Is Africa heading to China or the IMF?

A growing number of African countries are facing an uncertain outlook over the next year in terms of the servicing and repayment of their debt, while many governments continue to tap into international debt markets to finance massive infrastructure projects. As concerns over the impact of a global trade war on African economies mount and the continent faces a looming debt crisis, the International Monetary Fund (IMF) has recently shown some flexibility in its bailout terms. The Fund is preparing to step in as a lender of last resort in many debt-burdened or cash-strapped countries while softening its conditionalities in the face of competing Chinese loans. 

The role of the IMF in Africa

The role of the IMF at a time of mounting concerns over Africa’s debt is particularly important considering the expected impact of the global trade war on the continent’s economic output. An escalation of the US-China trade stand-off could more than halve the current forecast of just 3.5 percent growth for the sub-continent. Any impact might be softened by a weakening US dollar and falling borrowing costs, but the effect of falling trade flows and economic output should not be underestimated. 

Thus, the IMF is set to play an important role in offering debt relief to African countries in coming years. The Fund currently classifies six African countries as being in debt distress, including Mozambique, Sudan, and Zimbabwe. It rates another ten countries as being at high risk of debt distress, including Zambia, Ghana, and Ethiopia. EXX Africa has previously also expressed concerns over some of the continent’s largest economies like Kenya, Nigeria, and South Africa. Although the need for IMF intervention in these economies seems unlikely if the balance of payments remains sound. 

Chinese dominance under threat? 

In recent months, several African countries, including Kenya, Tanzania, and Sierra Leone, have cancelled large-scale Chinese-funded infrastructure projects. In June, Tanzania seemed to cancel a USD 10 billion port construction project in Bagamoyo. A court in Kenya has halted plans for the construction of a USD 2 billion Chinese-backed coal power plant near Lamu over environmental concerns. Other African projects, including massive rail construction projects in Ethiopia, Djibouti, and Kenya, have also come under scrutiny, leading China to write-off some loans. 

This activity has prompted suggestions that China’s role in Africa is changing and that its dominant financing role has come under threat. However, there is no evidence to suggest that African governments are steering away from Chinese investment. Instead, the region is fostering more competition from a broader source of funding. Chinese financing is often more expensive and with shorter maturities than the terms offered by multilateral financial organisations. Some forms of syndicated commercial lending from western banks and export credit agencies offer further competition in the increasingly varied investment climate in Africa. 

Alternatives for infrastructure lending 

The Asian Infrastructure Investment Bank (AIIB) may eventually offer an alternative to these forms of financing, although the AIIB is still in its inception phase. The AIIB was launched in 2015 with a focus on infrastructure financing in developing economies. In July, Djibouti and Rwanda (and Benin) were approved as non-regional members of the Bank, bringing the lender’s membership to 100, which includes major western economies like Germany, France, and the UK. However, the AIIB has so far focussed its lending outside of Africa, with only Egypt securing sizable deals from the institution. This is set to change as the Bank grows over coming years. 

As Africa still has an annual infrastructure financing gap of more than USD 100 billion, there is a growing need to diversify sources of funding. This includes an opening to traditional sources of financing from pension funds and sovereign wealth funds, which is being encouraged by the African Union’s new Development Authority and other initiatives. Therefore, Chinese investment is not being side-lined but instead, it is being integrated into a growing mix of funding options, which Africa is harmonising into a more competitive landscape. 

Looser IMF conditions 

Nevertheless, in the face of competing Chinese loans, the IMF is likely to loosen its conditionalities in order to retain its role as lender of last resort to African debt-burdened and cash-strapped countries. In July, the IMF agreed to disburse USD 448.6 million over three years to the cash-strapped Congo-Brazzaville government following two years of tense negotiations. Despite having to meet rigid fiscal targets to quality for IMF assistance, the Congolese government secured unusual flexibility from the Fund on its lending conditions as there is no guarantee that the government will implement enhanced transparency measures or publish opaque pre-export oil financing deals. 

Such loosening of IMF conditionalities is indicative of its future approach towards other African countries that are likely to require a bailout in coming years. Loosened lending conditions will prove good news for many African governments seeking urgent debt relief, although will do little to improve transparency and curb corruption which remains one of the heaviest obstacles to economic development. 

Read this full issue of Trade Finance Talks, free

This article was part of TFG’s third issue of Trade Finance Talks: Trade Wars & Tradetech, launched at Sibos 2019. This free issue gets into the detail of trade wars, trade flows and geopolitics, as well as looking at how digitisation and fintech is bridging the trade finance gap. You can read the full edition for free here.

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