Debt Diplomacy in The Shadow of Sanctions_ Chinese Lending to African Sovereigns Excluded from Western Capital Markets

Abstract

Recent increases in U.S. sanctions comprehensiveness and severity in Africa may create conditions of debt dependency detrimental to non-sanctioned African countries and to Chinese sovereignty. Chinese policy decisions when lending to Africa are informed by the prevailing financial conditions of potential borrowers. In non-sanctioned African countries, these financial conditions are in part determined by the external and internal market access conditions facing these countries and the debt service burdens of non-China African creditors. These debt service burdens are shaped by agreements with international groups. If achieved, these agreements would create debt service buffers in lending. In the absence of established Western capital markets or induced lending buffers, non-sanctioned African countries that default on their debts risk being punished with debt service conditions that force them to borrow from more expensive lenders. Chinese lenders could economically price the risks associated with the emergence of debt traps if they had the institutional capacity to negotiate borrower development strategies after default. However, China’s lender political economy and the operational and enforcement conditions of lenders, banks, and ECAs would impede this capacity. Given this scenario, as a result of growing debt service pressure, China may increasingly lend to economically distressed African countries, thus creating debt dependencies.