China’s Belt and Road Initiative (BRI) is an ambitious programme aimed at building global infrastructure and enhancing China’s influence worldwide. Launched in 2013, it has become the largest transnational infrastructure project ever undertaken by a single country. While the BRI has brought significant benefits – such as improved transportation and power infrastructure in various countries, it has also raised concerns about debt sustainability and the influence China wields over debtor nations.
Most of the countries that participated in the BRI were developing nations with weak credit ratings like Ghana. China’s cumulative engagement in the project has reached a staggering US$932billion, comprising US$561billion in construction contracts and US$371billion in investments. This immense scale of lending has both positive and negative consequences.
On the positive side, important infrastructure projects have been completed under the BRI. For example, a railway line in Ethiopia has significantly reduced travel time, while hydropower dams in Uganda have provided electricity and boosted tourism. Road and pipeline constructions across Central and Southeast Asia have also spurred economic growth. However, alongside these successes, there have been instances of wasteful projects, corruption, and poorly planned and over-priced projects that burden countries with unsustainable debt level – like in Ghana’s case.
In recent years, many developing countries that borrowed from China, including Ghana, have faced financial distress, exacerbated by economic mismanagement, monetary inflation, excessive fiscal dominance. As a result, China has reduced its lending activities, transforming from a source of capital for emerging market growth into a ‘global debt collector’. This shift in China’s lending approach has raised concerns about the repayment capacity of debtor countries and the challenges they face in negotiating debt relief.
A recently published paper by Horn, Parks, Reinhart and Trebesch sheds light on China’s extensive bail-out operations and its new system of international rescue lending. The study reveals that between 2000 and the end of 2021, China provided US$240billion in rescue loans through 128 bail-out operations in 22 debtor countries. This approach significantly differs from the traditional debt relief mechanisms employed by institutions like the International Monetary Fund (IMF) and the Paris Club. The Paris Club, an informal group of creditor nations, offers coordinated debt relief to debtor countries based on negotiated terms. In contrast, China prefers private negotiations with countries struggling to meet their debt obligations, avoiding participation in the Paris Club. China’s insistence on full repayment makes it difficult for other lenders to provide debt relief or offer low-interest loans to debtor countries, as the money would simply flow back to China.
China’s bail-out loans also differ in terms of interest rates compared to those offered by the IMF. While the IMF typically provides rescue loans with a 2 percent interest rate, Chinese rescue loans carry an average interest rate of 5 percent. This disparity, along with the lack of coordination among creditors, has prolonged debt crises in countries like Sri Lanka and Zambia.
The paper highlights that China’s rescue loans primarily serve as a bail-out for its banks, which have played a significant role in financing the Belt and Road Initiative. By extending emergency loans without demanding improvements in economic policy discipline or coordinated debt restructuring, China aims to protect its banks from losses. However, this approach has raised concerns about the opacity and fragmentation of the global financial system.
Furthermore, the study emphasises the use of swap lines, a facility where renminbi (Chinese Yuan) is exchanged for domestic currency, as a tool for crisis management. These swap lines have become crucial for bolstering gross reserve holdings and addressing short-term liquidity needs in countries experiencing financial distress. However, the lack of clarity on how the funds are used, particularly in servicing external debts to China, complicates debt monitoring and reporting.
The implications of China’s growing role as an international crisis manager and its influence on the global financial architecture require further research. It raises questions about the sustainability and transparency of China’s lending practices and the potential long-term consequences for debtor nations.
In the case of Ghana, the country has experienced a significant increase in its external debt in recent years, partly due to its participation in the Belt and Road Initiative. Ghana’s debt distress has been exacerbated by the economic challenges brought about by excessive borrowing, including a decline in revenue and increase in debt repayment needs. China is one of Ghana’s largest creditors, and as the country faces difficulties in servicing its debts, discussions around debt restructuring have emerged. Debt restructuring involves renegotiating the terms of existing debts to alleviate the burden on debtor countries. This can include extending repayment periods, reducing interest rates, or even partial debt forgiveness.
The process of debt restructuring can be complex and often involves negotiations between debtor countries and their creditors. In the case of China, the lack of participation in the Paris Club and its preference for private negotiations makes the process more challenging. The terms of debt restructuring with China may differ from those offered by traditional creditors, such as multilateral institutions like the IMF or bilateral lenders.
Debt sustainability is a critical consideration in the restructuring process. It involves assessing a country’s ability to meet its debt obligations without compromising its economic stability and development prospects. Debt sustainability analyses take into account factors such as the country’s debt-to-GDP ratio, debt service-to-revenue ratio, and external financing needs.
For Ghana, debt sustainability is a pressing concern. The country’s external debt-to-GDP ratio has increased significantly in recent years, reaching over 100 percent in 2022. High debt levels can crowd out public investment, hinder economic growth, and limit fiscal space for essential social and development programmes. In navigating debt restructuring with China, Ghana needs to carefully assess the terms and conditions of its existing debts. It should prioritise sustainable and transparent debt management practices to ensure that any restructuring efforts contribute to long-term economic stability and growth. This may involve engaging with other creditors, including multilateral institutions and traditional bilateral lenders, to secure favourable terms and achieve a comprehensive debt restructuring plan.
Additionally, enhancing domestic revenue mobilisation, improving public financial management, and promoting inclusive and sustainable economic growth are crucial for Ghana’s long-term debt sustainability. These efforts can help reduce reliance on external borrowing and create a more resilient and self-sufficient economy.
In conclusion, Ghana’s external debt restructuring efforts, particularly concerning its debts with China, are complex and require careful consideration of debt sustainability and long-term economic stability. The influence of China’s lending practices and its role as an international crisis manager adds further complexity to the situation. Addressing these challenges will require close collaboration between Ghana and its creditors, along with robust domestic economic policies, to ensure a sustainable and prosperous future for the country.
The writer is an Economic Policy & Financial Analyst
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