China is playing hardball in debt‑restructuring negotiations under the G20 Common Framework. A first breakthrough with Zambia’s official creditors has established some important modalities for debt treatment that can be applied elsewhere. However, China and other creditors are at variance over some important issues. China’s preference for maturity extensions rather than haircuts could put restructures in jeopardy, even where the country is a relatively minor creditor. Although EIU expects some ground to be ceded in talks with Ghana—one such case—the risk of inflexibility is high. Moreover, for most at‑risk sovereigns in Africa, China holds a significant proportion of external debt and so would wield considerable influence in any negotiations. 

African countries’ stock of debt owed to China has risen dramatically over the past decade, in line with an upward trend in borrowing since 2010. When the coronavirus crisis struck and debt‑carrying capacity deteriorated, Chinese lenders provided a large share of the relief to Africa under the Debt Service Suspension Initiative (DSSI), led by the IMF and the World Bank. The heavy burden shouldered by Chinese lenders reflected their status as a leading creditor to low‑income countries. Although the DSSI represented a willingness by China to participate in an international debt initiative, debt suspensions between sovereigns and Chinese creditors was conducted separately to Paris Club relief efforts. The desire for independence has proven to be a drawback to negotiations for deeper debt restructuring in Africa through the G20 Common Framework. Chinese state‑backed banks want multilateral lenders to share in losses—a demand refused by the latter on the grounds that their preferred credit status would be compromised.

After drawn‑out negotiations between Zambia’s government—which defaulted in 2020—and its official creditors lasting two years, a first agreement (still provisional) for a debt treatment under the G20 Common Framework was reached in June 2023. China’s insistence that multilaterals be part of the restructure was dropped, but to reach a consensus there were no haircuts on debt, as Zambian officials and Paris Club creditors had advocated. Relief was limited to maturity extensions and a grace period on interest payments, although in practice this means a large reduction in net present value. Zambia’s debt service bill will also increase, together with its capacity to repay in future—another demand of Chinese official lenders and one that breaks from ordinary practice. 

Mixed view on Zambia as benchmark for other talks 

Whether the Zambian case can be used as a blueprint to speed up other restructure negotiations is unclear. Chinese lenders are a heterogeneous group and have had to negotiate among themselves to establish how overlapping claims on Zambia be treated. China’s Export‑Import Bank (EXIM Bank) has been classed as an official creditor in Zambia’s debt talks, but other Chinese policy banks and lenders (including export credit agencies) have insisted they be categorised as commercial creditors and as such must negotiate in separate committees. Teasing out what debts are to be negotiated when and by whom has been complex. On the one hand, a standard on creditor typology among Chinese lenders has been set, which puts one thorny issue to rest in other debt‑restructuring talks. On the other, questions among these lenders about which debts to include in the Common Framework versus commercial creditor talks would probably resurface when they are faced with a different debt pile, owed by a different sovereign.

There has not been any commitment from the Chinese side that a final agreement with Zambia should be replicated elsewhere, as Western lenders hope. It is also unlikely that most African countries would want a debt treatment similar to Zambia, where China is the leading creditor, holding about one‑third of public external debt. Of the US$6.3bn in official debt that Zambia is attempting to restructure, more than US$3bn is held by EXIM Bank alone. For Zambia, it is natural that Chinese lenders carry substantial leverage. In cases where China is a smaller creditor, however, intransigence over no haircuts would be harder to accept. Zambia is also a peculiar case because high international prices for copper—the country’s principal export—has improved the outlook for debt‑servicing capacity. 

Ghana talks will provide important clues about Chinese policy

Ghana will be an acid test of how Common Framework debt talks can proceed when China is not a major creditor but still heavily involved. Ghana entered into a sovereign default on US$60bn on both domestic and external debt at the end of 2022 and sought a treatment under the Common Framework soon after on US$5.4bn of official external debt. Of this, only US$1.9bn is owed to China. An initial agreement towards a restructure with Ghana’s official creditors was reached fairly quickly in May, following which China agreed to co‑chair the official creditor committee, together with France. As in the case of Zambia, this was enough to unlock a loan from the IMF. However, progress has since been slow. New, concrete steps toward a resolution will be needed before a first review and US$600m disbursement can be signed off by the Fund. It is likely that continued wrangling about maturity extensions versus haircuts (desired by Ghana and the Paris Club) are behind the delay, and there are reports that China is unwilling to budge, despite mounting pressure.

On the Chinese side, there are concerns that an unwelcome precedent on taking losses would be set and a sense that a uniform stance would be better. However, an unwavering “no haircut” policy would derail IMF‑backed targets for reaching debt sustainability and in theory cause the restructuring process to fail, especially as a final deal could become the template for restructuring more sizeable private external debt. Ghana is attempting to secure a US$10.5bn debt reduction overall to exit distress. We expect a deal with Ghana’s official creditors to be reached by end‑2023 or early 2024 and for this to involve haircuts, with China ceding ground for reputational reasons and to prevent total deadlock. However, in the alternative scenario, where China refuses to absorb losses, there would be clear indication that where its share of official debt in restructuring is relatively small, the potential complications in reaching a settlement with China under the Common Framework actually become greater. 

Signs ominous for Africa overall

Such delays in restructuring, whether by design or not, are likely to deter other sovereigns from going down the same path, even if this means letting debt problems reach a point of default rather than attempting to secure an early treatment through the Common Framework. Moreover, EXIM Bank appears to be enforcing stricter lending terms, to the exclusion of some would‑be borrowers, rather than incorporating concessionary elements, making it harder for sovereigns to refinance or roll over debt at a time when borrowing from the international capital market has become restricted. 

We do not expect a wave of defaults, although sovereign risk is generally rising across the continent, exacerbated by restricted access to finance. For other African countries that do encounter repayment difficulties, it is now a more winding road to resolution than in previous decades, possibly even when China’s share in external debt is low, depending on the outcome for Ghana. Given Africa’s dire need for funds while global credit conditions remain tight, and especially if global interest rates stay higher for longer, countries could be left in limbo, if Chinese demands run contrary to debt‑sustainability objectives. It is worth noting that the countries at highest risk of debt distress are generally those where China will carry significant weight in negotiations, such as Djibouti, Kenya and Mozambique. Two other African countries already pursuing restructuring under the Common Framework—Chad and Ethiopia—both have sizeable debts to China. 

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.