For several years, there have been fears that African countries will become "victims" of the Chinese "debt trap", where Chinese lenders provide unsustainable loans to African countries. Such narratives are problematic because African countries are portrayed as inferior or incompetent in relation to Chinese lenders, while their Chinese counterparts are presented as predatory in relation to Africa. During the COVID-19 pandemic, we have seen these narratives resurface, despite the vast amount of data that refutes this theory.
This narrative is also very damaging because it downplays the agencies of African governments that are actively taking loans to finance their development. In fact, the concept of a debt trap has an implicit connotation that African governments need to be rescued from bad dealings with China or other countries and that African governments in general are acting badly.
So before we get into the debt trap narrative, it is important to assess the current rhetoric. We need to look at the continent's level of external debt from a perspective that shows us that it is not all doom and gloom and that there are in fact many opportunities across the continent.
In 2022, the continent's external debt level was $1.12 trillion. However, our analysis suggests that while current narratives continue to emphasize that external debt levels are overly burdensome for African countries, it is important to look at this from a different perspective.
For example, for the continent as a whole, external debt is 40 % of gross national income (GNI), well below the 1994 peak of 77 %. Further, this indicator varies drastically across countries. For example, Mozambique and Mauritius have external debt-to-GNI ratios of 424 % and 137 %, respectively, in 2022; while Algeria and Botswana have the lowest external debt-to-GNI ratios of approximately 4 % and 10 %, respectively. Thus, although some countries are facing increasing fiscal pressures, to claim that "Africa" is facing a debt crisis is simply misleading.
However, the truth remains that the continent needs finance now more than ever to support economic recovery after many turbulent years of economic shocks. We have estimated the infrastructure financing needs of just 13 African countries to meet the Sustainable Development Goals and Agenda 2063, and found an investment gap of between $108.9 billion and $149.9 billion per year by 2030. The African Development Bank estimates that the entire continent faces an annual financing gap of $402.2 billion in meeting the goal of accelerating structural transformation by 2030, or $86.7 billion by the Agenda 2063 deadline. Approximately 76 % of these funds would go to road and energy infrastructure alone.
Three points are key in addressing this story of the "debt trap" in China. First, in considering this so-called debt trap, it is essential to have a complete view of the continent's credit environment.
Many skeptics who deal with Chinese loans fail to take a comprehensive view. A key problem is that large numbers are often presented and attributed to Chinese loans without comparison to others.
In 2022, the continent's total bilateral debt to China was approximately $63 billion. This in itself appears to be a very large debt. However, it accounted for only 6 % of the continent's total external debt. By comparison, Africa's private sector debt accounts for about 43 percent of the continent's external debt, while multilateral debt accounts for about 34 percent of total external debt. With the exception of China, other bilateral creditors together accounted for about 8 percent of the continent's external debt.
Other bilateral lenders used to lend to African countries at a similar rate to China - but this trend has slowed considerably. For example, loans from the UK and the US accounted for 8 % and 10 % of the continent's external debt in 1970. By 2000, these shares had slipped to 2 percent for the U.K. and 5 percent for the U.S. In 2022, these figures were much lower, at 1.41 percent and 0.68 percent, respectively.
In addition, the cost of loans from China varies. For example, the Export-Import Bank of China has an average interest rate of 3.6 percent for the continent. By comparison, private sector loans can have extremely high interest rates - as high as 10 percent - due to the biased perception of risk on the continent.
Conversely, there are also "hidden costs" associated with the multilateral development banks (MDBs) and the Bretton Woods institutions due to the extensive conditionalities that require African countries to make policy changes that may not be in their best interest. This was recently manifested in mass protests in Kenya in response to proposed tax increases that the Kenyan finance ministry pushed through as part of the required IMF reforms before obtaining a new loan.
Second, it depends on the quality of the funds spent on debt. If external debt is used for current spending, such as budget support, it can free up fiscal space. However, this debt is not productive - because it does not generate financial returns for repayment.
African countries often secure Chinese funding to support productive sectors such as infrastructure development. Between 2000 and 2022, Africa secured about $116 billion in infrastructure development loans, with Southern and East Africa holding about 43 % and 25 %, respectively.
These inward investments by African countries represent a proactive effort to create long-term and sustainable economic growth that will dilute the current burden of servicing expensive and highly contingent external debt.
In contrast, other partners are not meeting Africa's financial needs. For example, many MDBs do not finance productive sectors such as infrastructure development. In fact, the World Bank has not financed a new independent railway project since 2002.
This is similar for many bilateral partners. For example, in 2023, U.S. organizations funded only three infrastructure projects, while Chinese organizations funded nine infrastructure projects in the same year.
Third, the real problem is the lack of cheap and concessional finance globally. Africa's development financing needs are enormous, but the volume and quality of finance the continent receives is meagre.
For example, according to the latest Nationally Determined Contributions (NDCs), Africa needs approximately $3 trillion, much of which is divided among the continent's 28 countries most vulnerable to climate change.
However, recent efforts to mobilise global climate finance, such as the $100 billion annual target set by the Conference of the Parties (COP), have accumulated a backlog of around $27 billion between 2020 and 2021. Moreover, this annual climate finance comes in the form of loans, which falls short of the type of financing African countries need to meet their huge development needs.
The reality is that there is no "debt trap" between China and Africa - but there is African demand for cheap and productive debt. China, as a permanent partner of African countries, can set the bar for how to achieve this.
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