Uncharted Territory: Navigating Africa’s Sovereign Debt Crisis with the Emergence of China as the Continent’s Largest Bilateral Creditor

The COVID-19 economic shock has highlighted the unprecedented amount of influence that China has in Africa, particularly as to issues of debt and development. Over the last two decades, China went from having almost no investments in Africa at all to becoming the continent’s largest bilateral creditor, largely as a result of lending under its Belt and Road Initiative.¹ According to the China Africa Research Initiative at Johns Hopkins University, between 2000 and 2019, Chinese financiers signed an estimated 1,141 loan commitments worth $153 billion with African governments and state-owned enterprises.² This essay examines the impact of China’s growing role as the leading creditor for African states and suggests that this is not simply the case of one set of largely Western countries and multilateral institutions being replaced by another lender. Instead, the opacity surrounding Chinese sovereign lending in Africa has a direct negative effect on efforts to improve transparency in governance on the continent and often implicates debtor sovereignty in alarming ways that merits much greater attention.

A New Default Landscape

Although COVID-19 was not solely responsible for Africa’s most recent sovereign debt crisis, the combined effect of responding to the pandemic and the resulting lockdowns magnified the fiscal strain on countries already in distress. Zambia, which defaulted on its debt in November 2020, is the clearest example of this, but other countries including Ghana, Kenya, Angola, and Ethiopia are in equally precarious positions. One thing that makes navigating this current debt crisis (as well as predicting its outcome) so difficult is the outsized role that China now plays in every negotiation to resolve it. During previous debt crises, when Africa’s chief creditors were Western governments and multilateral lenders, there was a long history of how creditors would respond to debtors in crisis; the script for how it would all play out was relatively well-known. This time around, China’s effective veto over debt restructuring options is a game changer for the global financial order and takes both Africa and the Paris Club nations into uncharted territory.

Even though China’s public banks, particularly the Export-Import Bank of China (China Exim Bank) and the China Development Bank, “are making inroads into the Bretton Woods institutions’ natural habitat” that should not, by itself, give us pause.³ Instead, it is the set of values and policy objectives accompanying that lending, both on the donor and recipient ends, that is highly problematic and has not yet been adequately examined through a moral and ethical lens. China’s rise as the preeminent bilateral creditor to African states is shifting Africa’s development paradigm and has a direct impact—not only on the ability of African states to pay their bills but also on efforts to increase government transparency and strengthen democratic institutions.

A Debt Trap by Any Other Name

While the conventional wisdom is that China, as opposed to both the Paris Club (an informal group of large creditor governments that since 1956 has worked to agree on coordinated responses to sovereign debt crises) and other Western-dominated multilateral institutions, lends on a morally neutral basis without regard for governance, transparency, or human rights issues, the reality is more complex. Not only does China have a strategic vision for its engagement with Africa, albeit one driven overwhelmingly by its growing need for resources to sustain its own economic growth, but it also has an interest in being perceived as a responsible stakeholder on the global scene, observing the norms of the international rules-based order, even if it disagrees with the particulars.⁴ Therefore, some of the discourse about China being a “rogue” donor on the African stage needs further unpacking, particularly in regard to the question of whether Beijing practices “debt-trap diplomacy” to deliberately entrap countries in a web of debt in order to secure some kind of strategic advantage over the recipient.⁵ This is a proposition to which the Chinese sharply object, as do a number of scholars, from both the Global North and South.⁶

Notwithstanding the objection to the term “debt-trap diplomacy,” the fact remains that many African states find themselves indebted to China to a degree unprecedented in their post-independence histories, creating a new dependency.⁷ Compounding this increasingly dependent relationship between Chinese lenders and African sovereign borrowers is the degree of opacity surrounding Chinese debt and the fact that the terms of the underlying debt instruments are not readily available to civil society and other stakeholders.⁸ This lack of transparency in connection with such a significant tranche of African sovereign debt has a direct bearing on governance and accountability issues on the continent and merits a much higher degree of scrutiny.

China’s opaque lending practices are particularly problematic regarding how debt instruments are negotiated and the lack of transparency and accountability surrounding the terms of these contracts. China considers the details of its lending program to be a state secret, and so it feels no compulsion to be transparent to its own citizens about its lending, let alone to the wider global financial community.⁹ In fact, lack of transparency is a hallmark of China’s international development program in that it does not provide country-by-country or project-by-project breakdowns of its investments, unlike, for example, the World Bank, which provides publicly available breakdowns for all projects that it funds.¹⁰ Of course, this lack of transparency in making public the terms of lending contracts is not limited to China—many sovereign borrowers, not just African countries, also do not routinely disclose their loan agreements.¹¹

As is often the case with contracts, the devil is in the details. The problem is that in this case we have very little idea of what those details are. While we may have a broad sense of what China has lent Africa in the aggregate, we can only speculate about the individual loan instruments.¹² This lack of transparency has become a particular concern over the course of the pandemic, as efforts to assist countries in debt distress have been stymied by an unwillingness on the part of states, such as Zambia in 2020, to disclose to multilateral institutions or Paris Club lenders the extent of their indebtedness to China.¹³ In fact, certain Chinese debt contracts have been found to contain unusual confidentiality clauses that prohibit the borrower from revealing either the terms or the existence of the debt itself.¹⁴

What’s Yours Is Mine

We do have some limited insights. A 2021 report jointly published by the Peterson Institute for International Economics, the Kiel Institute for the World Economy, the Center for Global Development, and AidData at William & Mary reviewed one hundred Chinese debt contracts they managed to obtain and found a number of terms that should give us pause. Among these are promises to forswear restructuring with Paris Club lenders, the creditor’s right to unilaterally cancel the contract, and the creditor’s right to demand immediate repayment in case of significant law or policy changes in the debtor or creditor country, as well as the aforementioned potential confidentiality clauses.¹⁵ Many of these contract terms would be found unconscionable or unenforceable as a matter of public policy in the courts of major financial jurisdictions, yet are part and parcel of these instruments.¹⁶

Beyond this Chinese boilerplate, which seems to be common to a range of debt instruments, there is also the question of what individual countries have agreed to in order to fund certain projects—in repayment terms, maturity dates, collateral, and interest rates. For example, in Uganda the government may have put up Entebbe Airport itself—the country’s only international airport—as collateral for a $200 million improvement loan from China Exim Bank.¹⁷ Assets of the Kenya Ports Authority, including the Port of Mombasa, are allegedly collateral for the Standard Gauge Railway (SGR) project.¹⁸ These outrageous contract terms are not simply because the Chinese are “pluckier” or better negotiators, they are the result, in many cases, of the active connivance of African governments and elites.¹⁹ Moreover, these terms are not only disadvantageous to the African borrowers but they also have serious and disturbing implications for both the debtor’s sovereignty and for transparency in governance. Mortgaging strategic infrastructure and natural resources, without public input or oversight, gives Beijing substantially greater sway over the public policies of borrowing governments as servicing Chinese debt comes to take priority over any other area of concern. The opacity of this debt means that critical fiscal decisions, which may affect generations to come, are at the arbitrary whim of central bankers and finance ministers in borrowing states without any real semblance of accountability.

Are African elites benefiting from these lending practices? Certainly. African governments are irresistibly attracted to China’s laissez faire attitude vis-à-vis governance and transparency, as well as Beijing’s historic willingness to fund projects that have faced a more skeptical reception in the West; Kenya’s SGR project is but one example.¹⁶ Moreover, it would be disingenuous and patronizing to assert that these governments do not know what they are doing. The allure of China as a sovereign lender is precisely that their loans come with less political strings than Western lenders, and they tend to be distributed faster.²⁰ In the case of Angola, Ricardo Soares de Oliveira argues that the state’s turn toward China was part of an active strategy to recast its relationships with traditional lenders and obtain better terms.²¹ There is some data to suggest that this strategy might bear some fruit.²²

Shadow of the Cold War, Old and New

Of course, none of this criticism leveled at Chinese debt practices is meant to exonerate those of Western governments or multilateral lenders or to suggest that their hands are clean when it comes to past transparency and accountability issues—even if today those principles (at least ostensibly) hold greater weight than in the past. For example, Paris Club lenders for decades have knowingly lent to profligate and corrupt regimes, such as that led by Mobutu Sese Seko in Zaire (now the Democratic Republic of the Congo) without a peep about democracy, transparency, or human rights—so long as their politics aligned with the Cold War aims of Western powers—fully expecting that every penny lent would be paid back by whatever government happened to be in power.²³ This Western insistence on repayment no matter who undertook the loan was on full display when lenders demanded that South Africa honor the debts incurred by the apartheid regime.²⁴

Nor is all of this a thing of the past for Western lenders. Particularly when loans are backed by oil reserves, Western countries are more than willing to relax their rhetoric on transparency and accountability in government to lend to resource-rich regimes, such as those in Equatorial Guinea and the Republic of Congo.²⁵ Notwithstanding the complications and hypocrisy of this history, the fact remains that a lending framework that is conditioned on transparency, accountability, and good governance principles serves to strengthen civil society and democracy-building efforts in a way that loans missing those conditions do not.

The more the public is engaged in the debt contraction process, particularly regarding the terms of borrowing, the more the ability of the state to borrow arbitrarily is reduced. This ability to circumvent parliamentary and public oversight, by having the actual contract terms known only to a select few, is what makes these Chinese debt instruments so attractive to certain African governments and so toxic to a healthy civil society.

The analysis of China’s impact on the African sovereign debt landscape is further complicated by the fact that all of this is taking place in the context of a profound paradigm shift in the structures of the international financial and political order, one shaped by the deepening rivalry between China and the United States. Whether we call this a new Cold War or not is immaterial; the fact of the matter is that, as with the former Soviet Union, countries in the developing world are being asked by the United States to choose a side in its struggle against China.²⁶ As Andrew Nathan points out in a recent piece in Foreign Policy, “the rise of China represents an epochal change in the world order—the accession of a new great power with interests only partially consistent with the United States’ and in important ways adverse to them.”²⁷ Africa, again, finds itself at the heart of this struggle and development finance is one of the battlefields on which this great power competition is playing out.²⁸ The ability to find multilateral, comprehensive solutions to Africa’s ongoing sovereign debt crisis will depend on the ability of the U.S., China, and the rest of the Paris Club nations to find common ground, which seems to be in increasingly short supply in today’s geopolitical climate.

Conclusion

African states and civil society are trying to navigate uncharted waters as they seek ways to resolve their ongoing sovereign debt crises while also trying to find ways to address the ongoing effects of the COVID-19 global pandemic. Shortages of fuel, wheat, and maize resulting from the war in Ukraine will only magnify the crisis. China’s unprecedented position as Africa’s largest bilateral sovereign creditor, as well as the opacity surrounding the scope and terms of that debt, complicates efforts to chart a course.

Nevertheless, the problem is not that African states are looking to play the growing China-West rivalry to their economic advantage. It is that in the process of securing what they see as the most advantageous loans, they have become overwhelmingly indebted to Chinese lenders in a manner and to a degree that could have profound impacts on their sovereignty. Moreover, they have done this in a way designed to circumvent oversight by both their parliaments and civil society.²⁹ The implications for democracy-building efforts, as well as transparency and good governance, of having China as such an intimate strategic partner merits much deeper reflection here on the continent and around the world.

—Charles B. Chilufya, S.J. and Fernando C. Saldivar, S.J.

Charles B. Chilufya, S.J. is the Director of the Jesuit Justice and Ecology Network Africa (JENA) in Nairobi, Kenya.

Fernando C. Saldivar, S.J. is Global Policy and Advocacy Officer for the Jesuit Justice and Ecology Network Africa (JENA) in Nairobi, Kenya.