Debt Sustainability & the Belt and Road Initiative in Africa

By Ryan Kennedy — 

Construction underway at Juba International Airport in Juba, South Sudan. African states accepting Chinese loans and investment for infrastructure projects should take steps to ensure debt sustainability. Source: Wikimedia commons user City Ren2002 used under a creative commons license. ,

Since 2000, China has lent more than $143 billion to African governments. The Chinese presence across Africa has accelerated through the Belt and Road Initiative (BRI), as 37 African nations have signed formal Belt and Road memoranda of understanding. It is easy to see why —the continent has an annual infrastructure financing deficit of $93 billion. China, often through BRI, helps provide this much-needed finance — but research shows that many BRI projects have poor debt sustainability records. China did not have a Belt and Road Debt Sustainability Framework (DSF) until April 2019. Unlike the International Monetary Fund debt sustainability framework, the BRI DSF is a Chinese institution for Chinese loans, making enforcement impossible.

To avoid these concerns, African countries must take steps to ensure Chinese infrastructure financing does not create debt sustainability issues. Two case studies — South Sudan and Guinea-Bissau — reveal African countries can ensure sustainable benefits from Chinese investment by insisting upon concessional lending rates, collaborating with multilateral institutions, and refusing resource-backed financing.

From Bad to Worse: South Sudan

In 2013 and 2014, South Sudan borrowed more than $181 million—approximately 5.9 percent of South Sudan’s 2016 gross domestic product (GDP) — from China’s Export-Import (Exim) bank at commercial rates, largely to rebuild Juba international airport and finance mining operations across the country. By March 2019, South Sudan owed  $150 million to China Exim bank. However, this is dwarfed by the $219 million South Sudanese oil producers borrowed from foreign oil companies through March 2017 — all of which is guaranteed by the nation’s oil reserves.

This is known as resource-backed finance. Due to the country’s risky credit profile, South Sudan’s state-owned oil monopolist Nile Petroleum (Nilepet) struggles to attract financing. However, firms like China National Petroleum Corporation (CNPC) will extend credit to South Sudanese partners if Nilepet provides oil reserves as collateral. From the creditor’s perspective, this strategy is attractive because it reduces risk. Under this system, CNPC and other international actors ensure repayment, even if their partners cannot provide hard currency.

CNPC brought in all equipment for oil exports and produces oil for export itself—a boon for the company. Since at least 2011, CNPC has held a controlling stake in all South Sudanese oil production, an arrangement that helps Nilepet avoid U.S. sanctions.  Chinese lending in South Sudan lacks transparency, so it is impossible to know how much of South Sudan’s $219 million in outstanding oil-backed loans are owed to Chinese firms. However, CNPC is a large-scale lender, along with Oil & Natural Gas Corporation of India and Petronas of Malaysia.

According to the International Monetary Fund’s 2017 Debt Sustainability Analysis (DSA) for South Sudan, resource-backed finance has exacerbated South Sudan’s acute debt distress without producing macroeconomic returns. An April 2019 Brookings report identified commodity-linked finance as a major contributor to debt unsustainability in Sub-Saharan Africa, and in June 2019, the IMF released an updated South Sudan country report. The IMF report recommends that South Sudan seek concessional lending rates and stop all new oil-backed advances. Instead, in April 2019, South Sudan’s Information Minister told reporters, “We have adopted the policy of oil for development.” Expanding oil-backed finance has only worsened South Sudan’s debt distress, and looking forward, the government appears intent upon continuing this policy.

Achieving Debt Sustainability: Guinea-Bissau

Unlike South Sudan, Guinea-Bissau has massively improved its debt sustainability position over the past two decades. In 1998, external debt stocks stood at 470 percent of GDP, a ratio that dropped to 24.4 percent in 2017. Guinea-Bissau has an expansive BRI agenda, seeking Chinese investment in Buba deep-water port and the agricultural sector. Despite Guinea-Bissau’s history of debt distress, the country has maintained its debt sustainability so far.

The IMF’s 2017 Debt Sustainability Analysis reveals three main reasons for this. Guinea-Bissau completed their program under the multilateral Heavily Indebted Poor Countries (HIPC) initiative in 2010. The HIPC benefited Guinea-Bissau through multilateral debt relief, support for poverty reduction and macroeconomic stability, and educational improvements, among other areas. Moreover, since 2010, they have strictly avoided non-concessional lending, insisting upon concessional rates. Lastly, but perhaps most importantly, they have engaged with multilateral institutions that provide technical assistance, such as AFRITAC West (housed in the IMF) and the African Legal Support Facility (ALSF) (housed in the African Development Bank). This way, they have engaged with BRI while ensuring that the nation has a sustainable debt position.

This is no small achievement. As recently as 2017, Guinea-Bissau had outstanding non-concessional debt obligations to China’s Exim Bank. The ASLF provided litigation and advisory services to help the nation renegotiate their Chinese loans resulting in a 90 percent reduction in Guinea-Bissau’s outstanding obligations and saving Guinea-Bissau over $45 million. Guinea-Bissau has also worked closely with AFRITAC West, the International Monetary Fund’s regional technical assistance facility. During 2018, AFRITAC West trained 15 managers in identifying sources of vulnerability in Guinea-Bissau’s public debt portfolio, among other activities. While the IMF still believes that Guinea-Bissau is vulnerable to global commodity shocks, the country has massively improved its debt sustainability footing while participating in Belt and Road.

As these cases illustrate, Chinese investment, including through the Belt and Road Initiative, comes with both benefits and hazards. South Sudan’s resource-backed finance and non-concessional loans have brought the country to the brink of default. Meanwhile, by insisting upon concessional lending rates, avoiding resource-backed finance, and working closely with multilateral institutions like AFRITAC West and ALSF, Guinea-Bissau has overcome their past debt challenges. By adopting these best practices, African policymakers can benefit from Chinese investment while avoiding debt traps.

Mr. Ryan Kennedy is a research intern with the Simon Chair in Political Economy at CSIS.

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