JOHANNESBURG—The International Monetary Fund’s (IMF) executive board approved a bailout worth nearly $449 million for OPEC member Congo Republic on July 11, potentially setting a precedent for other nations struggling under the weight of large debts to China.
China has aggressively courted African nations for investments seen as advantageous to its national agenda.
Congo’s economy suffered from a sharp drop in crude prices in 2014, and debt levels had ballooned to 118 percent of GDP by 2017. But even as its oil producing neighbors secured IMF programs, Congo’s negotiations for a bailout dragged on for two years.
The Fund demanded that Congo ensure the long-term sustainability of its debt as a precondition for a three-year extended credit facility programs.
Congo reached an agreement to restructure a portion of its Chinese debt in April.
“The recent agreement to restructure the Republic of Congo’s bilateral debt should be accompanied by continued good-faith efforts to restructure commercial debt,” said IMF Deputy Managing Director Mitsuhiro Furusawa.
Congo’s Chinese debt stood at nearly 1.48 trillion CFA francs ($2.56 billion) at the end of March.
Under terms of the restructuring deal, repayment of 944 billion CFA francs will be extended an additional 15 years. Congo, however, must pay off a third of that amount by the end of 2021 and China will not reduce the amount of principal owed, a process known as taking a haircut.
“There is a substantial reduction in the amount of debt service that would have been required during the program period,” Alex Segura, IMF mission chief for Congo, told Reuters.
Test Case
Many observers see Congo as a test case for the IMF.A number of African countries facing unsustainable debt resulting from commercial borrowing, a boom in Eurobond issues and years of Chinese lending on the continent are expected to turn to the IMF for help in the coming years.
“The IMF is tacitly accepting that China will not take a haircut on debts to African governments,” said one banker, who has followed the negotiations.
The IMF is also advising Congo’s government to restructure high-interest debt it contracted with oil traders including Glencore and Trafigura despite a previous pledge to the Fund that it would not engage in oil-backed borrowing.
“I think they’ve learned their lesson as to the costs of these kinds of practices,” Segura said.
To qualify for the IMF program, Congo’s government has undertaken a series of reforms to improve transparency in the management of public resources, particularly in its traditionally opaque oil sector.
But natural resource transparency advocacy group Global Witness complained that details of oil-backed loan agreements and major infrastructure contracts remained largely hidden.
China’s investments in Africa also are often connected to Beijing’s economic development goals. In recent years, China has poured financial aid into Congo in order to secure mining rights to lithium and cobalt deposits there—key materials for making electric car batteries. Electric vehicles are among the 10 tech sectors that Beijing has set as priorities for development, as outlined in the “Made in China 2025” agenda, a plan for China to become a high-tech manufacturing giant.
And One Belt, One Road (OBOR, also known as Belt and Road), China’s ambitious initiative to finance infrastructure projects across Asia, Africa, and Europe, has come under scrutiny for burdening poor nations with debt.
In Kenya, China has financed big-budget infrastructure projects, which has left the African country unable to pay its loans to Chinese entities.
