Zambia and Mozambique Illustrate Ballooning African Debt, Growing Chinese Influence, and Challenges to U.S. Interests in Africa

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Zambia and Mozambique Illustrate Ballooning African Debt, Growing Chinese Influence, and Challenges to U.S. Interests in Africa

April 26, 2018 7 min read Download Report
Joshua Meservey
Senior Policy Analyst, Africa and the Middle East
Joshua Meservey is a Senior Policy Analyst, Africa and the Middle East at the Heritage Foundation.

Summary

Recent debt scandals in Zambia and Mozambique are part of a larger trend of unsustainable debt levels contributing to financial crisis in African countries. Some cases involve Chinese lending, giving Beijing influence in strategic parts of the continent important to U.S. interests. The U.S. should promote accountable, rules-based governance in Africa by increasing engagement with the continent and reorienting the focus of some extant American initiatives. The U.S. should also remind African countries of the negative effects of unsustainable debt levels, including the possibility of having to surrender strategic assets to China, and it should encourage China to abide by international norms on lending to least developed countries and to be transparent about loan terms and conditions.

Key Takeaways

Recent scandals involving undisclosed debt are part of rapidly growing sovereign debt across Africa that is plunging a number of countries into debt distress.

At the core of many African countries’ increasingly unsustainable debt is poor and frequently corrupt governance, which must be the focus of long-term solutions.

China holds significant amounts of recent African debt, giving it influence in countries important to U.S. interests.

Some of Zambia’s creditors recently alleged that the Southern African country’s debt may be twice what its government says it is. If true, it will make Zambia’s current difficult economic situation even more precarious. According to the Paris Club—a gathering of representatives of major lending nations—Zambia is already at high risk of debt distress (generally defined as the inability to fully service debt), and the undisclosed debt issue is impeding Zambia’s negotiations for an International Monetary Fund bailout package.REF

The allegations invite comparisons to another African country that recently revealed previously undisclosed debt. In 2016, Mozambique admitted to carrying more than $1.4 billion in secret debt (subsequent revelations brought the total undisclosed debt to over $2 billion), prompting the International Monetary Fund and donor countries to suspend aid to the country. Mozambique later defaulted on the loans.

Three Related Challenges

Zambia and Mozambique’s debt scandals illustrate three related challenges that will profoundly affect the future of many African states, while posing a significant problem for U.S. interests on the continent.

First, sovereign debt is growing rapidly across the continent. In the past six years, Zambia’s debt as a percentage of gross domestic product (GDP) rose from 21 percent to 61 percent.REF Since 2001, Mozambique’s external debt has quadrupled. Skyrocketing debt in these two countries has contributed to the bloating of average public debt as a share of GDP in sub-Saharan Africa from 40 percent in 2013 to about 56 percent in 2017.

In addition, the number of sub-Saharan African countries with debt levels above 50 percent has more than doubled since 2013REF—a significant concern, as some scholars consider a debt to GDP ratio greater than 40 percent to be perilous for most developing economies.REF According to the World Bank, 12 sub-Saharan African countries (up from seven in 2013) are either in debt distress or are at high risk of it.

Second, poor and likely corrupt governance is most to blame for these debt problems. Responsible borrowing is often key to a country’s growth, but many African leaders have recklessly borrowed and spent. Nearly half of the more than dozen African countries that issued bonds between 2010 and 2016 are close to defaulting or are trying to restructure their bond debt.REF In six years, Zambia more than quadrupled the amount of money borrowed through external loans.REF Much of the money is funding infrastructure projects, some of which are of dubious economic value, at a time when the government has so little money it cannot afford basic drugs for its hospitals.REF

If corruption were less severe, African countries would derive greater benefit from loans. A study found that up to 63 cents of every dollar borrowed by African countries from 1970 to 2010 left the continent within five years, much of it stolen.REF An audit could not find $500 million of Mozambique’s $2 billion hidden debt. The auditors also could not say if the projects financed by the loans would ever be profitable and determined that the state-owned companies that received the loans overpaid for equipment by more than $700 million. Zambia’s Ministry of Health, despite the looming drug shortage because of non-payment to pharmaceutical companies, allegedly recently paid nearly quintuple what it should have for ambulances in a probable corrupt bargain.REF

Third, China’s role in debt problems in Mozambique and Zambia mirrors the situation in many other African countries. Beijing provided the majority of new loans that swelled Zambia’s declared external debt,REF and in 2016 China owned 28 percent of Mozambique’s bilateral debt, by far the largest percentage among bilateral donors. From 2013 to 2015, Chinese institutions issued loans valuing $5 billion to $6 billion to African governments yearly, constituting in 2015 an estimated one-third of all new debt in sub-Saharan Africa.REF According to the Paris Club, China on average owns 56 percent of the bilateral debt of the four African countries in debt distress.

Commercial debt and Eurobonds also significantly contribute to Africa’s debt problem, but Chinese lending gives Beijing—a frequent American rival—significant influence throughout Africa. For example, China owns Djiboutian debt equivalent to about 75 percent of its GDP,REF giving it leverage over a country key to U.S. interests in Africa. Djibouti, in the Horn of Africa, hosts the U.S.’s only permanent African military base and perches on the Bab el-Mandeb Strait, a global shipping chokepoint.

The engagement of China and other countries headed by similarly corrupt and authoritarian regimes will also likely influence African economic and governance norms away from the transparent, rules-based processes the U.S. promotes.

A U.S. Response

To assist in the creation of economically vibrant, democratic African countries free of excessive influence from the U.S.’s geopolitical competitors, the U.S. should:

  • Increase its engagement with Africa and reorient the focus of some existing initiatives. Such measures should include focusing the U.S.’s overseas development assistance on enhancing countries’ free-market systems and encouraging accountable and competent governance; enhancing the efficiency of U.S. aid by eliminating “buy American” provisions and subsidies to U.S. shipping companies that deliver aid; boosting trade beyond the African Growth and Opportunity Act; and making the U.S.–Africa Leaders Summit a regular event.REF
  • Prioritize the fight against African corruption. The fight against corruption in Africa should include helping countries strengthen their civil societies, promoting economic freedom, leveraging technology and the power of crowds, and elevating the fight against graft as part of U.S. development assistance.REF
  • Encourage Beijing and its debtors to abide by international norms on lending and be transparent about terms and conditions. The details of Chinese lending are frequently opaque, making it harder for African publics to hold their leaders accountable for economic decisions.
  • Publicize the negative effects of Chinese lending without regard for debt sustainability. The U.S. should remind African leaders and publics about the negative effects of Chinese lending without regard for debt sustainability, and it should use China’s regard for its global reputation as an opening to pressure Beijing to lend more responsibly. While China is unlikely to accede to mere requests, particularly as it sometimes uses lending to advance its geopolitical interests, China is concerned about its global reputation and likely does not want to be seen as a predatory lender.

A Growing Challenge

Zambia and Mozambique’s debt problems, part of a larger trend of unsustainable debt levels threatening financial crisis in some African countries, represent broader challenges to U.S. interests on the continent. Poor and corrupt governance, combined with easy Chinese money and non-transparent lending practices, are contributing to the problem. The U.S. should try to influence the governments and public of these African countries to borrow and spend responsibly, while encouraging Beijing to adopt international lending standards, using China’s concern for its global reputation as an opening.

—Joshua Meservey is Senior Policy Analyst for Africa and the Middle East in the Douglas and Sarah Allison Center for Foreign and National Security Policy, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.

Authors

Joshua Meservey
Joshua Meservey

Senior Policy Analyst, Africa and the Middle East