Can China and the Paris Club work together in the service of Africa?


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The economic crisis linked to Covid-19 “has brought a significant risk of over-indebtedness in several African countries by exacerbating the vulnerabilities that have accumulated over the last decade”, according to an article by BNP Paribas entitled “Managing the risk of over-indebtedness of Africa (2021) ‘.

According to academics Francisco G. Crneiro and Wilfried A. Kouame, the need for public financing has doubled the debt-to-GDP ratio “in more than a quarter of the countries of sub-Saharan Africa”.

Since the 1950s, the Paris Club has brought together the major creditors and financial institutions involved in debt restructuring, providing both political and financial tools. Although China is not a member of the Paris Club, it is Africa’s largest bilateral creditor, and it became a challenge.

New trends

In 2018, China held 21% of the public and public debt of 38 African countries eligible for the initiative.

“We are faced with an unprecedented situation for African countries: they have a repayment framework with Paris Club creditors and another with China. The two are very different and that is the major challenge. China’s loans through its specialized banks (such as Exim Bank) are part of its Belt and Road (BRI) policy, ”explains Estelle Prin – Chinese analyst and lecturer in geopolitics at Sciences Po Lyon – The Africa report.

“There is little financial information available; sometimes borrowing countries can disclose them, but China cannot. The challenge for Paris Club creditors is to assess the level of indebtedness of countries requesting relief or suspension, ”she said.

However, China’s accession to the G20 framework could be a step towards Paris Club terms. “As long as China joins the G20 Common Framework […], the debt relief it provides over the coming period is likely to be closely aligned with the relief provided by Paris Club members due to the principle of “comparable treatment” incorporated into the Framework. common, ”says Lex Rieffel in an article titled“ Normalizing relations with China with the Paris Club ”.

This implies a similar treatment of the indebted country by the creditors. However, it is difficult to imagine China giving up its preferential contractual clauses.

Geopolitical battle

“By insisting on the issue of Paris Club clauses, Western countries are actually trying to fit China into their debt rules, while taking a step back, lowering credit limits and, at the same time, , absorbing gently[ing]’the potential influence of China’s foreign loans with their framework of rules, and share the reputation benefits of China’s sovereign loans,’ said the Chinese Embassy in Comoros.

Indeed, it is less an economic problem than a political problem.

Perhaps what is needed is a more conducive international sovereign debt architecture, coupled with a change in the governance system in Africa.

“Today, the United States government is one of the smallest creditors in low-income countries, with only $ 370 million in bad debts. China, on the other hand, with more than $ 31 billion in bad debts on heavily indebted poor countries (HIPCs), is a larger creditor than all other government creditors combined, ”said Scott Morris, in his testimony before the US House Subcommittee on Security, International Development and Monetary Policy.

“It will be a question of which terms prevail. The Paris Club cannot compete with China’s spending credit capacity. Within the Paris Club, there is a credit limit on import-export banks (around 12%). China, not having respected these limits, can go as far as it wants – sometimes [up to] 50% – they want [lend] freely, ”said Alexander Demissie, founding director of The China-Africa Advisory. The Africa report.

China also appears to have a variable and evolving approach.

“China faces its own economic, monetary and financial challenges. This could decrease the amounts it is willing to lend to African countries, ”explains Prin.

She adds: “China’s attitude also varies depending on the context, there are two types of countries. If they have natural resources, like Angola, they will have high debt service capacities and will be less of a problem for China. Poorer countries with fewer resources and low growth may have more difficulty ”

Sovereign bonds and downgrades

In response to these challenges, the first joint debt relief initiative under the G20 – Debt Service Suspension Initiative (DSSI) – was created.

Debt service includes interest and principal payments on loans, but also on sovereign bonds. They are issued to raise public funds and repay past loans. While 18 African countries joined the DSSI in April 2020, many of them experienced a loss of confidence in their markets. At the same time, Fitch Ratings downgraded seven of the 19 sovereign states rated in sub-Saharan Africa.

“Rating agencies have become chief deterrents and […] very dogmatic. They say if you even plan to reconfigure or restructure your debt, we’ll lower your grades. These are the same agencies that were give AAA ratings just before the global financial crisis [in 2008]. They haven’t really changed or understood the realities on the ground, ”Zemedeneh Negatu, global president of the Fairfax Research Institute, said at a talk at Chatham House.

Default and restructuring

With the DSSI being extended until the end of 2021, questions about possible defaults on the continent remain.

According to the IMF’s “Regional Economic Outlook for Sub-Saharan Africa”, “non-resource-dependent countries are expected to see their average per capita income increase by 21.6% by 2025. Oil exporters, who are among the most populous countries in the region, will have no gain in per capita income during this period.

Until there, Zambia is the only country to have defaulted on its bond (Eurobond). Its economy – which is based on copper production – and its high debt-to-GDP ratio (94.5% in 2020) seem to confirm IMF forecasts.

However, restructuring through the DSSI could have other motivations. “It has nothing to do with Ethiopia’s repayment capacity, we only have a billion dollars of bonds that we manage on a regular basis. It is not a question of bankruptcy or insolvency, it is a question of obtaining additional financial support – therefore restructuring – because it is at the heart of our [Homegrown Economic Agenda] reforms, ”Ethiopia’s Finance Minister Eyob Tekalgn Tolina said at the Chatham House conference.

At the end of the line

Although the absence of a clear agreement between China and the Paris Club may serve African countries benefiting from DSSI, “a two-way pandemic leads to a two-way recovery,” said Kristalina Georgieva, managing director from the IMF.

Perhaps what is needed is “a more conducive international sovereign debt architecture, coupled with a change in the governance system in Africa,” says Rabbah Arezki, chief economist and vice president for the region MENA at the World Bank.

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