At FOCAC, China Renewed Commitments to Africa. Here’s What Needs to Happen Next.

The Forum on China Africa Cooperation (FOCAC), China’s triennial conference with Africa, has been the primary mechanism for bilateral engagement across economics, health, peace and security, education, and culture since its inaugural session in 2000. Each summit is an opportunity for China to outline its Africa programs for the succeeding three years, including the announcement of a renminbi-denominated resource package that would accompany each program. While the size of the package announced at last week’s summit will get significant media coverage over the coming months, including comparisons with the one announced at the US-Africa Leaders’ Summit, it is important to highlight structural limitations in translating those lending targets into actual projects. To partially address these constraints, this post proposes expanding the Africa Growing Together Fund at the African Development Bank and embracing a wider slate of participants to enable continued and sustainable lending from China to African projects.

China recommits, to African leaders’ relief

Coming into this year’s conference, African policymakers had noted with growing concern a decline in Chinese lending to the continent since 2016. In 2022, the total amount of Chinese loans to Africa fell below $1 billion, a two-decade low. These recent declines are no doubt a function of COVID-19 and the need for China’s biggest policy banks to focus on the domestic economy, as well as the declining fiscal space for taking on additional debt among African sovereigns. Given China’s pivotal role in financing African infrastructure, this decline did not escape notice. Kenya, for example, reported through its National Bureau of Statistics, a “significant drop in direct investment from China.” The report showed that “between 2020 and 2022, Chinese expenditures in Kenya’s construction sector, which is China's leading area of foreign investment in the country, dropped more than 34%.”

Reflecting the African concern, at a FOCAC side event hosted by Development Reimagined and the Alliance of African Multilateral Finance Institutions (AAMFI), George Elombi, Executive Vice President at the African Export-Import Bank, noted in his opening remarks that African lending institutions had come to Beijing this year with the intent of convincing the Chinese to increase lending to the continent. The African contingent would have no doubt been heartened by a Boston University report that Chinese lenders had issued new lending commitments valued at $4.61 billion to eight countries and two regional financial institutions in Africa, the first increase in 7 years.

That new finance is much needed for a region that has been buffeted by a series of external shocks. The economic impact of COVID, the Russian invasion of Ukraine, and high inflation and corrective central bank actions in the developed world interacted to create a period of economic stress for African economies. China’s financing has thus been a crucial lifeline. China’s willingness, over the previous decade, to directly finance large-scale infrastructure projects in Africa is unmatched by any other bilateral partner. The importance of Chinese lending and trade to Africa was reflected in the size of the African delegation at this year’s FOCAC—51 heads of state. Dozens sought and obtained an audience with the Chinese president.

In the end, the appeal worked: President Xi’s announcement of a resource package of just over $50 billion, $10 billion more than the 2021 proclamation, came as a relief to the continent’s governments, businesses, and regional lending institutions.

But the economic situation remains challenging

That relief must, however, be tempered by the reality that most African sovereigns lack the fiscal space to absorb new liabilities. While defaults in Zambia, Ghana, and Ethiopia are the extreme cases of constricted fiscal space, most African sovereigns are at high risk of debt distress. Debt service now accounts for about 11 percent of the continent’s revenue—with that number higher in some countries than others. This risk has now been priced into premiums demanded for African sovereigns issuing Eurobonds. Some African sovereigns issuing Eurobonds—Kenya, Côte d’Ivoire, Benin—have had to offer eye-watering, double-digit rates of return. These high rates meant foreign currency debt remains prohibitively expensive for most African sovereigns, effectively locking them out of international capital markets since 2022. Nigeria considered issuing a Eurobond, but found the option too pricey and opted for a domestic dollar bond. Even then it has had to pay a 9.75 percent yield per annum. Meanwhile, despite the continuing need for concessional finance for development, “As of April 2024, 20 African countries were either in external debt distress or at high risk of external debt distress.”

Against this backdrop, regardless of the size of the FOCAC lending package, the normal route of government-to-government lending remains restricted. There is, however, still a channel through which China can continue to sustainably lend to finance African infrastructure, manufacturing, and other projects—an option that China has already begun exercising. Per Boston University, half of Chinese commitments to Africa in 2023 went to regional and national lenders. These include finance and trade credit to the Africa Export-Import Bank (Afrexim) and Africa Finance Corporation (AFC). The recommendation here is to move beyond extending lines of credit to these institutions and to deposit fixed-term resources with them that would leverage their advantages.

The case for a new approach to Chinese lending

In 2014, China created a 10-year, $2 billion fund at the African Development Bank (AfDB), the Africa Growing Together Fund (AGTF), which has been co-managed by the AfDB and the People’s Bank of China. The intent of the fund was to finance both sovereign and non-sovereign development projects on the continent. And although the AGTF got a mention in FOCAC 9 implementation plan, there was no indication if the fund would be replenished as its term ends this year.

At its launch, the then-AfDB VP for Finance noted that it would provide an additional $2 million a year for “more or larger-sized projects” on transport and renewable energy projects—two persistently high-need sectors. The need for the AGTF is arguably higher today than it was a decade ago.

China should expand and reauthorize the AGTF for up to another decade. The expansion I’m proposing would be in both resources (increasing from $2 billion to $5 billion) and in participants (adding smaller African multilateral development banks, or MDBs) under the same operational and institutional arrangements. The $5 billion benchmark would match the resources available to the China Latin America and Caribbean Cooperation (CLAC) Fund, which was established seven years ago for a region that half the population of Africa.

The proposed expanded resource envelope reflects a) limitations in direct government-to-government lending at the rates China currently lends, b) the scale of the funding gap, and c) the speed with which these resources need to be deployed. China’s more stringent project selection criteria and its preference for a starring role for Chinese private enterprise align with these MDBs’ advantage of superior project selection and implementation, portfolio lending, a prominent role for the private sector, and agility in deployment.

As their pipeline of bankable projects expands, smaller African MDBs have gone after commercial lending to raise capital for their projects and would benefit from a direct infusion of the promised loan facilities in this year’s FOCAC package. For example, in March this year, the Africa Finance Corporation raised its largest loan—a $1.16 billion, 3-year facility with private banks—including China’s own ICBC (London Branch) acting as China Coordinator. Smaller African multilaterals like the Trade and Development Bank (TDB), AFC, and Afrexim would benefit from both the expanded envelope and the longer tenure of the AGTF, even if the lending rates were near commercial rates.

This year’s FOCAC went further in the promise of Chinese support for Africa’s modernization and industrialization ambitions. China pledged to support the “construction of local value chains, manufacturing development and deep processing of key minerals in Africa.” These reflect direct African input into FOCAC planning, but none of these activities can be sustainably and profitably launched without deep participation from the region’s lenders. An expanded Africa Growing Together Fund can address this missing link.