June of this year saw South Korea hold the first Korea-Africa Summit since the founding of the Korean government in 1948. About thirty state leaders from 48 African nations were among the delegations that were invited. Many specialists in the sector think that Africa and Korea have reestablished their collaboration in many economic dealings and areas of cooperation at the state-head level, with certain African leaders even managing to get millions of dollars for projects in their nations.
Given that Africa is mired in debt of billions of dollars, it is difficult to foresee how its leaders would use the secured monies they got from Korea. This specific issue—the worsening debt crisis—created obstacles for many African nations trying to overcome their debt, advance economically, and end poverty. Following extensive conversations about the economic, social, and general growth of Africa with his friend, the Ethiopian scholar Mesay Berhanu, he took the time to write his views and recommendations with a particular emphasis on the Korea-Africa partnership.
By Berhanu Gemechu Mesay
The papers headed “Africa’s deepening debt crisis: How Korea’s latest move would help make a difference” are what I would like to recommend our readers to read.
Africa is drawing interest from the world’s top technological players due to its abundance of rare minerals, which are vital to the development of future high-tech sectors like semiconductors and batteries. Large commercial prospects are also available in the continent, especially for infrastructure projects, since many African countries are now paving the way for ambitious economic development and prosperity. Africa has so rapidly turned into a theater of conflict for the competing interests of developing nations and established creditors.
According to the African Development Bank Group’s most recent Macroeconomic Performance and Outlook report, the continent is predicted to have an average GDP growth of 3.8 percent in 2024 and even a higher chance of an additional increase to 4.2 percent in 2025. Africa would therefore rank as the world’s second-fastest-growing economic area. Even with such a bright future, many African nations continue to face a variety of development obstacles, such as heavy debt loads and the skyrocketing costs of borrowing that are already hurting public service delivery and development expenditures.
Anyways.
Africa’s mounting debt
By 2022, Africa’s total public debt will have surpassed USD 1.8 trillion, up 183% from 2010, and about 300% more than the continent’s GDP growth rate during the same period. Because of this, it was predicted that in several African countries, the debt-to-GDP ratio will surpass 60% in 2023. At least one-third of African countries suffer greatly from external debt because they are either excessively indebted or on the verge of becoming so. Sub-Saharan African nations’ external public debt climbed from USD 305 billion in 2010 to USD 702 billion in 2020, a more than two-fold rise. This rise from 24% and 76% a decade before, respectively, represented 40% of the region’s GDP and 156% of its export commerce.
African nations thus had to pay USD 44 billion in interest to foreign creditors in 2022, since some of these nations had to devote up to 60% of their national income to debt repayment, depriving them of vital public services such
such as access to clean drinking water, power, health care, and education.
The World Bank found that between 2011 and 2019, the average rise in public debt as a percentage of GDP in 65 developing nations was 18%. The situation worsened significantly in sub-Saharan Africa, where the average GDP climbed by 27%. Regrettably, these loans aren’t being used for long-term infrastructure initiatives that would spur economic development and finally enable the nations to emerge from a protracted debt problem. The majority of its use is to settle previous obligations and cover ongoing expenses related to providing essential public services like healthcare and education. According to data from the World Bank, current consumption outpaces capital investment in thirty-three sub-Saharan African nations in the sample by a ratio of over three to one.
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The Impositions by the IMF
To assist the continent deal with the effects of COVID-19, French President Emmanuel Macron proposed on April 13, 2020, a major cancellation of Africa’s debt. However, the G20 decided to temporarily suspend payments to the poorest nations. Therefore, 60% of African nations find it difficult to pay for necessities as they must spend more money paying off debt. Due to the increase in global commodity prices, the continuing conflict in Ukraine has had a particularly significant effect on African nations.
The IMF emphasizes the significance of protecting low-income families from increasing inflation and ensuring that everyone has access to cheap food in its October 2022 Fiscal Monitor Report, which is titled Helping People Bounce Back. The International Monetary Institute, however, strongly advises against indebted poor developing countries trying to contain price rises by tax cuts, subsidies, or price controls since they are seen to be ultimately unproductive and expensive to the budget. Because of this, the IMF has come under fire for providing these impoverished, heavily indebted developing nations with little other choice except to keep taking out new loans to finance their ongoing demands. For example, USD 500 million of Kenya’s most recent USD 1.2 billion World Bank disbursement will go toward paying down the USD 500 million Eurobond that matures in June 2024. The Kenyan government had intended to raise taxes, but because of the conditions tied to the loan arrangement, there was a statewide protest that became violent, forcing the government to rescind its plan.
According to the most recent report by the Mo Ibrahim Foundation, Kenya, with USD 3.3 billion in 2022, is among the top ten countries in Africa, heavily dependent on ODA, along with Tanzania (USD 3 billion), Uganda (USD 2.4 billion), and the Democratic Republic of the Congo (DRC) (USD 3.4 billion). Except for 2018, Africa has continued to be the leading recipient of such foreign assistance since 2013, even if the overall amount of ODA inflow to the continent has recently decreased from USD86.4 billion in 2020 to USD81.4 billion in 2022. In addition, Egypt, Ethiopia, Nigeria, Mozambique, Morocco, and Niger are among the top 10 recipients. Combined, they received USD 37.8 billion in 2022 or 46.4 percent of all assistance coming into the continent.
The World Bank recently issued a warning, stating that should Nigeria fail to implement the prescribed macroeconomic reforms—which include raising gasoline prices, eliminating some tax breaks, and enacting new taxes, among other measures—the loan of USD 1.5 billion could be canceled. The deal also contains a cash distribution scheme designed to safeguard the population’s impoverished and unstable parts.
Following Ghana’s 2022 default on the majority of its USD30 billion in external debt, which was partially caused by the COVID-19 pandemic, the conflict in Ukraine, and increased global interest rates, the West African nation has now negotiated a USD13 billion debt deal with external bondholders, making it the second African nation after Zambia. As per the deal, the country is eligible for debt relief on USD 4.7 billion of its loans and will receive around USD 4.4 billion in cash flow until 2026. Ethiopia, a different Horn of Africa nation, is likewise anticipating reaching a similar agreement with the IMF in its proposal for a comprehensive debt restructuring, given that it missed the USD 33 million “coupon” payment on its $1 billion Eurobond in December of last year. Ethiopia must depreciate its local currency, nevertheless, to be eligible for the desired debt restructuring. This would increase the already high rate of inflation that is already hurting the local economy.
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The “debt trap diplomacy” of China
China’s mining and infrastructure projects have played a major role in establishing its strategic position and involvement in Africa. Western competitors see China’s large-scale, high-risk investment strategy as an instrument of power to maximize its influence over African nations. China is accused of compromising on the purchase of vital assets including ports, trains, and airports as part of its long-term objectives outlined in the “One Belt” program if African nations fail to pay their loans. To safeguard its financial interests on the continent, China also moves to get involved in the private military and security sector in Africa.
Over USD 170 billion in loans from China are said to have been given to 49 African nations and regional organizations between 2000 and 2022. Research by the New Institute for Security Studies (ISS) found that although there are still worries about a lack of transparency and provisions in loan contracts between the two parties that might affect local industry, China was not the main source of Africa’s debt issue. The lack of collective restructuring alternatives in Chinese loan contracts is another issue. These contracts also include clauses designating Chinese state-owned companies as the projects’ principal contractors, which has a detrimental effect on the growth of regional industry.
The story of “debt trap diplomacy,” which was first popularized by Western actors after being coined by an Indian think tank in 2017, depicts a situation in which Chinese loans to African nations could ultimately result in unmanageable debt loads and possibly even the loss of sovereignty for many of the continent’s nations. A study conducted by the Institute for Security Studies found that it would be harmful to the ability of individual countries to make independent and sovereign financial decisions if loan agreements included clauses that forbade collective restructuring and contained extensive confidentiality clauses.
According to a different recent research, just half of Chinese loans made to countries in sub-Saharan Africa are included in national debt registers. But this kind of opaqueness is not exclusive to Chinese funding; certain private sector loans from the West are also linked to this kind of behavior.
Concessional loans, which have more favorable terms than regular commercial loans and are thus often oriented toward infrastructure projects, alleviate the infrastructure deficit on the continent and constitute an important part of China’s involvement with Africa.
Nonetheless, there exist additional noteworthy collateral dangers that impede the financial adaptability of African nations. One example is the USD 200 million loan that Uganda received in 2015 from the Export-Import Bank of China for the Entebbe International Airport Upgrading Project. Uganda was obliged to put funds in an escrow account, which would provide the lender the ability to take the airport in the event of failure, as the airport is not a liquid asset and so could not be used as collateral. The deal also stipulates that all airport earnings must go toward repaying the debt over 20 years, even though the airport existed before the loan.
A 2017 study that examined 29 publicly sponsored projects in 10 countries found that a variety of reasons, such as political goals, irregularities in the project awarding procedure, and a lack of collaboration among stakeholders, contributed to the projects’ failure. Among the numerous other issues that have contributed to the failure of many internationally financed initiatives in Africa over the last several decades are difficulties with project design and execution, inadequate maintenance, and obstacles to public acceptability and participation.
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The Approach from South Korea: “A New Model”?
Over the last several decades, Korea’s relationship with Africa has never been as extensive as that of its regional rivals, China and Japan. Despite this, commerce between Korea and Africa has increased significantly—from USD 900 million in 1988 to USD 16.6 billion in 2023—and foreign direct investment has increased along with it.
The transfer of technology to Africa, balanced trade, and facilitating debt reduction via multilateral lenders are among the most important concerns that African leaders brought up during the 2024 Seoul Africa Summit, which took place early last month. Africa’s usable minerals are finding a rising market in Korea, but worries about Africans’ lack of technical capacity to process natural resources locally using suitable technology, even at an early stage, persist.
By 2030, Korea plans to increase its official development support to Africa to USD 10 billion, and it will also provide USD 14 billion to finance the investments made by Korean businesses on the continent. However, it is anticipated that the “new model” would include much more than merely giving help. Seoul has introduced the so-called Tech4Africa program, which aims to provide Africa’s rapidly growing youth population access to training and educational possibilities. It is said that the most recent strategy, which emphasizes management and human development, is seen to be essential to accelerating economic growth in Africa.
Additionally, Korea promises to sign bilateral agreements, such as trade and investment agreements and economic partnership agreements (EPAs), with each particular African nation.
Investment Protection Agreements, Promotion Frameworks, and Double Taxation Avoidance Agreements. Several express worries that the African Continental Free Trade Area (AfCFTA), a continental plan that is gradually gaining traction among African governments, may be jeopardized by the zeal shown by several African countries to establish an EPA with Korea. According to Ngovi Kitau, a former Kenyan ambassador to South Korea, who recently spoke with The EastAfrican, EPAs with specific countries may make agricultural goods in Africa less competitive since the Republic of Korea has not entered into an EPA with the continent as a whole.
Korea has a wealth of knowledge and experience in the area of digital government, as evidenced by initiatives like the Korean Statistical Information Service (KOSIS), the Korea On-line E-Procurement system (Koneps), and the Customs e-Clearance system (Uni-Pass), which can be shared with African governments to enhance public services and promote the growth of the digital economy on the continent. African authorities are eager to acquire further knowledge from Korea in fields such as robotics, biotechnology, and artificial intelligence. On the other hand, some observers have pointed out that Korea seems hesitant to commit to accelerating technology transfer to African nations, the majority of which are chastised for lax adherence to international intellectual property rights regimes that might not effectively curb the practice of copying and localizing technology.
Africa anticipates that Korea will assist the continent in the field of renewable energy by helping to decarbonize production and consumption and by establishing dependable supply chain networks. It is also said that Korea can provide clean cooking methods that will lessen emissions and deforestation, address respiratory-related fatalities, and strengthen the position of women in society.
South Korea recently inked a deal with Uganda on the fringes of the most recent summit in Seoul to give a USD 500 million loan to assist fund the construction of infrastructure, according to a statement from Uganda’s fund Ministry. Although the infrastructure project’s specifics have not yet been made public, it is anticipated that the funds will be used to finance energy and transportation developments. Although the funding gives Uganda the much-needed financial capability it lacks, it will also add to the country’s mounting debt load, which is being driven by infrastructure expenditure that, as of December 31 of last year, reached USD 24.6 billion. Uganda’s rating is reduced from B2 to B3 based on “diminished debt affordability,” according to Moody’s most recent assessment.
Additionally, Kenya and Korea have inked a deal for USD 485 million in concessional development funds, of which USD 238 million will go toward putting the Konza Digital Media City Project into action. Korea has facilitated the construction of the Kenya Advanced Institute of Science and Technology (Kenya-Aist), akin to its Korean counterpart, the Korea Advanced Institute of Science and Technology, via a comparable effort formerly known as the Economic Innovation Partnership Program.
In general, Korea’s most recent approach to Africa is anticipated to be devoid of the strict conditions imposed by organizations such as the IMF and to avoid China’s “debt trap diplomacy,” which is determined to hold African countries as collateral slaves. Rather, it must encourage transparency and responsibility in the loan distribution process and the execution of associated projects. Most importantly, Korea should support local capacity building in terms of technology and skills transfer to African states to ensure the continent’s bright future. This is in addition to expanding infrastructure development across the continent.
In the upcoming years, the promise of Seoul’s alternative vision for Africa—which would support the continent’s ambition to become a hub for global production chains and manufacturing—will need to be put to the test in the real world given Africa’s mounting debt load and the competing and frequently antagonistic roles of its principal international lenders.
Mesay Berhanu Gemechu received his degree in international development studies with an emphasis on Africa from Hankuk University of Foreign Studies in Seoul, South Korea. In addition to holding the position of 2023 African Correspondent for the Korea-Africa Foundation, where he represented Ethiopia, he was also deputy editor-in-chief of Addis Fortune, the biggest English weekly in Ethiopia. At the moment, Mesay resides in Seoul, South Korea.