On 22-23 June, France will host the Summit for a New Global Financing Pact, which aims to conclude international agreements to tackle global crises. Germany is a member of the committee of states and international organisations preparing the summit. Also on the agenda is the growing debt burden of many countries in the “Global South”. Zambia and Ghana have run into payment difficulties and can no longer service their loans. They need rapid debt rescheduling, debt relief and access to finance to avoid default and restore their fiscal capacity. In the background, however, there is a conflict of interests simmering between Western and Chinese actors, hindering multilateral solutions. At the centre is the question about the future shape of the international financial architecture.
The debt report published by Misereor in March 2023 shows a sharp increase in public debt worldwide. Countries in the "Global South" are particularly affected: 64% of countries are critically or very critically indebted (high risk of over-indebtedness), including Ethiopia, Ghana, Malawi and Zambia.
In November 2020, in the wake of the Covid-19 pandemic, Zambia became the first African country to default on its debt. For two years, the country has been in an International Monetary Fund (IMF) stabilisation programme and is waiting for creditors to agree on a restructuring of its debt, that is, longer maturities, lower interest rates or grace periods. Ghana has also been in default since the end of 2022. In May 2023, after protracted negotiations with the IMF, the first tranche of a multi-billion dollar bailout was released. In return, Ghana must undergo a major programme of fiscal consolidation.
Other countries considered to be the continent’s growth engines are also suffering from mounting debt burdens: Kenya’s credit rating was downgraded by the major rating agencies in May 2023 due to sovereign liquidity risks. It is becoming clear that more and more countries will not be able to repay loans as scheduled, and negotiated solutions between creditors and borrowers will be necessary.
Typically, indebted countries have borrowed from a variety of domestic and foreign, multilateral and bilateral, development and commercial lenders over a longer period of time and with different conditions. These lenders need to be brought together in negotiations to discuss possible ways out of the debt crisis. For example, rescue loans from the IMF, the “lender of last resort”, require the approval of at least 85% of the IMF’s shareholders. Participation in an IMF stabilisation programme, in turn, is a prerequisite for starting debt rescheduling negotiations in the Paris Club, the informal grouping of 22 creditor countries. For other lenders, too, a positive assessment by the multilateral development banks is often a prerequisite for entering into debt rescheduling negotiations.
Multilateral solutions are an important lever to achieve effective agreements among the many creditors on terms acceptable to the countries. However, these are currently being hampered by mutual blaming. There are several lines of conflict between actors from the West and China.
In the West – for example in the United States, Europe, Australia and the United Kingdom – there is criticism of China’s handling of African countries’ external debt. Former World Bank President David Malpass regularly criticises the lack of transparency in Chinese lending and is calling on China not to block concerted debt restructuring efforts. Similar criticism has been voiced by German Finance Minister Christian Lindner during his visit to Ghana and by US Treasury Secretary Janet Yellen. In this context, a study by the Kiel Institute for the World Economy shows that Beijing rarely grants debt relief and the lack of documentation on Chinese loans is complicating the work of creditor committees. In the public debate, there are also persistent accusations that Beijing is using debt as part of the Belt and Road Initiative to exert political influence in borrowing countries. However, research by Johns Hopkins University has put these accusations into perspective.
With an average share of around 12% of African countries’ private and public external debt, China is often the largest bilateral donor. However, the share of Chinese lenders varies considerably from country to country: in Angola it is around 40% (USD 18 billion), while in Ghana it is only 6% (USD 1.7 billion). Moreover, Beijing is currently changing its investment approach. Its current lending level to African countries is only at 10% of its 2016 peak. Instead of investing in large, fully state-financed infrastructure projects, which in some cases have contributed significantly to African countries’ national debt, Chinese actors are increasingly investing in smaller, more profitable projects with private financing, such as toll roads.
In return, China vehemently rejects accusations of having a disproportionate responsibility for the precarious debt positions of affected countries and, for its part, emphasises the responsibility of Western private creditors and multilateral development banks. This criticism is also backed up by studies: Debt Justice calculated last year that African governments owe three times as much to private Western creditors than to China (35% of foreign debt) and that they charge on average twice as much interest on loans (5% vs 2.7%). Moreover, private creditors – mostly Western banks and asset managers – often do not participate in debt restructuring initiatives. This assessment is supported by the Debt Report, which places the main responsibility (70%) for outstanding claims on low- and middle-income countries on G7 and EU countries (bilateral loans, private bank loans and bonds, and shares in multilateral development banks).
China also demands that the multilateral development banks participate in debt relief, which they categorically reject. They point out that their credit ratings could be downgraded if they accept “haircuts” at their expense. This, in turn, would have negative consequences for the borrowing countries, for whom lending conditions would deteriorate. China, however, makes a similar argument in its own case.
Public positions seem to have hardened and are not conducive to quick compromises. This is partly because a lot is at stake for the negotiators. IMF Director Kristalina Georgieva demands that Beijing stick to the established rules of the game (“playing by the rules”). These are set by the IMF and the World Bank – the main United Nations institutions of the post-war global financial architecture. Both institutions are Western-dominated: Since its inception, the leadership of the World Bank has been in US hands, while the leadership of the IMF has been European. G7 and EU countries hold more than half of the voting rights in the institutions.
China, on the other hand, is seeking fundamental reforms of the multilateral development banks. It is advocating for a redistribution of the voting rights according to actual economic power. Beijing’s reformist ambitions and demands for the equal treatment of all lenders, including the multilateral development banks, is being met with approval in many countries of the Global South.
In addition, China is increasingly relying on new multilateral institutions such as the New Development Bank (“BRICS Bank”) and the Asian Infrastructure Investment Bank (AIIB), which are not Western-dominated. Both are based in China. Bilaterally, Beijing’s role as a donor is also changing: China is often now the lender of last resort for bailouts – a role traditionally played by the IMF.
There is little willingness in the West to make concessions on reforming the global financial order. At the same time, it is in the interest of Western actors to negotiate within the existing multilateral mechanisms.
Germany is a member of the G20, the Paris Club and the fourth-largest shareholder of the IMF. France co-chairs the creditor committee for Zambia with China. Together, they could provide the impetus for a European resolution initiative. European countries can also look at the question of how to better involve private lenders based in Europe in debt restructuring negotiations – for instance in the framework of IMF programmes.
To advance multilateral solutions, European actors should pursue the following negotiation approaches at the Paris Summit:
A Western negotiation strategy that seeks to isolate China as the cause of excessive public debt in the Global South distorts the overall picture and is detrimental to reaching an agreement. Instead, it should be made clear that China is an important actor in finding a solution, as suggested by Chatham House, among others. This requires Western and Chinese negotiators to recognise the legitimate interests of the respective opposing sides. A consensual solution will require all creditors to accept losses or make other concessions.
Rapid solutions for affected countries are needed before the major issues concerning the reforming of the global financial system are finally negotiated. Negotiations should therefore not follow a “nothing is agreed until everything is agreed” approach, whereby negotiators sit out challenges and hope to gain tactical advantages in the process to advance their interests. Small, incremental negotiation outcomes should be treated as (partial) successes that can feed directly into country-specific solutions.
Sensitive financial issues are often discussed in protected spaces where it is possible to informally exchange views and identify converging interests. This is likely to be the case at the Paris Summit as well. Previous global financial crises have highlighted common interests of Western and Chinese actors in the stability of the global financial system. China’s participation in the G20 initiative to suspend debt servicing during the Covid-19 pandemic (“Common Framework”) is largely viewed positively. Cooperative signals were recently sent by Kristalina Georgieva during the Boao Forum and by Beijing on the occasion of the IMF and World Bank Spring Meetings. The recent agreement between China and Western donors on debt relief for Ghana can serve as a positive precedent. The sign-off was made possible because both China and the Paris Club members agreed to a (limited) restructuring of their claims.
If meaningful progress on debt relief is reached at the Paris Summit, negotiations between China and the West on other contentious issues could use similar multilateral mechanisms.
In West African states, criticism of the “neo-colonial” CFA Franc currency and calls for monetary reform are not new. In this Megatrends Afrika Spotlight, Robin Frisch (University of Bayreuth) explains what monetary sovereignty means and how it is debated in CFA Franc countries. A profound monetary reform away from the CFA Franc offers a potential way out. Proposals exist, but they lack implementation.
China is investing in large-scale infrastructure projects across Africa. In Kenya, it has built several of these “mega projects”. While their economic viability remains to be seen, debates on the risks and benefits of Chinese investments and public debt are in full swing. 2022 is not only an important election year in Kenya but also a peak period of debt repayments. In this political climate, Chinese mega projects are either portrayed as symbols of independence and modernity, manifestations of usurpation, or colossal losing deals.