As U.S. President-elect Joe Biden starts to formulate his foreign policies, the list of regions and issues needing immediate attention is already long. But one that should stand out is Africa’s debt. Tipped into crisis territory by the economic knock-on effects of the COVID-19 pandemic, it threatens to push the region further into China’s hands.
Even before the pandemic hit, many African countries had enormous debt burdens, which grew heavier this spring when the value of their currencies fell relative to the foreign currencies in which the debt was denominated. At the same time, the income necessary to make regular interest payments on the debt dried up. Commodity-dependent African economies like Angola and Nigeria rely on oil; demand had already been slumping since 2015, and the sectors were hit again this year as global demand plummeted because of the COVID-driven economic downturn. Those more service-oriented African countries not dependent on commodities fared no better, since tourism and foreign remittances cratered as well.
Facing an untenable situation, in March, Ethiopian Prime Minister Abiy Ahmed wrote an open letter with a plea for help. He called for a two-year moratorium on debt repayments: from all creditors (bilateral, multilateral, and private) and for all African countries (not just the poorest). With the continent spending about 2 percent of its GDP just servicing its debt, he pointed out, there was little funding left to direct toward the pandemic response, for which he also requested an additional $150 billion in emergency financial assistance.
In the run-up to this spring’s G-20 meeting, his call was picked up by European and African leaders. But the initiative that emerged from the G20—the Debt Service Suspension Initiative (DSSI)—covered only bilateral debt (not all debt), only through the end of 2020 (not for two years), and only for the poorest African economies (not all of them). A proposal to grant IMF Special Drawing Rights, which would have given the countries access to additional financing, also faltered. The United States, it appears, had blocked such a measure since the Special Drawing Rights (SDRs) would have been available to all countries—benefiting friend and foe alike including China, Iran, and Russia. SDRs would have been game changing. Last employed in response to the 2009 global financial crisis (and backed by the Obama administration at that time), they offered far more in terms of fiscal breathing space—in the form of an injection of liquidity—than the DSSI, which just put a temporary hold on debt repayments.
Despite hopes that the DSSI would be extended for longer, in October it was renewed again for only another six months. G20 members sympathetic to Africa’s plight argue that the short time horizon is an attempt to improve the measure before locking it in over a longer period. Namely, they want to secure the full participation of China and private creditors who between them hold two-thirds of Africa’s debt. Failing to secure their buy-in risks relief intended for the pandemic response going instead to service Africa’s debt to China and private creditors.
Historically, African debt was principally held in the West. But today, China is a major player. At $143 billion, it has 20 percent of all African debt on its books. The remainder is split between the major multilateral international financial institutions, like the IMF and World Bank (which together hold 35 percent), and the private sector (32 percent).
In some ways, those figures represent a success—especially the diversification into that third sector, private credit. Justifiably viewed as a hard-won achievement, private investment has opened up another major source of development financing. Yet private debt falls outside of the DSSI, and some African countries, including Kenya, feared that accepting the agreement would lead private creditors to downgrade their credit ratings. They have therefore opted out of the DSSI. In the long run, they hope, doing so will preserve their access to private capital. But in the short term, it represents a difficult fiscal choice.
And then, of course, there is China to consider. To the extent that it, like the private sector, isn’t playing along fully with the DSSI, China is left with influence to try to renegotiate the debt it holds on its own terms. And the question is not whether Beijing will renegotiate if asked. The question is what it will want in return. Arguably, it views advancing its global footprint as more valuable than immediate debt repayment.
The West should sit up and pay attention to this issue. Not out of charity, but rather because the debt issue has exposed in dramatic fashion the degree to which it has failed to create alternatives to China’s model merging state power and the private sector. This represents both a geopolitical loss and a real loss for Western business who might otherwise want to invest on the continent.
So what can be done? For now, efforts are underway to improve the DSSI to include the private sector and increase Chinese transparency and full participation. Failing that, the Western powers could up the ante: condition further DSSI assistance on recipient countries entering an IMF program, which would give the IMF a say into how countries manage their debt obligations. But entering an IMF program would also imperil African countries’ future access to private credit markets, so it would serve as a stick of last resort.
This situation highlights the role that the West needs to play in providing alternatives to Africa in financing and investment. Debt relief now is firefighting. Financing and private investment is a longer-term readjustment of the asymmetry with China. In Europe, there are stirrings in this direction. Working with the EU and others, France has called for a heads-of-state meeting slated for May 2021, with the aim of generating alternative financing and private investment mechanisms for Africa. President Emmanuel Macron has pointed out that the OECD rules have made Europe unable to compete in Africa on a level playing field against those—China—that do not abide by it.
In the United States, meanwhile, a Biden administration offers the opportunity to revisit the key SDR issue. Already supported by the overwhelming majority of U.S. allies, Biden could correct Trump’s SDR veto and unlock a major source of relief.
