The recent announcement that Zambia will default on several of its Eurobond notes, and the indication from ratings agencies that several other African countries are in similar danger are just the latest indicators of how the economic crisis kicked off by the pandemic is impacting African economies.
But the genesis of the crisis doesn’t lie in COVID-19 – it’s much older. It lies in the ongoing problems of development itself. It’s easy to blame African mismanagement or the profligacy of certain African leaders, and in the case of Zambia those factors are partly to blame.
But Zambia, like many other African countries, took on debt to fund infrastructure without which entry to the global economy remains impossible. Despite all the talk of innovative mixed finance and public-private partnerships that circulated in global development seminars right up until COVID whapped them, Africa has very few options to get stuff built. If you take away multilateral debt (ponderous, complicated, and rare) and commercial debt (expensive, and now economically lethal) you’re left with bilateral debt, which in the current climate mostly comes down to Chinese debt.
The issues with Chinese loans are well known. They are opaque and tied to using Chinese contractors. More issues might emerge as more countries fall into debt distress. How Chinese actors deal with default will be the next test for China-Africa relations. As we’ve covered in recent newsletters, Laos has struck a debt-for-equity deal with a Chinese company which kept it from defaulting. In return it essentially gave over control of the power grid’s transmission to a new Chinese-controlled joint venture.
Judging by the ongoing public anxiety around compromised sovereignty that we’ve seen in places like Nigeria, this kind of deal would likely spark a firestorm of controversy among African voters.
But how much choice do African leaders have? Compared to the downgrades and other punishments that follow a default, they might see a domestically toxic deal with a Chinese creditor as the lesser evil.
This means that one of the unexpected results of COVID-19’s inflaming of preexisting weaknesses will be that Africa will be pushed more firmly into China’s corner.
African governments aren’t fully to blame for this. In the end, it comes down to the financial landscape within which African countries are trying to develop. This is the problem that needs fixing, right at the moment when the world seems to have run out of fixes.
