China and West must “urgently” talk about Africa’s debt distress

The slow pace of the G20 Common Framework

The IMF identified 22 low-income African countries as being in debt distress, or at high risk of debt distress, at the end of last month.

The overall picture is set to deteriorate due to the economic legacy of the pandemic, food and energy price shocks underpinned by Russia’s invasion of Ukraine, and the rise of interest rate levels in developed countries to fight inflation.

In November 2020, during the Covid-19 pandemic, China and Western lenders tried to cooperate regarding Africa’s debt conundrum with the creation of the G20 Common Framework, which applies the Paris Club methodology but with the inclusion of China and other non-Western lenders.

However, two years later, only Chad has completed has completed a treatment of its debt. Zambia and Ethiopia – the two other countries that applied – are still waiting for their debt restructuring agreements which are delayed due to Chinese positions in the framework, says the report.

“There has so far been very limited appetite on the part of countries to apply for relief under the Common Framework, in part because progress towards completed debt treatments for those that have applied has been painfully slow…it is clear that the Common Framework has not yet met its initial promise and there is scope for significant improvement.” the authors say.

More specifically, four factors are identified as responsible for the slow pace of the Common Framework:

“First, some lenders and parts of the authorities in China are still uncomfortable with the central role played by the IMF – together with the World Bank – as an independent arbiter of how much a country can afford to pay through the debt sustainability analysis. Second, there is the concern of both public and private sector Western lenders over the lack of transparency in the total amount of external debt African countries have incurred. Third, there are differences of view between the Chinese authorities and Western governments on exactly how burden-sharing should be implemented between different types of the lending institution Fourth, is the differences between Chinese lenders and Western lenders (particularly in the private sector) in the way in which any relief should be delivered.”

Chatham House warns that the above factors mean that the Common Framework will be unable to deal with Africa’s biggest debtors in 2023.

However, “it is widely accepted that there is no realistic alternative – either politically or economically – to the Common Framework as the basis for tackling debt distress in low-income countries,” says the report.

The only way out of this gridlock is therefore strong reforms targeting the Common Framework itself and finding long-term solutions that can meet African economies’ financial needs and avoid a similar situation in the future.

G7 core in leading a multilateral discourse

As China moves away from its previous high-volume, high-risk model of investment in Africa to one where deals are struck at a smaller and more manageable scale, its approach to the management of Africa’s debt distress problems is likely to become increasingly multilateral, argues the report.

Traditionally, China has taken unilateral actions to deal with its African debtors, such as last August when it forgave 23 interest-free loans for 17 African nations while pledging to deepen its collaboration with the continent.

Considering China’s difficult economic position, such actions are unlikely to take shape next year, making the incoming Japanese presidency of the G7 a chance to open a broad-based dialogue with China and leading African nations on the topic. “An important determinant of the route China chooses to take, on both debt relief and future investment in Africa, will be the extent to which it sees benefit in continuing and even deepening the current multilateral approach,” say the authors.

“From the West’s perspective, China is critical to finding a lasting solution to African debt distress. Neither the current debt crisis, nor Africa’s future financing needs, can be tackled without China’s participation.”