Debt, Geopolitics, and Investment: How Africa's Financial Crisis Shapes Western Capital Strategy

Background

As we enter the latter half of the decade, Africa is again at the heart of global competition - not just for resources or for influence, but for the ability to shape its own economic trajectory.  In the 2020's, external debt has become a geopolitical tool of choice that shapes how and where foreign investment capital flows. For European and U.S. investors, decisions once made on solely economic terms are now deeply intertwined with questions of sovereign risk, multilateral negotiations, and China's strategic calculus.

Current Situation

In 2025, over 20 African countries are currently in - or approaching - debt distress.  Indeed, debt burdens now exceed 70% of gross domestic product (GDP) for the countries of Ghana, Ethiopia, Kenya, and Tunisia, with Zambia surpassing 100%. This has led to an inverse level of involvement on the continent between the International Monetary Fund (IMF) and the Asian Infrastructure Investment Bank (AIIB). The West's IMF increasingly manages a burgeoning schedule with government officials of debt-laden states in order to work through creditor negotiations, while the AIIB has gradually decreased the breadth and the pace of its investments in Africa.

Making matters more complex, these countries are diversified in terms of who they owe and what is at stake.  Zambia and Ghana are entangled with Eurobond markets, IMF loan conditionality, and Chinese infrastructure loans.  Ethiopia and Kenya hold significant bilateral debt with China.  Tunisia's public debt profile is heavily reliant on the European Union (EU) and the IMF, but faces domestic political resistance to structural reform.

This fiscal situation has geopolitical consequences. The inability of these African states to discharge their debt places into doubt the stability of the states themselves.  It also increases the likelihood over time of extra-African involvement by states with financial interests at stake (e.g. the U.S. and China), as well as intra-African geopolitical opportunists.

The Bank Dilemma

Since the de-colonization of the 1950's and 60's, the chief lending institutions to the African continent have been the West's IMF and (more recently) China's AIIB.  At the moment, neither is attracted to resolving the "Rubik's cube"-like fiscal puzzles at the heart of each country's debt situation.  Likewise, many of these debtor states face their own bracing domestic political pressures to avoid further involvement with non-African entities under the impression that these organizations are exclusively responsible for their current predicament.

In the case of the IMF, its involvement brings both stabilization along with volatility.  IMF involvement can signal to global markets that a country is taking responsible steps to avoid default, thereby unlocking further financial support. Additionally, IMF insistence on debt transparency helps potential investors clarify the risk - and thereby build trust - between the host nation and foreign investors. At the same time, a typical IMF diet of policy prescriptions to debtor nations include fiscal consolidation, currency devaluation, and subsidy reductions which - individually or together - trigger social unrest in these countries.

Relative to the early days of China's "Belt and Road Initiative" (BRI), the AIIB's pace and extent of recent fiscal involvement in Africa has been fairly modest.  Assuming the accuracy of reported figures, Africa only accounts for about 4% of AIIB's total disbursed funds since its inception. Presumably the chief demarcation point for AIIB investment was the COVID-19 pandemic, the argument being that China itself developed fiscal strains requiring attention.  Prior to the pandemic AIIB annual commitments to African nations surpassed $10 billion, while post-pandemic (2023) investments totaled only $4.6 billion. Although the AIIB currently projects a limited footprint in Africa, China's state-owned banks remain critical creditors that exercise increasingly stringent repayment terms to African clients.

Consequences for Africa's Economic Sectors

Infrastructure: Once a favored sector for Western and Chinese capital alike, African infrastructure is now considered collateral in debt restructuring plans.  Hallmarks of large-scale infrastructure projects on the continent lean toward partial completion and poor execution (or maintenance) by local laborers.  For example, the suspension of Chinese-funded railways in Kenya, as well as curbs placed on IMF-related projects in Zambia, have caused delays and cash-flow challenges for foreign engineering firms and financiers.

Energy and Extractives: In Ghana, post-IMF reforms have led to revised petroleum fiscal frameworks, nicely increasing the state's take but reducing investor certainty.  Zambia, too, has threatened to re-negotiate its mining contracts amid domestic pressure for revenue re-distribution.  Both are classic instances of a growing African phenomenon, "resource nationalism", driven by debt imperatives.

Service industries (Financial & Fintech): Foreign banks (e.g. Citibank) and fintech firms (e.g. PayPal) face palpable constraints not just from inflation and foreign exchange scarcity, but also from governmental controls aimed at trying to defend domestic currencies.  For example, in Ethiopia and Nigeria capital repatriation is invariably delayed due to these difficulties, thereby making investment planning opaque and reducing enthusiasm from Western investors.

Tale of the “Two Traps”

Africa finds itself navigating two perilous, and increasingly intertwined, dynamics that threaten its sovereignty as well as its strategic future:  the “debt trap” and the so-called “Thucydides Trap”.  The former is most visibly associated with China’s BRI and, as shown above, ensnared several African nations in cycles of unsustainable borrowing tied to opaque infrastructure deals.  While many of these projects promise modernization (e.g. roads, ports, railways), the financial terms often lack transparency.  They tend to saddle governments with repayment obligations they can scarcely meet and lead to compromises in national control over critical assets.  As we have seen, countries like Kenya and Zambia face mounting pressure to prioritize debt servicing over public investment which can only serve to undermine democratic accountability and long-term development.  In this context, debt is not just an economic burden.  It becomes a lever of influence.

The second danger is the “Thucydides Trap”, so named because the Greek historian concluded that the rise of Athens sufficiently concerned Sparta as to make war between the two inevitable. The work was an analysis of 16 historical case studies over the last 500 years in which a rising geopolitical power threatened to displace a ruling one.  Of these cases, 12 led to war and 4 did not.  Current intra-African political dynamics do not persuasively resemble those cases.  However, when geopolitical inequities can be linked to the debt leverage exercised by extra-African actors like China, the continent’s circumstances begin to take on more ominous hues.  In combination with the BRI and actions in the South China Sea, Africa has become another setting for China’s geopolitical aspirations and a growing front in its effort to revise the liberal international order.

Conclusion

Africa's debt crisis is not merely a millstone around the neck of its needed continental development in the 21st century.  It also is a forum in which global capital strategies are being re-shaped which are, in turn, a reflection of geopolitical competition between the U.S. and China. For the foreseeable future a clear-eyed diagnosis of Africa's investment environment is not merely whether to invest, but how to structure any investment amid conditions of continued nation-state competition and increasing fiscal fragility.   

Recommendations (U.S. & European public actors)

• To the extent it is politically palatable, choreograph blended financing options to de-risk infrastructure and energy investment.  This could be pursued by means of state-backed international development finance institutions, like World Bank's International Finance Corporation (IFC), the U.K.'s British International Investment (BII), or Germany's DEG.

• Support any multilateral reforms that draw-in China to commit to structured debt frameworks.

• Make incremental overtures within investment states to harmonize environmental, social, and governance (ESG) standards.  Examples include: carbon emissions and resource use (E), labor practices and human rights (S), and transparency/anti-corruption efforts (G).