DEVELOPMENT LENDING TO AFRICA IN DECLINE

Study finds loans in 2020 fell to lowest level in a decade as economic impact of pandemic exacerbates concerns over countries’ abilities to repay funds

Chinese lending to Africa for infrastructure projects continues to be in long-term decline, as the impact of the Covid-19 pandemic exacerbates concerns over default risks, a study has found.

The latest briefing paper from the Boston University Global Development Policy Centre found that lending in 2020 – the latest available data – fell by 78 per cent to its lowest level in more than a decade, with just 11 deals signed worth US$1.9 billion.

This compares with 33 loan agreements worth US$8.3 billion in 2019.

In the study, released on Monday, the centre’s global China research fellow, Jyhjong Hwang, said the reduction in loan commitments “is a continuation of a long-term decrease since 2016 and is further exacerbated by the Covid-19 pandemic”.

Heightened default risks from ballooning public debt might have also dampened China’s appetite for more lending to Africa, with Zambia becoming the first African state to default on Eurobond repayments in November 2020, she added.

“The Covid-19 pandemic likely impacted both African countries’ ability to borrow and China’s willingness to lend,” Hwang said.

The 2020 agreements included transport, power, information technology and banking sector projects in eight countries – Burkina Faso, Democratic Republic of Congo, Ghana, Lesotho, Madagascar, Mozambique, Rwanda and Uganda, the centre’s researchers said in the study.

China Eximbank financed eight of the projects, with the remainder going to Bank of China, Industrial and Commercial Bank of China and Dongfang Electric International Corporation.

Notably absent from the list was China Development Bank, with no new loans in 2020, after years of shrinking its African investments in relative and absolute terms since 2016.

The African Export-Import Bank, based in Egypt, received US$200 million from the Bank of China to support the recently launched pandemic relief fund.

The researchers noted that one sector had avoided a hit from the pandemic, with an increase in loans to the information and communications technology (ICT) industry in 2020.

After years of trailing the transport, power and mining sectors, ICT accounted for US$568 million worth of loans across five projects to take second place after transport – an amount broadly consistent with its 20-year average of US$640 million each year.

In contrast, transport and the power sector suffered precipitous cuts to lending in 2020, after a decade of average annual loan commitments of US$2.3 billion and US$1.9 billion, respectively.

“While ICT projects with loans signed in 2020 will not materialise immediately, the acute need for communication abilities was likely amplified during the pandemic,” the researchers said.

They also noted that the reduced lending to the power sector might be part of a larger trend, marking China’s retreat from financing coal and hydropower projects, which have been controversial.

Data analyst Oyintarelado Moses from the centre’s Global China Initiative, said the pandemic had “significantly constrained” many African borrowers and intensified the “cautionary” practices of Chinese lenders in recent years.

“Looking forward to the post-pandemic era, Africa’s development-related financing gaps and the constrained debt environment of some countries will necessitate Chinese lenders to find innovative ways to partner with African governments to support infrastructure development and reach sustainable development goals,” she said.

Despite the low volume of 2020 loan commitments, Chinese lending to Africa remains significant.

Between 2000 and 2020, the centre’s database recorded 1,188 loan deals worth US$160 billion to 49 governments, their stateowned entities and five regional multilateral organisations. The loan amounts are not equivalent to African government debt, as the database does not track disbursements or repayments.

While loan commitment levels might recover slightly, the researchers said that “without structural changes to borrowing practices and lending standards, loan amounts are unlikely to buck the long-term reduction trend”.

Other financing instruments – such as foreign direct investment or Chinese loans to African regional banks for on-lending to governments – might become more frequent sources of financing development projects in Africa, they noted.

The researchers said it might be “down now, but not out” since “a loan reduction in 2020 may not reflect a definite pullback of Chinese lending to the region, as the decline highlights how Chinese loan amounts tend to fluctuate during times of crisis and exposure to structural risk levels”.