Amid Plunging Prices, Africa's Commodity-backed Debts to China Become Perilous

Over the past 15 years, many African countries borrowed tens of billions of dollars from China to build badly-needed infrastructure. Short of cash, these countries instead leverage their natural resources to repay their debts. Ghanaian bauxite, Angolan oil, and Zambian copper, for example, were used to generate the revenue to service these loans.

When commodity prices were high, or even just stable, these deals made a lot of sense. After all, many of these countries really didn’t have any other alternative given that raising money in the private capital markets was too expensive and no other bilateral lender was willing to extend credit lines as large as what China offered.

Then in January of this year, things started to change. The first infections of novel coronavirus, or COVID-19, were reported in China. Within weeks, China was engulfed in a full-blown epidemic that brought the entire country, and its economy, to its knees. Chinese manufacturing, consumer activity, and industrial production all effectively stopped. The Chinese suddenly just stopped buying the oil, gas, minerals, and timber that places like Africa sold and that sent prices for these commodities into a tailspin.

But here’s the catch: regardless of how low commodity prices fall, those loans still need to be re-paid. And that presents a perilous risk to a number of African countries, according to the findings of a new report by the New York-based Natural Resource Governance Institute.

“While these loans have often provided much-needed infrastructure, such as roads and hydro-dams, in many cases they have led to crippling levels of debt and the risk of losing collateral that is itself worth more than the value of the loan,” wrote co-author David Mihalyi, a senior economic analyst with NRGI.

David and NRGI Guinea Country Manager Hervé Lado join Eric & Cobus this week to discuss their new report on the dangers of resource backed lending in Africa and what governments need to do to better manage the current high levels of risk.

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