China and Africa: A New Narrative on Debt Sustainability and Infrastructure Financing

In an environment characterized by rising interest rates and high uncertainty, avoiding a global recession is possible not by halting investment, but continuing to invest in public assets in the Global South. Public assets like railroads, bridges and other critical infrastructure are able not only to generate a positive yield, but also support sustainable structural transformations, generate jobs and revenues and promote economic growth. However, public sector assets have been undervalued in traditional debt sustainability narratives.

In a new journal article published in the Journal of Infrastructure, Policy and Development, Yan Wang and Yinyin Xu propose an alternate narrative on debt sustainability that emphasizes the value of public assets. The authors analyze infrastructure financing under the circumstances of debt restructuring, investigating the role of completed infrastructure projects that were co-financed and jointly built by China and African countries.

The authors found that Africa appears to be in grave debt distress when viewed using the typical debt sustainability lens, but may be in better shape if viewed with the lens of a public sector balance sheet. As for China’s role, its substantial contribution to the building of public assets has addressed and resolved key bottlenecks in Africa’s economic transformation. Moreover, when countries were in debt distress, China restructured and refinanced approximately $15 billion of debt in Africa over the past 20 years.

Wang and Xu argue that bilateral and multilateral creditors need to work together to design tailored restructuring plans to help African countries ease their debt burdens and expand fiscal space for  sustainable economic recoveries. To build upon their strengthened fiscal foundations, they say African countries need to work with patient capital holders such as multilateral development banks and regional and national development banks and continue to experiment with innovative asset-based refinancing.