The COVID 19 pandemic has had a huge impact, bringing the global economy to a halt. We saw in April, the New York Mercantile Exchange, registering a barrel of oil at minus $37.63. It is not only airline carriers that are laying off huge numbers of employees.
Even in China, the leading force of world growth, we see the GDP has decreased in the first few months of 2020 by 8.6%. Those countries with low-incomes, subject to commodity prices, and tourism now find themselves and all of their citizens facing economic disaster. Citizens can’t afford to pay for basic amenities, let alone enjoy playing for Thunderbolt Casino bonuses!
The Prime Minister of Ethiopia, Abiy Ahmed reached out to creditor countries stating that many countries, 64 in fact, we're already spending more money on repaying external debt in 2019 than they were spending on health, which has left little money to deal with the issues wrought by a pandemic. Most of these countries, practically half, are located in sub-Saharan Africa.
Half of Ethiopia’s revenue which is accrued from exports is spent servicing existing debts. Now with the pandemic, the situation is even worse. Revenue has decreased further but at the same time, health expenses have increased. Experts are saying that low-income countries have a choice, they “can either pay foreign creditors or allow more of their citizens to die”.
A temporary suspension of debt repayments for the world’s lowest-income countries has been agreed by Finance Ministers of G20 countries. But some creditor countries like China and Saudi Arabia for instance are known to behave outside of the recognized joint debt relief framework.
The sovereign creditors club, otherwise known as the Paris Club, is made up of mainly OECD members. When the situation of debt relief comes up in a financial crisis in a particularly poor country, the Paris club will take advice from the International Monetary Fund and from the World Bank. These poor and troubled countries are able to benefit from debt relief but do need to contend with a somewhat controversial reform agenda.
China – independent sovereign creditor
Low-income countries have been receiving significant amounts of aid from China since the late 1990s. This, under the Belt and Road Initiative. China’s approach to investment and aid is based on its own developmental experience. China was itself a low- income country back in the 1980s and renegotiated previous foreign agreements. China, as a creditor, is only loosely connected to the Paris Club.
It will generally renegotiate problematic loans jointly. This often involves an extension to the repayment time and perhaps a temporary freeze on payments. It is very unlikely for China to write-off debt. China’s two policy banks are the China Export-Import Bank and China Development Bank. For China, the repaying of the principal is a basic business rule.
China is very strict, perhaps because of economic outcomes that have occurred following Paris Club relief. Economic growth is found to occur with debt stock relief as is a change to repayment plans to bring about greater financial prudence and a chance of “long-run debt sustainability”.
This is China’s way of finding a middle way between the two options. China is also not a single creditor but part of a whole group of lending bodies which is possibly another reason for their approach. It could be that China needs a “Dongcheng Club” of its own to create more transparency of its own creditors. Dongcheng, in Beijing district, is where many of the relevant government agencies are located.
So, China being part of the G20’s debt repayment freeze is in line with its usual practice, which is agreeing to freeze repayment where it can be justified. But at the same time, China rarely joins in with multilaterally-agreed sovereign debt talks or schemes. However, it is hoped that the extreme situation brought about by the pandemic may move China to agree to more than just a freeze on payments and perhaps to act more in line with that of the Paris Club and move to write-off debts. But according to China’s past behavior, this does not seem likely.
China’s approach to cooperation with Africa
In 2014 China introduced the Belt and Road Initiative and its Premier, Li Keqiang made a visit to Africa. He spoke at the African Union and clearly stated China’s intention of “innovative and pragmatic cooperation”, stressing that China would not play the usual role within the international development status quo. An example is the 2019 investment “bauxite-for-infrastructure deal” made between China and Ghana.
But the status quo has been seriously interrupted since Covid-19. China is still holding onto the goal or completely getting rid of absolute poverty by the year 2021, but everywhere else this goal seems to have faded. African countries with already low incomes face increased poverty and a challenging economic situation which will take them backward and be difficult to overcome.
COVID-19 nonetheless, has comprehensively interrupted the status quo. Moreover, while China itself remains doggedly on track to realize a long-standing goal of eradicating absolute poverty by 2021, hope for achieving that goal elsewhere has diminished. Low-income African countries face elevated poverty and an economic backward step that will be challenging to recover from.
Possibilities for a pragmatic African approach to China
China has an interest in African countries for its long- term development plans. At the same time, China is important for the African long-term agenda. African has very important new energy and technology connected minerals. It is also the largest population of the globe’s youth. This huge young population is the market of tomorrow.
China is today an industrial superpower and the second-largest economy in the world. There was little international interest in joining China when it agreed to loans to develop the Mombasa-Nairobi railway. Tanzania has since been able to attract and negotiate with many possible rail investors. Hopefully, this will continue as the pandemic eases.
China is going through major economic and demographic changes. It could well be that the fall out from the pandemic may in fact increase the speed in which some industries get relocated. Those African countries working closely with China and other investors may actually benefit from this. However, one thing which may hinder this cooperation is if the increased levels of debt accrued during and after the pandemic. Debt write-offs may be the only way forward.
For China and African to move forward together on “innovative and pragmatic cooperation”. It could be that China may need to make an about-turn and offer to write off some debt. China may need to change its current loan stock to align with loans from the World Bank and the IMF. The prospects for sustainable debt and development in those countries where debts are high could aid in this. Serving both of these could be the Belt and Road Initiative.
The best way forward would be to all work together – countries in debt and the Paris Club to find the right balance between debt relief and debt stock. This should align with Africa’s moves towards eliminating poverty and should embrace more sustainable future globalization.