Countries facing Covid-19 debt need flexible financing: lessons from China

14 April 2020
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Old Djibouti train station, Addis Ababa, Ethiopia. Photo: Henrik Berger Jørgensen, 2014, CC BY-NC-ND 2.0.

The sharp shock to global economic activity caused by the coronavirus outbreak will be felt acutely by fiscally-constrained governments in the coming months – and potentially years. A global recession will hit developing countries hard, impacting employment, their public services, social spending, and the welfare of the most vulnerable citizens.

China’s past approach as a rising lender and development partner has been one of flexibility and leniency in periods of difficulty. But alongside flexibility – from China and beyond – there will need to be a coordinated effort from development finance partners in the months to come to address the emerging debt crisis.

China’s growing development finance in Africa

China’s economic engagement in Africa has seen a dramatic expansion, much of it linked to infrastructure investment. It is estimated that China has lent $143 billion to African governments and parastatals from 2000 to 2017. These waves of outward capital have been strongly tied to domestic economic cycles and China’s ‘going out’ policy.

Economic trends in China have had amplified (PDF) economic impacts on Africa. For example, China’s booming domestic investment in the early 2000s had significant growth effects on the continent, and the slowdown after 2013 hit major resource exporters to China – such as Angola and Zambia – particularly hard. Knock-on effects, for government revenues and collapsing currency values, also affected the ability of many countries to service external debts. With Covid-19, the economic crunch the crisis has generated will have magnified impacts.

Flexibility in Chinese lending

Despite the fear of ‘debt-traps’ (where debt is used as a means to seize national strategic assets) that Chinese lending has generated, most cases of a country failing to repay their debt to China have resulted in deferment or renegotiated loan terms. From 2000 to 2018, China wrote off $9.8 billion of debt (mostly zero-interest loans) to other countries, many in sub-Saharan Africa. As a creditor, China’s approach to cases of debt distress has been one of flexibility – something sorely needed now as the global economic impact of the coronavirus is already affecting debt service for African countries.

I saw a prominent case of this flexibility while researching the Addis-Djibouti cross-border railway line in Ethiopia – a flagship project in the Belt and Road Initiative (BRI). Ethiopia, struggling with a severe lack of foreign exchange, was able to defer loan repayments and renegotiate the terms of its $1.6 billion railway construction loan from China. China extended the repayment period from 15 to 30 years and also cancelled Ethiopia’s zero-interest loans. Ethiopia’s political relationship with China as a geostrategic partner in the BRI has been an advantage in negotiating for greater lending flexibility.

Transparency and coordination are also key

This flexibility, however, is not always a good thing. Similar to Ethiopia, the Republic of the Congo (ROC) struggled with a loan repayment, and China’s flexible response was again to defer repayment. However, this ad hoc ‘wait-and-see’ approach and the ‘hidden’ nature of the ROC’s Chinese lending complicated the country’s debt restructuring efforts and its negotiations with its Paris Club creditors. Through trilateral engagement with the International Monetary Fund (IMF) and China, the ROC was able to access a loan package from the IMF. This package was conditional on the restructuring of its Chinese debts – and transparency on the amount and terms.  

Countries facing coronavirus debt need flexibility – from all sides

With respect to being a traditional source of capital, China’s flexible approach as a development financier can be an advantage for recipient borrowing countries. But how can we activate this flexibility? The strategic use of political leverage, in the case of Ethiopia, can be effective, but the case of the ROC shows that international pressure and coordination can also be instrumental. This kind of flexibility will be sorely needed to address the immediate economic and fiscal impacts of Covid-19.

As the crisis precipitates capital flight from emerging economies, there is a pressing need to relax debt repayments for highly-indebted African countries. This is a period where both traditional and non-traditional lenders such as China will need to demonstrate greater flexibility as responsible development partners. But flexibility is not enough if only practised by a subset of partners – transparency and coordination will be needed from all sides. Covid-19 is an opportunity for traditional development financiers to work with China, to coordinate and structure debt relief initiatives – and to push for greater transparency on China’s overseas lending.

Authors

Senior Research Officer
Yunnan Chen is a Senior Research Officer in the Development and Public Finance programme. Her [...]