Examining the sustainability of African debt owed to China in the context of debt-trap diplomacy

Abstract

The escalating public debt in African nations has sparked global discussions regarding the sustainability within the region. This concern primarily stems from China's increasing role as a significant financier of African infrastructure projects, raising fears that China might be using debt to gain geopolitical leverage by ensnaring impoverished nations in unmanageable loan agreements. To address this issue, we employ three distinct approaches: a descriptive trend analysis, an examination of the debt-to-GDP ratio, and a modelling approach.For the modelling, we utilize a panel Autoregressive Distributed Lag model to assess the short and long-term relationships between economic growth and specified independent variables, including loans. We choose this model because it allows for panel data analysis encompassing the African countries over a span of 20 years and accounts for potential autocorrelation through the inclusion of lagged terms.Our key findings indicate that, based on the debt-to-GDP ratio, some African countries have sustainable debt levels, while others are at risk of facing financial distress. Furthermore, the results of the Autoregressive Distributed Lag model suggest that Chinese loans contribute to long-term economic growth in the region. Therefore, our study recommends that African governments implement robust debt management strategies to avoid default. Additionally, they should recognize that debt can stimulate economic growth when utilized to enhance infrastructure and production capacity.