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Understanding the Significance of China’s Interest-Free Loans Cancelation

By Oyintarelado Moses and Jyhjong Hwang

On August 19, 2022, China announced it would waive 23 interest-free loans (IFLs) with maturity by the end of 2021 for 17 unspecified African countries worth an unspecified total amount. This announcement comes as requests for debt relief from Zambia, Ethiopia, and Sri Lanka dominate financial news headlines. But Chinese IFL provision and forgiveness in Africa is not new—and this latest announcement is in line with China’s historical approach to IFLs.

In our recent policy brief, we created four estimations for the total canceled value based on timeframes and country criteria assuming at least a ten-year loan maturity. Altogether, we estimate the IFL forgiveness could amount to $45 million to $610 million, which constitutes a small portion of China’s lending to Africa. Countries that could potentially see their overdue IFLs forgiven include Angola, Burundi, Cabo Verde, Cameroon, The Democratic Republic of Congo, The Republic of Congo, Ethiopia, Guinea, Lesotho, Mauritania, Mozambique, Senegal, Tanzania, Togo, Uganda, and Zambia.

Using the Chinese Loans to Africa (CLA) Database, managed by the Boston University Global Development Policy Center, we found 212 IFL commitments between 2000-2020 in 38 countries. IFLs accrue no interest and typically have a five- or ten-year grace period followed by five- ten-, 15- or 20 years of repayment. The total value of IFL commitments is $2.22 billion, or 1% of the total loan commitment value of $159.98 billion in the database. IFLs also tend to be smaller than other loans: the average size of an IFL across 21 years is $10.49 million, compared to the database average of $134.57 million.

IFLs are unique financial instruments; while accounting for a small portion of Chinese loan commitments to Africa, their provision has often served as diplomatic signals.

Historically, the Chinese Ministry of Commerce (MOFCOM) administered IFLs, in addition to providing grants, in a bundle known as the “Economic and Technical Cooperation Agreement” (ETCA). In 2021, the China International Development Cooperation Agency (CIDCA) became the administrative agency of IFLs, and IFLs were classified as a financial instrument in China’s foreign aid funds. Based on these designations, IFLs are not on the books of policy or commercial bank lenders, so cancellation implies relatively more political than strictly financial considerations. These unique features distinguish IFLs from other Chinese loans to Africa, as commercial and concessional loans tend not to be forgiven.

The purposes of IFLs are often unknown. Sixty percent of IFLs (128 loans) in the CLA Database have an unallocated sector and an unknown purpose. These unallocated loans are often described as finance for “mutually agreed upon projects” without further elaboration. Forty percent of IFLs (84 loans) have a known purpose. Transport, other social, water, and ICT are the top four sectors that receive IFLs. It appears IFLs are disproportionately likely to finance stadiums more than other types of loans, as six of the 19 stadiums, or 32%, that are loan financed in the CLA Database are financed by IFLs. This corroborates existing research on China’s “stadium diplomacy” abroad, where building stadiums is used as a means to cement bilateral relations and improve public perceptions of China abroad. This aligns with IFLs’ designated purpose of use, which is for public infrastructure and industrial and agricultural production projects that are too big for grants but too small for concessional loans. 

IFL cancelation is not new – there are nine other instances of Chinese IFL debt cancellation in recent years. Since 2005, China has forgiven overdue IFLs at FOCAC and UN High-Level Meetings. That series of forgiveness targeted overdue IFLs in least developed countries, heavily indebted poor countries, and small island countries in Africa. China’s 2011 Foreign Aid White Paper specified that “when aid recipients encounter difficulties upon repayment of interest-free loans, the Chinese government has always responded with flexibility and extended repayment periods after bilateral negotiations.”

While the dollar value of cancelations may not be large, the announcements are seen as long-term contributions to China’s foreign relations with African countries.

Consider Algeria. China signed [HM1] a $3 million interest-free loan with Algeria in January 2002. To then Algerian secretary-general of the Foreign Ministry Mr. Abdelaziz Dherrad, the total “amount of the loan itself might not be important, yet it indicates the solid cooperation between both countries.” The Chinese vice-minister at the Ministry of Foreign Trade and Economic Cooperation Zhou Keren followed by noting, “it is a modest loan, but it expresses the friendship of the Chinese people and Algeria.”

Oyintarelado (Tarela) Moses is the Data Analyst and Database Manager for the Global China Initiative at the Boston University Global Development Policy Center.

Jyhjong Hwang is a Global China Pre-Doctoral Research Fellow at the Boston University Global Development Policy Center, where she leads research for the Chinese Loans to Africa Database for the 2021-2023 research cycles.

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