Debt geopolitics

Last week, US Treasury Secretary Janet Yellen will push for the urgent resolution of Ghana and Zambia’s requests to restructure their sovereign debts and help conclude a debt treatment for Sri Lanka. Yellen is also pushing for concrete steps to speed up the overall debt relief process and make it more transparent, but it remains unclear if there would be progress on Zambia’s request since it’s in some ways up to China. Yellen will discuss the debt issue in separate meetings with the G20 group of major economies and the Global Sovereign Debt Roundtable officials.

Much of the talking points around US Vice President Kamala Harris’s recent Africa trip centred around the inadequacy of US initiatives, which analysts and experts have largely and rightly pegged around the geopolitical competition between Washington and Beijing. The debt discussions are America’s way of stepping out of the overwhelming focus on security assistance to playing in a turf that has been the forte of its strategic competitor for the past decade.

In the ensuing geopolitical competition between both superpowers, openings will be found. This opportunity for the US comes as Chinese lending to African governments fell to a 16-year low in 2020, as the impact of the coronavirus deterred countries on the continent from borrowing. Lending in 2020 fell 78% from a year earlier to $1.9 billion, the lowest since 2004, according to a Boston University Global Development Policy Center report. Western discomfort with such cheap loans that the Chinese Belt and Road Initiative was framed around warnings of a debt trap, where it was feared that African countries are given cheap loans to make them forever indebted to China.

Debt forgiveness is now at the heart of Africa’s relations with both China and the United States amid slow economic growth in many economies on the continent, which has made debt servicing a nightmare. Ghana, for example, may be compelled to prolong its dance in the debt restructuring theatre if China fails to show up at the negotiation table; and as restructuring talks at the international front delay, gains made in the domestic debt operation exercise could be erased. For most of the developing economies, the IMF-World Bank spring meeting is an opportunity to exert final pressure on restructuring negotiations, and Ghana isn’t leaving any stone unturned: nine lawmakers have joined a delegation led by Finance Minister, Ken Ofori-Atta, and the the Bank of Ghana Governor, Dr Ernest Addison, to convince the International Monetary Fund (IMF) for the $3 billion support.

Last week, we had a series of calls from different angles urging creditors to fast-track debt operation talks, especially for developing economies. Zambia remains a test case for most countries attempting a debt operation exercise with China being a significant bilateral creditor. The country’s debt talks have stalled due to a standoff between China and the West on the form of economic restructuring and the magnitude of losses each side is willing to accommodate. According to the IMF, Zambia will have access to about US$188 million (the first tranche out of a total package of $1.3 billion) in financing once the review is approved by the Fund. To remove any hurdles to the timely completion of the review, the IMF has told Zambia it needs its official creditors to move forward and reach an agreement on a debt treatment in line with the financing assurances they provided in July 2022.

Accra’s situation is synonymous with that of Lusaka’s where China appears to be missing at the collective negotiation table. But while the picture still looks gloomy, Mr Ofori-Atta’s recent tweet offered some glimpse of hope. According to him, Ghana had “productive restructuring talks” with the International Monetary Fund (IMF), International Finance Corporation (IFC) and Japan International Cooperation Agency (JICA), among others. As Accra awaits an IMF executive approval, some of its economic indicators have begun seeing significant improvement; inflation dropped for the third consecutive time in March after reaching a more than two-decade high of 54.1% in December 2022. The local currency on hand has appreciated cumulatively by more than 20% since the beginning of the year.

However, Ghana’s growth rate has been truncated by the World Bank to 1.6%, lower than government estimates. Worryingly, the debt-to-GDP ratio is projected to touch 99%. The Treasury Department’s intervention should not be seen as a Father Christmas move as politicians on both sides of the partisan divide in Washington are becoming increasingly militant in their calls for countries to pick a side in the competition with China. The kind of concessions Ghana and Zambia have to make to get debt relief will be subject to what they consider pragmatic in their long-term future, and how to manage future concessions with Chinese infrastructure investments will remain a headache.