The problem has become even more acute due to the steep increase in interest rates in the US and other major economies over the last year and the relative fall in the value of the currencies of these African countries, making loans offered in dollars and other currencies expensive.
Moreover, the economic recession due to the pandemic and Russia’s invasion of Ukraine has undermined the ability of many African nations to service their sovereign debts. According to Chatham House, at present 22 low-income African countries are either already in debt distress or at high risk of debt distress, reported Africa Daily.
According to researchers at Chatham House, huge Chinese lending to Africa has created a dilemma for China as it struggles to recoup its money and at the same time presents itself as a friendly nation. They warned that China could resort to more unilateral actions by appropriating significant native assets such as ports, railways or power networks in response to defaults.
The crisis is worrying as most African countries with Chinese loans are witnessing a repayment crisis and are seeking deferment of interest payments and re-negotiating loan terms.
In fact, Zambia has already defaulted on its debt and debt restructuring talks have made little progress due to the hesitancy of Chinese state-owned banks.
Kenyan officials and ministers have reiterated that they would ask China to extend the repayment period on USD 5 billion worth of loans, as the debt is “choking” the country’s economy.
Djibouti’s total debts to China equate to around 43per cent of its GDP and recently announced it was suspending payment on USD 1.4 billion in Chinese loans, reported Africa Daily.
US Treasury Secretary Janet Yellen has reiterated on multiple occasions that China has become the biggest obstacle to progress in these countries.
The lack of transparency in these agreements is another major problem.
According to a study by the Center for Global Development, a Washington-based think-tank, in collaboration with AidData, all of the contracts of China Development Bank and 43 per cent of the deals signed by the Export-Import Bank of China included confidentiality clauses about the terms of the loans.
Moreover, AidData reported that half of China’s lending to developing African countries is not reported in official debt statistics, reported Africa Daily.
Further, the loans provided by China come at higher rates of interest than Western sources. At around 4 per cent, these loans are close to commercial market rates and about four times that of the same type of loans from the World Bank or Western country.
Moreover, the repayment period in the case of a Chinese loan is generally less than 10 years, as compared to around 28 years for other concessional loans provided by other institutions to developing African countries, reported Africa Daily.
Findings also showed that Chinese loans require borrowers to create special accounts with a cash balance that China can seize in case of default.
