By Kevin P. Gallagher
The climate crisis was caused by actors outside of Africa, yet Africans are suffering among the worst effects from climate change. Looking forward, African nations need to mobilize financing upwards of 10% of GDP annually to adapt to climate change and to chart a development path that is climate resilience, low-carbon and socially inclusive by 2030. Mobilizing affordable finance and debt relief is top of the agenda this as week African and global leaders, including a large Chinese delegation, convene in Nairobi for the landmark Africa Climate Summit.
Though China is far from as responsible for climate change or debt distress than its Western counterparts, China can be and needs to be part of the solution by leading with its own institutions on supporting sustainable, low-carbon development in Africa.
In a new report, we show that with less than a decade to mobilize financing ahead of 2030, most African countries are losing access to capital markets, while those with access face costs of capital that are high and unsustainable. Before the COVID-19 pandemic and other external shocks, private capital costs were close to 6% – these costs have now close to doubled. Moreover, an increasing number of countries are at or near debt distress.
By 2021, total debt stock in sub-Saharan Africa had more than tripled since 2008, with the region experiencing the largest increase in debt as a share of government revenue and as a share of GDP across the Global South. Of this debt stock, 28% is owed to multilateral development banks (MDBs), 40% to private creditors (including bondholders) and 11% to China.
Developing countries in general and Africans in particular need new liquidity and cheaper forms of capital and grants, while some need comprehensive debt relief. China has long supported an increase in global liquidity for countries in distress through new issuances of Special Drawing Rights and quota-based increases at the International Monetary Fund. China has also supported significant capital increases in the World Bank and other MDBs that would help bend down the cost of capital and provide more grants for poorer countries.
While China has also been the leader in suspending the debts of the most debt distressed countries, in terms of granting developing countries substantial reductions in the overall level of debt, China has been reluctant to engage.
This is because creditors that are a much larger part of the debt equation in Africa—private creditors and the MDBs—are not engaging either. In our report, we outline how all creditor classes could participate in debt relief linked to climate and development goals for sub-Saharan Africa. This includes the MDBs, in a manner that will not jeopardize their preferred credit status or AAA credit ratings.
Although China (like African countries) has little voice and representation in the Western-dominated international financial institutions, China can lead by example. According to the Chinese Loans to Africa Database, Chinese development finance institutions have provided $123 billion from 2008-2021 to African governments and Chinese commercial and other actors provided an additional $30 billion. This finance has been critical to the creation of public assets in African countries and helping governments overcomes infrastructure bottlenecks.
However, Chinese financiers must exhibit great care to ensure projects do not create undue risks to biodiversity and Indigenous lands. Indeed, a new study published by the Boston University Global Development Policy Center, Fudan University Green Finance and Development Center, South African Institute of International Affairs and LSE IDEAS finds that Chinese firms and financiers don’t always live up to China’s relatively strong environmental, social and governance guidelines while operating in Africa.
For example, Ethiopia’s Renaissance-Addis Transmission Line and Eastern Industrial Zone was found to carry risks of pollution, deforestation and harm to Indigenous lands from rapid development. Comprehensive environmental and social impact assessments were lacking from the projects, echoing wider concerns about habitat destruction and sustainability impacts of Chinese projects abroad. Additionally, waste management and pollution risks in the Ethiopian projects require additional oversight and mitigation.
At the Africa Climate Summit this week, Western countries have a chance to revive the multilateral system and implement major reforms at international financial institutions to ensure greater capital, voice and representation is available for African countries. In the meantime, China can set the example with its own institutions.
Kevin P. Gallagher is a Professor of Global Development Policy at the Frederick S. Pardee School of Global Studies at Boston University and the Director of the Boston University Global Development Policy Center. Follow him on X: @KevinPGallagher.
