China, the world’s largest bilateral creditor, is under pressure to provide debt relief to free up funds for poor countries, many in Africa, to fight COVID-19 and its economic impact. Almost daily over the last few months, articles have been published in major news outlets regarding debt relief for low-income countries, emphasizing China’s role and frequently referring to China’s participation in the G20’s Debt Service Suspension Initiative (DSSI). But the DSSI is only part of the picture. There are in fact numerous examples of Chinese debt relief over the last two decades from which we can gain insight into the likely shape of China’s COVID-19 era debt relief.
Firstly, and most notably given the continued accusations of “debt trap diplomacy,” Chinese actors do not seize assets in response to debt repayment issues (while the case of the Hambantota port in Sri Lanka is often characterized as an asset seizure, this has been shown to be incorrect). Secondly, Chinese debt relief tends to be ad hoc and applied on a case by case basis, rather than following a standardized process, in contrast to debt relief offered by the Paris Club, a multilateral forum for restructuring bilateral official debt.
My fellow researchers and I, led by Professor Deborah Brautigam at the China-Africa Research Initiative (CARI), maintain a database of Chinese loans to Africa, tracking each loan Chinese financiers have extended to African governments and their state-owned enterprises since 2000. We estimate Chinese financiers signed loan commitments totaling US$148 billion with these African borrowers between 2000 and 2018.
According to World Bank figures, low-income African countries eligible for the DSSI owe China approximately US$64 billion of disbursed outstanding debt, with US$7 billion in debt service due this year. That is a considerable sum that either has to be paid to China, and therefore cannot be contributed to COVID-19 relief efforts, or suspended by China.
The DSSI is only a small piece of the debt relief that will likely be necessary in the wake of the COVID-19 crisis, however. The economic impact of COVID will extend beyond the eight months covered by the DSSI. And as a debt service moratorium, the DSSI does not address underlying debt sustainability over the long term.
Where does China stand on the DSSI?
The G20 countries, including China, along with the Paris Club, the World Bank, and the IMF, have teamed up to launch the DSSI, which proposes a moratorium on official bilateral debt service for low-income countries extending for the final 8 months of 2020, and encourages private creditors to do the same.
This marks the first time that China has signed on to a multilateral debt relief initiative. However, much controversy remains over China’s involvement. The DSSI applies to “official bilateral debt,” and what qualifies as official bilateral debt is a point of contention. Rumors were recently swirling that China was going to exclude from the debt relief process all loans other than zero-interest loans (ZILs), which make up less than five percent of China’s lending to Africa, essentially “making a mockery” of its involvement in the initiative.
Months after the launch of DSSI, we have more clarity on how China will participate. The rumors were proven false as China began to extend debt service moratoriums to low-income countries under the initiative, and the World Bank confirmed the participation of China Eximbank. Of the US$ 5.3 billion suspended under the initiative as of mid-July, at least US$ 2 billion has been suspended by China, according to the Financial Times.
However, the China Development Bank (CDB) will not participate in the DSSI as an official bilateral creditor, although Chinese officials have asserted that CDB is participating in debt suspension efforts as a “market-based financial institution.” This seems to be a strategic move on the part of China to avoid locking in CDB to the DSSI terms, especially as the terms may be expanded. The fact that the World Bank itself is not including its own loans in the DSSI may also play a role in China’s reluctance to include the CDB.
The exclusion of CDB from the DSSI has attracted criticism, including from David Malpass, the president of the World Bank. CDB is well-known as one of China’s two policy banks along with China Eximbank, directly overseen by China’s State Council. CDB is not, however, a large lender to low-income countries in Africa, outside of Angola.
Beyond the DSSI: “Debt Relief with Chinese Characteristics”
What will happen with Chinese loans not covered under the DSSI? And what will China do if the DSSI is not enough to address the debt crisis in certain countries? It is likely that some borrowers will fall into arrears on their loans to China under the dual pressures of macro-economic and public health crises. Fears of China’s debt-trap diplomacy and asset seizure abound.
Our research at the China-Africa Research Initiative shows that when countries have trouble repaying their loans to China, rather than suing them in court to seize assets, China provides debt relief. For our recent publication, “Debt Relief with Chinese Characteristics,” we documented 16 cases of debt restructuring involving US$ 7.5 billion in 10 countries in Africa, and 1 case of refinancing for Angola, between 2000 and 2019. China also cancelled African loans worth roughly US$ 3.4 billion in the same period, although only ZILs are eligible for loan cancellation.
But the way China provides debt relief is distinct. Much like the Belt and Road Initiative writ large, China’s debt relief tends to be messy and ad-hoc rather than meticulously planned out. China has never joined the Paris Club and, other than the DSSI, negotiates debt relief bilaterally. Among the cases of China’s restructuring in Africa, no two cases are the same. There does not seem to be any standardized processes or consistent oversight body. Different lenders provide debt relief differently, and negotiations with different countries play out differently. Negotiations with Chinese lenders can often take up to a year, and outcomes vary widely.
Begrudgingly Kicking the Can Down the Road, but not that Far: The case of Cameroon
On one end of the spectrum we find relief that looks similar to the DSSI, whereby debt payments are reduced or forgiven for a short period, but the original terms of the loans remain the same, like in the case of Cameroon.
Unlike the DSSI however, the debt relief deal reached with Cameroon was negotiated bilaterally, and reflected China’s close but rocky relationship with Cameroon. China Eximbank has signed over US$ 5 billion worth of loans with Cameroon between 2000 and 2018 for infrastructure projects, but as much as US$ 2 billion remained undisbursed from China Eximbank as of end-2018.
Conflicts over repayment mechanisms, contract bidding, and Cameroon’s inability to pay its share of project costs all hindered project implementation. (Like most Export Credit Agencies, China Eximbank often only funds a percentage of project costs, usually 85 percent, requiring a 15 percent “buy in” from the borrowing government.) One Chinese project engineer working in Cameroon wrote an article about the difficulties they face in the country, including electricity shortages and strained relationships with local project supervisors.
So when Cameroonian President Paul Biya requested debt restructuring in August 2018, China Eximbank appeared reluctant. Eventually, Cameroon decided to take measures into its own hands, unilaterally deciding to withhold debt service payments in January 2019 in the hopes that the payments would be folded into a relief deal. In response, Eximbank halted disbursements to its projects in the country.
Finally, the two sides reached an agreement in July 2019. Cameroon was required to pay the debt service it had withheld up to that point, and China Eximbank would reduce the payments owed by Cameroon by two-thirds for the next three years for a total of US$ 250 million of deferred payments. However, Cameroon would still have to pay off each loan by the original due date. Effectively, the deal kicked the can down the road, but not that far.
Achieving Sustainability with the IMF Watching: The case of the Republic of Congo
On the other end of the spectrum we see maturity extensions and interest rate reductions on large loans, like in the Republic of Congo.
Like in Cameroon, China Eximbank has also signed billions worth of loan commitments with ROC, just under US$ 5 billion. Unlike Cameroon however, ROC is a large oil exporter and many of its loans from China Eximbank are backed by escrow accounts filled with revenues from ROC’s oil exports to China. As figure 1 shows, ROC’s largest borrowing spree came between 2012 and 2014, after oil prices had breached US$ 100 per barrel.
When the price of oil halved between 2014 and 2015, the Congolese economy crashed. By 2017, ROC’s debt to GDP ratio had risen to 120 percent, of which approximately a quarter of the debt stock was owed to China. The ROC approached the IMF for assistance, who required that the ROC restructure its debt service to sustainable levels before they would offer ROC an assistance program.
Over the next two years, the ROC worked with China to reach an agreement that would satisfy IMF requirements. According to Debtwire, a debt market consultancy, this was not easy:
“[The issue with China] is that this is the first time that Beijing is going to agree to such a large debt restructuring… [While China may have committed to ensuring Congo’s debt sustainability], neither the IMF nor Beijing know what the definition of “debt sustainability” being used by either side is. This is an issue that wouldn’t arise with the Paris Club for instance, because the IMF could be certain that this group of creditors is using the same definitions and assumptions.”
In April 2019, the two sides finally reached an agreement that satisfied the IMF, which approved a US$ 500 million assistance package for the ROC a few months later. The outstanding balance on eight loans was restructured, amounting to about US$ 1.6 billion of the ROC’s debt stock to China. Both principal and interest payments were reduced: the restructuring extended the maturity of each of the loans by 15 years, and the interest rates on seven of the loans were reduced to 1.5 percent, and on the final loan to two percent. Further adjustments to ROC’s debt service payments over the next three years reduced debt service during the IMF’s three-year program period by about US$ 370 million.
China’s Debt Relief in the COVID-19 Era
China’s borrowers in Africa can’t seem to catch a break. Almost all countries that received restructurings from China since the commodity price crash in 2015 are now requesting debt service suspensions under the DSSI, including Cameroon, Republic of Congo, Ethiopia, Mozambique, and Chad. Prior to COVID, prospects seemed to be improving as commodity prices recovered, but have now crashed again.
If China’s lenders, particularly China Eximbank, continue to offer debt relief as they have in the past, we are likely to see solutions that vary by country. For countries facing the most severe balance of payments crises, China is likely to help. Our research at CARI shows that Chinese lenders are unlikely to pursue lawsuits or asset seizures.
Moving forward, one would hope that China, learning from its past cases of restructuring, will be prepared to offer meaningful relief as quickly as possible to address the COVID-19 crisis.
Kevin Acker is the Research Manager at the China Africa Research Initiative (CARI). While drawing largely from his research at CARI, any opinions are his own and may not necessarily reflect those of the organization.