The Geopolitics of Debt in Africa

Recent economic phenomena in Africa and their future impact on international trade.

Ghana has gone from being the most promising economy of 2019 to a country in

revolt, mainly due to rampant inflation. It’s just one of the many African states that,

mainly due to geopolitical reasons, find themselves on the verge of bankruptcy. Given

the progressive destruction of global value chains, the possible effects on future

dynamics in the race for new markets by the West and the East are exorbitant.

Ghana has been considered almost unanimously by regional observers to be the brightest

star of Western Africa during the past two decades. The World Economic Outlook in April

2019 predicted its growth rate over the year to be 8.8%, placing the African nation on the

lead worldwide. The main sources of optimism have been both a skyrocketing economy,

driven by the discovery of new oil fields in the Gulf of Guinea, and the stable democratic

institutions with the government of President Nana Akufo-Addo, in office since January 2017.

Less than four years later, in February 2023, the nation entered into a settlement with local

creditors for the restructuring of public debt after inflation hit a record 54.1% in December

2022 (with food inflation at 59.7%) and the nation’s balance of payment worsened up to a

deficit of 3.64 billion dollars. The rationales for such a rapid downfall are numerous, among

which the uncertainty brought by COVID-19 and the government's dubious economic

policies undoubtedly played a role. However, rather than being the structural reasons of such a collapse, these seem to be exogenous elements worsening an already fragile growth

process.

The deal with local creditors became a priority for the Ghanaian government as the only tool available to get access to the IMF’s Common Framework. This institution has been theorized during the Italian G20 to cope with debt issues arising from the pandemic, predicting it could’ve been an economic nightmare for low-income countries. It considers debt treatment on a case-by-case basis, driven by requests from eligible countries. When a nation applies, a Debt Sustainability Analysis is driven by the World Bank and the IMF and, in case of positive response, a Creditor Committee is convened. The strength of this tool stands in the fact that the two major creditors of African countries, namely the “Paris Club” and China, are theoretically both involved: they must carry out debt haircuts and, at the same time, support structural policies to strengthen the autonomous development of African economies.

To date four countries (Ghana, Chad, Ethiopia and Zambia) have requested access, but the

mechanism hasn’t entered in place yet: China has been unwilling to accept losses coming

from its "risky gamble" of the BRI, despite its previous commitment.

In April 2023, the IMF called for a Global Sovereign Debt Roundtable in Washington which

laid the foundations for an initial jumpstart of the Framework. Could this be a decisive step

towards the end of economic colonialism in Africa? For several reasons, I argue that this will not be the case. On the contrary, this analysis leads to the conclusion that there will be an incentive for Western countries to subsidize their companies in Africa even more in the years to come, especially in the extraction sector.

The true reasons behind the action of Western nations have nothing to do with disinterested goodwill towards former colonies, but are rather driven by the desire to counter China’s overarching power in the region. The "red giant" has slowly built consensus in Africa in the last decade, involving almost all nations in the Belt and Road Initiative. By doing so, it “armed itself” with a very strong geopolitical blackmailing weapon, namely public debt. As a result, we witness a strong correlation between African nations which worsened their relations with Taiwan, the presence of vital minerals for the production of electric engines or solar panels and their eligibility to the Common Framework, with Chad being the first glaring case.

It's likely that the fear of a backlash effect against them led western companies to lobby their

governments to take actions in the extraction field, to prevent the creation of a Chinese

monopoly in a sector with increasing returns in the next few years. This analysis wants to

exacerbate the possible effects of this maneuver on the future of both international trade and diplomatic relations.

A declining model and a rising one: US and Chinese lending policies in Africa.

In 2015, Cameroon and Somalia were the first African nations to officially participate in the

Belt and Road Initiative. Over the past eight years, in parallel with the investments of the

Multilateral Development Banks of Western countries, a new flow of money at low interest

rates supported the development of infrastructures and services in sub-Saharan African

countries.

The CCP’s lending policies have taken a clear direction: the money could go to two types of

borrowers, both those with good repayment possibilities, representing a gain for Beijing, or

those for which any money lost represents a price to be paid for diplomatic advantage. In the period of maximum economic growth of the red giant, priority was given to this second type of investments: they appeared to be the most advantageous in the long term, in an economy increasingly dominated by large global value chains.

China understood the weakness of US-led agencies in the Africa loan market. To access

development bank funds, African countries must achieve objectives according to old theories of change, inadequate to Chinese competition. In this way the cheaper and most easily accessible money of the Chinese government was preferred by African nations to the

cumbersome and expensive loans of IDA and IBRD.

In addition, in response to growing global challenges, UN development banks have become

more risk-averse. At the same time China has been able to behave like a venture capitalist,

subsidizing its state-owned extraction companies, many times exploiting child labour. Beijing has intensified its presence in countries like the DRC, whose cobalt has contributed to significantly lower the production costs of electric cars, giving it the lead in the industry

despite the US-led Tesla.

Xi Jinping’s goal has always been to secure its monopoly in an industry with increasing

returns in the future. By doing so, he followed the "Western” belief that economic

interdependence would then mean political collaboration between nations. All this would

have been doomed to collapse with the events of 2020-2022, including COVID-19, the

closure of world markets to Russia after the invasion of Ukraine, the weakening of the WTO

and the progressive regionalisation of trade agreements and value chains.

The map of Chinese loans abroad has been, then, redesigned. Banks offer less loans to

Africa. Instead, they are aiming to support closer countries, such as Pakistan and Sri Lanka,

sources of cheap transportation raw materials, where Chinese businesses are able to dodge

Western trade tariffs and build local value chains. This led to the rapprochement with the

countries of the Paris Club and the formulation of a plan to commonly redesign the too high

debt accumulated by African nations.

The future of the Common Framework

Until now, the Common Framework has remained only in the declaration of intent of the

Rome G20. Some nations, such as Sri Lanka, have negotiated a process of debt

restructuring outside the framework with their creditors (especially China), while others, such as Zambia and Chad, have been waiting for too long. The rise in the interest rates by the Federal Reserve has made the financial situation of these countries, which have already

declared bankruptcy several times, even more worrying.

After a long stalemate, the parties at the IMF Washington Round Table have made

significant progress. China agreed to the requests of the Paris Club nations in exchange for

early access to debt sustainability analyses of countries receiving treatment, which are made by the IMF and the World Bank. After three years, the Common Framework seems on the verge of kicking off.

The geopolitical implications are mixed: on the one hand, the agreement is the result of the

progressive regionalization of world trade, given the failure of the Belt and Road Initiative.

On the other hand, for the first time the United States and China find common ground where they have been divided to date.

If the Common Framework fails, many African states will be forced to declare bankruptcy,

with the risk of a knock-on effect on the region’s economies. There could be a period of

hyperinflation and the possible dollarization of some currencies, as happened in the case of

Zimbabwe: Zambia seems to be already on the brink to collapse. In the current geopolitical

situation, this would cause increasing tensions, both economically and militarily, in the

corrupt political institutions of the most resource-rich African governments, with the risk o proxy wars of economic nature.

What should we expect for the future?

The WTO has been severely weakened in the last few years, since many bilateral

agreements have replaced the free trade areas under construction before COVID. Trump

has begun to counter China’s aggressive trade policy with protections, and the same line

seems to have been maintained by the Biden administration. Regionalisation of trade is

paradoxically more likely if the Framework will be successful, given China’s changes in trade policy strategies. The BRI now seems to be a memory of the past, or at least a stalled

construction site.

One last key factor to consider is the resource curse. Most of the raw materials used to

produce electric engines and semiconductors such as lithium and silicon are extracted in

China or in neighboring countries such as Afghanistan. Given the regionalization of trade

blocs, Beijing will be able to develop a comparative advantage on this market which will have an increasing salience in the next years, cutting off the United States.

The world seems to be facing two options: the first scenario, more optimistic, sees a

progressive relaxation of trade relations between the two blocks and a shift of the economies on their respective comparative advantages with the resumption of intra-bloc trade with low tariffs. Low evidence makes me think that this scenario will be likely, at least in the short run. Alternatively, Western countries will have to find ways to make up for the lack of raw materials by exploiting the stabilization of African countries' debt to encourage greater intervention by their companies in Africa.

In any case, without a globalized economy, the prospects for development for African

nations still seem to be blocked by their natural wealth and, at the same time, structural

fragility.

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