The country’s finance ministry announced a suspension of all debt service payments on external government debts, including foreign currency bonds, commercial loans and most of the country’s bilateral debt. Calling the decision an “interim emergency measures”, the ministry said Ghana faced a “major economic and financial crisis, and its attendant social challenges.
Beginning with the economic impact of pandemic, the developing countries have been hit hard by sharp increases in global interest rates, a stronger US dollar, high rates of inflation and other disruptions caused by the Russia-Ukraine war. Many developing countries are finding it difficult to meet both foreign and local currency debt repayments and many have taken on new debt to finance expansion in public spending. For instance, Sri Lanka earlier this year defaulted on external debt payments while Zambia missed payments in 2020.
Amidst the grim economic scenario, Ghana announced an exchange of local currency government bonds with a value of more than US$11 billion that will sharply reduce interest payments to its domestic creditors. It also reached a preliminary agreement on a US$ 3 billion bailout from the IMF on the conditions of receipt of financing assurances from Ghana’s external creditors and on progress on the domestic debt exchange.
The data shows that at the end of 2021, Ghana owed more than US$13 billion to foreign shareholders and US$ 3.2 billion to foreign governments including China and South Korea. About 70 to 100 percent of the government revenue is currently going towards servicing the debt and the country’s inflation has nearly shot up by 50% last month.
Ghana has been experiencing the worst economic crisis in a generation and this largely underlines the extent of debt distress among developing countries especially in sub-Saharan Africa. At present, 22 African countries are either already in debt distress or at high risk of debt distress. China’s rapid rise as a major bilateral lender to African countries has given it an increasingly important role in debt restructuring. This year it agreed to co-chair with France a bilateral committee to help restructure Zambia’s foreign debts but progress has been slow.
Chinese lenders accounted for more than 30% of loan payments in six of the 22 most indebted countries – Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia and Zambia. Estimates point out that 59% of Angola’s foreign debt payments serviced Chinese lenders. Djibouti, where China has made significant investments into building ports and free trade zones, and also set up its first overseas military base, makes 64%of its external debt payments to Beijing. Ethiopia, Africa’s second most populous country, is struggling with US$ 13.7 billion debt and is seeking debt relief via a G-20 common framework committee, which China is co-chairing. Progress is stalled due to concerns over Ethiopia’s ongoing civil war.
Chinese loans are particularly easy for African regimes to access without any significant political or procedural obstacles. However, as China’s goodwill throughout previous negotiations seem to suggest, Beijing has hardly any interest in economic or political collapse of the region. China is the world’s largest bilateral lender but discloses little on lending conditions and also on how it renegotiates with borrowers in distress. Earlier this year, G-7 countries called on China specifically to take a more active role in helping strained countries overhaul their debt burdens.
Previously, China did confirm on forgiving 23 interest-free loans to 17 African countries, however, interest-free loans make up a very tiny portion of China’s lending to African countries. Interest free loans account for less than 5% of the $843 billion in Chinese loan commitments to 165 governments globally between 2000 and 2017, as some estimates suggest. The lending remains primarily opaque and the massive infrastructure projects built by China in Africa have ballooned into costly white elephants for many countries.
One of the China’s most senior diplomats, Special Representative Liu Yuxi was in Ghana the same day the country’s finance ministry announced it would suspend debt repayments to external creditors. Liu appeared to be on regional tour of West Africa, however, it is not clear whether Liu had any discussions with the hosts about rescheduling payments of Ghana’s outstanding loans to China.
At a critical juncture when the African nations need to raise the necessary finance to broader social improvements for the their populations amidst the ongoing crisis, Chinese lending has fallen in recent years and is set to remain low for the coming times. The situation for African countries is likely to worsen in 2023. The international community needs to take a stock of the situation and should strongly emphasis the importance of transparency, accountability and fairness in Chinese lending practices.
