Covid-19 and Africa-China relations: challenges and opportunities

19 June 2020 (Last Updated July 1st, 2020 10:04)
Covid-19 and Africa-China relations: challenges and opportunities

The economic impact of the Covid-19 outbreak on Sub-Saharan Africa (SSA) is expected to be strong, in part reflecting the continent’s exposure to China, particularly in Ghana, Angola, South Africa, and Nigeria, which are reliant on China’s demand for their commodities exports. In addition to being SSA’s largest trading partner, China is also a large and fast-growing source of aid and the largest source of construction financing. Spending cuts and frozen projects are likely to be witnessed given China’s own challenges amid the Covid-19 crisis, and this adds more uncertainty to the region that has been marred by widespread geopolitical and economic instability.

China has already pumped significant amounts of cash into Africa. It is now the continent’s largest bilateral creditor, accounting for around 20% of external debt on the continent. In April, African governments asked for a reduction in their commercial debt while preserving their current credit ratings, and the G20 forum agreed to a one-year suspension of debt repayments for the majority of SSA nations, and urged private creditors to engage in similar actions. China, the largest single creditor to SSA, will participate in debt relief schemes. It was agreed that debt restructuring would occur on case by case basis rather than follow a broad brush approach.

China tends to renegotiate troubled loans bilaterally, usually offering an extension of a grace or repayment period, including a provisional freeze on repayments, but seldom cancelling any debts (other than on some small loans). Given Africa’s huge and growing reliance on China as a source of funding and how the pandemic has exposed how fragile its economies are, there is concern that African states will suffer a similar fate to Sri Lanka which went on a borrowing binge to reconstruct dilapidated infrastructure in the aftermath of its civil war. The country ran up an insurmountable debt burden, which forced the Sri Lankan government to abandon majority control over the port in 2017 in lieu of repayment to China. The Sri Lankan example demonstrates China’s unique form of ‘debt-trap diplomacy’ and despite a lack of explicit political conditionality, this poses a threat to the sovereignty of many African countries and they could be forced into debt-for-assets swaps. With the heightened trade tension between US and China even during the pandemic, this may push African governments to find alternative options of funding, for example from the US under the Trump administration’s Prosper Africa initiative. Earlier in 2020, in the latest of the “Africa Plus One” Summits, the UK-Africa 2020 Summit, aiming to boost trade and investment links with SSA, total commercial deals amounted to $8.5bn. While this could present a change in foreign policy for the region, the lack of Chinese funding’s conditionality (minimal obligations that do not fall under the global multilateral framework for official creditors known as the Paris Club raising doubts about the transparency and commercial viability of Chinese state-sponsored lending) continue to make it an attractive option for many regional markets in the continent. Ethiopia and China for example have strong ties that the latter agreed last year to restructure a loan for the $4bn railway linking Addis Ababa with Djibouti and the $2.5bn Addis Ababa-Sebeta-Mieso-Dewale road project. The rescheduling of the loan for the railway project alone has saved Ethiopia more than $430m in marginal interest and the grace period obtained.

African leaders are aware of China’s failings, including its mismanagement of the Covid-19 outbreak in Wuhan and racism in Guangzhou (videos were circulated in April on social media showing discrimination against Africans in Guangzhou) that many feared that Chinese investment would slow down in the region. However, the Chinese have been quick to provide aid and support African nations during the ongoing Covid-19 pandemic. An estimated $280m of Covid-19 crisis-related aid and support has come from China. A big part of it is from private individuals and the businesses community, according to China Africa Project. A communiqué issued on 13 June by the African Union (AU) mentioned that China has confirmed the supply of 30 million testing kits, 10,000 ventilators and 80 million masks each month for Africa. Aside from the medical help, investments in the continent did not cease during the pandemic, for example, current data from the Ethiopian Investment Commission (EIC) shows that at least 30 Chinese investment projects have been licensed in Ethiopia between 2 January and 16 April, involving total registered capital of more than $2bn.

For its part, China appears determined to support Africa’s sustainable development while allowing African countries to devise their own development strategies and improve their own governance, as indicated in the FOCAC Beijing Action Plan. China’s commitment to the region was further emphasized at the virtual China-Africa summit held on 18 June, in which China will start ahead of schedule the construction of the Africa CDC (Africa Centres for Disease Control and Prevention) headquarters this year, work with Africa to fully provide the health care initiative adopted at the FOCAC Beijing Summit, and speed up the construction of China-Africa Friendship Hospitals along with the collaboration between Chinese and African hospitals.

China will also continue to invest in resource-extracting industries, given its need to obtain strategic resources to drive its economy. However, a dip in Belt and Road Initiative (BRI) related activity is expected as the Chinese government evaluates its investment in the region and may opt to trim its investments in less critical markets.

The manufacturing sector’s performance in the continent during the pandemic has shown how reliant African nations are on China given the disruption to supply chains and the impact of depreciating currencies on import costs, and this has re-emphasized the importance of building domestic capacity. Supply chain risks for machinery imports and movement of personals have been massively hit, imposing drastic damage on industries such as the flower sector in Ethiopia and Kenya. Once restrictions are lifted, African governments and businesses will have to try to balance managing sharp uncertainties with regard to demand for their exports against rising costs for inputs such as labour, electricity, fuel, rent, and taxes. The more complex and import reliant a business supply chain is in Africa, the higher the risk of disruptions in the future, hence strengthening local supply chains will provide an impetus for localized industrial construction across the continent. However, sophisticated manufacturing and infrastructure are obstacles to increased localised production and intra-regional trade.

With the implementation of the African Continental Free Trade Area (ACFTA, originally scheduled for July 2020 but is now delayed by a year due to the pandemic), there is an expectation that intra-regional trade and local production will rise. However, to fully exploit the potential benefits of the ACFTA, addressing Africa’s physical infrastructure gap, including transport and utilities infrastructure, will require between $130bn and $170bn worth of public and private investment per year, and there’s a shortfall of between $68bn to $108bn, according to African Development Bank (AfDB).

The ACFTA creates a pressing need for connectivity between African countries. This means new opportunities for infrastructure investment in transportation; information and communications technology ICT; enough road networks, among others. Africa’s legacy of underdevelopment has left its roads, railways and ports infrastructure lacking in capacity and quality. To support the development and maintenance of Africa’s ‘hard’ transport infrastructure (such as roads and railways), ‘soft’ infrastructure – the financial, regulatory and governance systems, and institutions to manage the transport systems to their full aptitude – needs to be developed simultaneously.

While the removal of soft trade barriers will help the continent’s trade activities, hard infrastructure barriers will continue to pose challenges. The pandemic provides a pressing need for Africa to adopt reforms to boost private investments in regional transport projects, such as rail corridors, road corridors and ports, to realise the full benefits of a more sophisticated trading system. Although China is not the sole source of funding in the region, Chinese financial support is likely to remain vital for many countries. China’s emphasis on infrastructure construction increased with the launching of the BRI; and BRI projects and initiatives are an extension of the BRI goals and the African Union’s Agenda 2063 and Programme for Infrastructure Development in Africa (PIDA), which advocate for increased regional integration within the continent.