Africa’s debt crisis, worsened by the COVID-19 pandemic, European war, and climate change, is reaching alarming proportions. Public debt in Africa reached US$1.8 trillion by 2022, an 183% increase since 2010, and nearly 300% higher than Africa’s GDP growth rate. This imbalance makes it difficult for governments to manage their financial resources.
China, a key lender in Africa, extended loans exceeding US$170 billion to 49 African countries and regional institutions between 2000 and 2022. A New Institute for Security Studies (ISS) research found concerns about China’s lack of transparency, clauses impacting local industries, and the absence of collective restructuring options in Chinese loan contracts.
Chinese loans have been instrumental in financing infrastructure projects and stimulating economic growth in many African countries. However, recent trends suggest a reduction in these loans due to factors like COVID-19 and evolving Chinese priorities. The term ‘debt trap diplomacy’ suggests that China may use its loans to ensnare African countries in unsustainable debt burdens, potentially leading to a loss of sovereignty. While these claims are disputed, some of China’s lending patterns require closer examination.
China’s loans to Africa differ from those of Western institutions like the World Bank and IMF, as they often include conditions that can strain fragile African economies. These conditions include the prohibition of collective restructuring and extensive confidentiality clauses, which limit borrowing nations’ ability to make independent financial decisions. A lack of transparency surrounding Chinese loans is another major concern, as government transparency is crucial for financial interactions with external creditors.
A study found that half of Chinese loans in sub-Saharan Africa are not disclosed in sovereign debt records, affecting infrastructure projects funded by Chinese loans. This lack of transparency increases the risk of corruption, especially in weak governance structures. Concessional loans, often directed towards infrastructure projects, are crucial for China’s engagement with Africa and reducing the continent’s infrastructure gap.
However, lending contracts often stipulate that Chinese state-owned enterprises are primary contractors for the projects, suppressing local industry development and introducing other problems.
Chinese loan contracts can pose significant collateral risks and hinder African countries’ financial flexibility. For example, the Entebbe International Airport Upgrading Project in Uganda, granted by China in 2015, required a cash deposit in an escrow account, allowing the lender to seize it in case of default.
The contract mandated a 20-year loan repayment for all airport revenues, a practice found in numerous Chinese lenders and foreign states, according to the Centre for Global Development.
Africa’s debt crisis requires immediate attention, and China should help find sustainable solutions. Concerns about transparency, collateral agreements, and their impact on African sovereignty must be addressed. ISS research suggests steps to address these concerns include legally binding transparency in loan agreements, fair regulations for all creditors, improved debt management, and increased research to enhance debt management capabilities at the national level in Africa.