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How COVID-19 Will Change China And Africa’s Economic Relationship

15 May 2020 – One reason for China’s strictness may be earlier research suggesting that different types of Paris Club relief lead to different economic outcomes. Debt stock relief is found to enhance economic growth and a change to repayment terms to induce greater fiscal prudence and better prospects of long-run debt sustainability. This trade-off may lie at the heart of identifying a balance between the two approaches. Another reason could be that China as creditor is not a single lending agency but in fact something of a labyrinth of lending entities. China may even need something of its own “Dongcheng Club” to instigate greater transparency among and between its own international creditors, with Dongcheng being the Beijing district hosting a cluster of the relevant government agencies.

In other words, China joining the G20’s debt repayment freeze is both consistent with its past practice – in offering a repayment freeze where justifiable; but unique – China seldom participates in multilaterally-agreed sovereign debt discussions. The latter has led to hopes that the extreme circumstances induced by COVID-19 may encourage China to go beyond a freeze on repayments and, Paris Club-style, to more magnanimously offer something closer to a debt write-off. Its past behaviour would suggest that is unlikely.

As China nears its milestone of eradicating absolute poverty by 2021, it is especially timely for China and African countries to proactively work together on ‘innovative and pragmatic’ cooperation. This may include what would be a rare offer by China of significant debt stock write-off. It could also include, at the least, re-equating the terms of China’s existing loan stock with those of equivalent loans from the World Bank or IMF. Prospects for such calls would undoubtedly be aided by elevated prospects for sustainable debt and development in debtor countries – something the Belt and Road Initiative could both serve, and also be served by. Source (Tralac)