How should China handle its bad loans to poor countries?
Many African countries are living on the edge of a debt crisis.
Public debt is currently at 60% of Sub-Saharan Africa's GDP, and 19 out of 35 poorest countries are at a high risk of debt default. Without significant support, many of them may be unable to meet their debt obligations soon.
Key takeaways
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Several African countries are at risk of default; hence, China's interest in negotiating debt forgiveness is exciting, given its role as the largest lender to Africa.
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China's debt forgiveness will be critical to dictating how debt forgiveness will be shaped in the future.
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The Paris club is a good model for mass debt forgiveness, given its role in debt restructuring and forgiveness in the late 1990s and 2000s.
To put it simply, the developing world is suffering from a sovereign-debt crisis, and China is one of the lenders at the heart of it. An undesirable mix of the pandemic, rising inflation, rising interest rates, and the war in Ukraine have left these African countries struggling to pay back loans from China and other creditors. Zambia, one of the worst-hit African countries, defaulted on its Eurobond debt service payments in 2020, including many others. By March 2022, the southern African country owed its lenders over $2.4 billion (principal and interest payments). The country has now sought support from the International Monetary Fund (IMF) for a way out of its debt distress.
As a result, China—Zambia's largest creditor—has been called on to help resolve the crisis. The latest development involves the Export-Import Bank of China initiating talks to renegotiate Zambia's existing debts to China.
This is coming shortly after Chinese lenders forgave 23 interest-free loans owed by 19 African countries. While the move was commendable by the Chinese government, interest free loans only make up about 2% of the loans owed by African countries, so the debt forgiveness didn’t change much for most countries.
One of the reasons why Chinese lenders did not offer more debt restructuring was because the loans given to Zambia —and many other African countries—are owed to several
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