loans to this east Africa nation, there are real fears it might sign off its port to China after borrowing more money than it can pay back.