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China, Nigeria’s biggest bilateral creditor, reduces lending

China, Nigeria’s biggest bilateral creditor, reduces lending

China, Nigeria’s biggest bilateral creditor, is reported to be scaling back lending in Africa amid its worsening growth woes.

That comes at a time of rising interest rates globally and shrinking liquidity, factors that have already sent bonds of the riskiest African borrowers such as Ghana and Zambia, and currencies including South Africa’s rand to near pandemic lows, Bloomberg reported on Monday.

Nigeria’s external debt owed to China accounts for 83.57 percent of its total bilateral debt as of June 30, 2022, totalling $3.9 billion, a 12.7 percent increase from $3.5 billion in the same period last year, according to data from the Debt Management Office (DMO).

Bloomberg reported that the evolving debt dynamics with Beijing, whose lending is focused on long-term infrastructure projects, threatened to push reluctant governments into the arms of the International Monetary Fund (IMF) and World Bank for balance of payments support.

It said economic programmes from the fund often restrict commercial borrowing and require Chinese lenders to sit around the restructuring table with Western lenders.

Aninda Mitra, macro and investment strategist at BNY Mellon Investment Management in Singapore, who has covered EMs for more than two decades, was quoted as saying that “with shallow local markets, and thin policy and market buffers, Africa is going to need all the help they can get to smooth out the macro shocks which are buffeting them.”

“China’s reticence in debt restructuring and softening of its lending terms is bound to heighten vulnerabilities at these frontier economies.”

From 2000 to 2020, the top 10 African government recipients of Chinese loans were Angola, Ethiopia, Zambia, Kenya, Egypt, Nigeria, Cameroon, South Africa, Republic of Congo and Ghana, according to data from the Boston University Global Development Policy Center.

Of those, Ethiopia has been flagged by JPMorgan Chase & Co. as carrying high repayment risk, and under threat of reserve depletion by the end of 2023, according to Bloomberg. Zambia, which is in default on its Eurobonds, and Ghana have approached the IMF for bailouts that may involve debt restructuring, while Egypt is seeking a new loan, it said.

China is Zambia’s biggest creditor, accounting for almost 75 percent of bilateral borrowings, and is co-chairing a committee negotiating a debt restructuring after the country became Africa’s first pandemic-era sovereign defaulter in 2020. President Hakainde Hichilema had criticised the cost of Chinese projects before he won power last year, and has since forged closer links with nations including the US and the UK.

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In 2020, Nigeria’s debt office said the loans from China were being used to finance infrastructure projects in the country.

It said the projects were 11 as of March 31, 2020, and they include the Nigerian Railway Modernisation Project (Idu-Kaduna section), Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project (Abuja, Kano, Lagos, and Port Harcourt), Nigerian Railway Modernisation Project (Lagos-Ibadan section) and rehabilitation and upgrading of Abuja-Keffi-Makurdi Road Project.

“It is widely accepted that investment in infrastructure is one of the most effective tools for countries to achieve economic growth and development. Using Loans from China to finance infrastructure is thus in alignment with this position,” the DMO said.

Charles Robertson, global chief economist at Renaissance Capital Ltd, was quoted by Bloomberg as saying that China’s scaling back would slow growth in the region and “can’t be welcomed by most debt investors.” In the early years of Chinese lending to Africa, just 25 percent of countries were at high risk of debt distress, with sovereign spreads higher than 1,000 basis points. That proportion has grown to 60 percent, he said.

Countries that have made progress with the IMF this year include Kenya and Mozambique.

“Those countries that succeed in greater engagement with the IMF will most likely not be that negatively affected by China’s disengagement,” said Jacques Nel, head of Africa macro research at Oxford Economics. “However, those that are unable to move closer to the IMF and World Bank but with big funding gaps might find it difficult to cope without cheap Chinese funding.”