Following the go-out policy of China since the turn of the twenty-first century, Beijing for now has become Africa’s biggest bilateral lender. China held about $73 billion of Africa’s debt in 2020 and $9 billion in private debt.

Initially, these fresh Chinese loans were seen as a huge funding respite for Africa as the continent was in dire need of funding to close its huge infrastructural gap – which is the largest in the world.

With increasing Chinese lending on the continent came the allegation of debt-trap diplomacy. This is the idea that China loads up small countries with so much debt than they could possibly repay while ensuring they collateralize such debts. And in the default, China takes control of vital assets in the country which were used as collateral for the loans. In short, China exerts undue political and economic influence on nations that default on its debt.

However, China has strongly refuted these claims. In fact, China has reduced its lending to African countries in recent years. Though there is no conclusive evidence to suggest that the debt trap narrative may have played a role, it cannot entirely be discounted.

Even though it is less choked on Chinese money, the West African country of Ghana has its fair share of Chinese debts, which it had to restructure to secure an IMF deal late last month.

Speculations are rife that China will take over part of the country’s electricity export revenue as well as its mineral revenues from crude oil and bauxite. In this article, I discuss how portions of the narrative are misleading and why China might not resort to seizures even if that happens to be the only option available.

Portfolio of Ghana’s Debts to China

According to Boston University China Loans to Africa Database, between the years 2000 and 2020, Ghana contracted a total of 53 loans from China amounting to $5.3 billion. These loans were sought for projects in different sectors such as power, transport, ICT, defense, education, etc. The specific lenders were Chinese policy banks, contractors, and commercial banks. $1.7 billion of the $5.3 billion is outstanding with payment due this year. This amounts to 5% of the country’s total external debt.

Ghana’s government earlier this year had communicated to external lenders the government’s inability to service its debt due to the economic pressure, occasioned by the twin problem of the coronavirus pandemic and the Russian-Ukraine war.

Default, IMF, Debt Restructuring, China, and matters arising

Ghana in the last quarter of 2022 announced that it is seeking an IMF program to help bolster its economy against the fallout of the pandemic. The economy had since come under severe pressure with the country defaulting on its external debt obligations. The IMF agreed on a $3 billion bailout package with the country, but part of the prerequisite for the program was the restructuring of both local and foreign debts of the country.

Restructuring of foreign debts in other jurisdictions has progressed slowly due to Chinese disagreement with the IMF/WB-led restructuring process. Zambia had been a victim of this sluggish process. There were speculations that Ghana’s aspiration for a Fund program could possibly be held at bay due to the same fears. Fortunately, the Chinese did not drag their feet, making it possible for Ghana to secure a Fund program in a record 10 months.

Would China take over Ghana’s mineral and electricity revenue when Ghana defaults

First, thanks to the IMF program, Ghana would not default on its debt obligation to China. Though we don’t know the new terms, Ghana has successfully restructured its debt with external lenders including China. It is expected that at the end of the 3-year IMF program, Ghana will be in the right economic position to be able to service its foreign debts.

But following the news of the IMF Board approval of Ghana’s program and successful disbursement of the first tranche of $600 million, a notable Ghanaian media house, Myjoyonline, broke a story of how Ghana risks losing its electricity and mineral revenues in the event of defaulting on its Chinese debt.

But in the event Ghana’s economic malaise persists post the IMF program, would China force Ghana to give up its collateral of mineral and electricity revenues to settle the debt? Let’s dig down.

Of the $1.7 billion outstanding debt that Ghana owes China, $619 million is collateralized with either oil, bauxite, or electricity revenue. $550 million or 89% of the total collateralized loan was secured from Sinohydro for the construction/rehabilitation of selected roads in Ghana.

This loan was contracted within the larger $2 billion Master Project Support Agreement (MPSA) signed between the government of Ghana and Sinohydro Corp Ltd in 2018. Under the deal, Sinohydro Corp Ltd would construct infrastructure across the country in exchange for 5 percent of Ghana’s bauxite reserve found in the Atewa forest.

So default or no default, Ghana would honour almost 90% of the total Chinese collateralized debt with bauxite. Prior to the MPSA, mining of bauxite has been low on the government’s agenda and its contribution to government revenue is quite insignificant.

In 2022, for instance, bauxite revenues brought the government a paltry $22 million. Therefore, China taking over bauxite revenue in the face of a default cannot pose a significant challenge to the government’s limited financial resources.

The remaining $65 million or approximately 10 percent of the $619 million collateralized debt may be repaid from oil or electricity revenue. Though the amount in question is insignificant, I argue that in the face of default, China is less likely to take the route of seizing collateralized assets.

China seems to be the leader in pushing for a new multi-polar world order against the status quo of the US’s unipolar dominance of the world. This development has seen Beijing and Washington battle for influence and support among the countries of the global south.

While approval ratings of the West seem to be dipping in Africa, especially in the wake of straining relations between France and some African countries like Mali and Burkina Faso, China’s approval ratings in Africa seem to be soaring, especially among the youth.

The support of African countries has been crucial for China in many multilateral institutions. Ghana for the most part is seen as an iconic African country. Being heavy-handed on the country by way of seizing up all collateral will send the wrong signals to many African countries which maybe be bad for China’s image on the continent.

Furthermore, China will suffer the consequences in the geopolitical scheme of things. Beijing will likely overlook the economic difficulties to keep its African friends so that its political objectives could be achieved.