China or US: Who's delaying debt relief to developing world
October 11, 2023
Hit by multiple crises such as the COVID-19 pandemic, the war in Ukraine and climate change, developing countries, many of them in Africa, piled on colossal levels of debt to keep their economies afloat. Today, 3.3 billion people live in countries that spend more on interest payments than on education or health, according to the United Nations.
Many developing countries find themselves in a vulnerable position in a shock-prone world, with their financial coffers running low amid soaring food and energy costs; rising interest rates in the United States and elsewhere pushing up borrowing costs for governments; a surge in the value of the US dollar driving up interests on dollar-denominated debt; and China, their go-to creditor in the past decade, witnessing a major slowdown.
In the past few years, about 10 countries, including Zambia and Sri Lanka, have already defaulted, while more than 50 others such as Pakistan and Egypt are facing repayment difficulties.
"For a large number of developing countries, the debt crisis means money not spent on game-changing, life-changing investments in the well-being and progress of people, who are the real 'wealth of nations,'" Achim Steiner, administrator of the UN Development Programme, told DW.
Any relief from creditors has been painstakingly slow to arrive as the International Monetary Fund (IMF), World Bank and the Paris Club of creditors contend with the rise of new official creditors such as China, India and the Gulf countries.
The catastrophic debt crisis facing developing countries is among the key themes at the annual meetings of the IMF and World Bank in Marrakech as leaders find ways to accelerate debt relief.
"It is a very frustrating moment because, from a technical and policy perspective, the route is very clear on how to give these countries that relief. But there's really a kind of a bigger geopolitical problem at play that makes that relief very difficult," Clemence Landers, senior policy fellow at the Center for Global Development, told DW.
The debt crisis could also have major ramifications for wealthy countries as it would force even more people from debt-stressed countries to seek refuge abroad. The impact could also be felt in terms of lost exports to struggling countries.
China's rise complicates debt relief efforts
Debt relief efforts have been traditionally led by the rich countries belonging to the Paris Club. However, the rise of China as the single-largest bilateral creditor to poor countries has complicated those efforts.
China has issued loans worth more than a trillion dollars for major infrastructure projects as part of its Belt and Road Initiative, at high rates and often on opaque terms. Many of those loans have become distressed. Back in 2010, only 5% of China's overseas lending portfolio supported borrowers in financial trouble. Today, that figure stands at 60%, Brad Parks, from AidData, a research lab at William & Mary university in Virginia, told DW.
Partially because of domestic loan troubles, Beijing has been unwilling to take a hit on its loans, and initially shunned multilateral debt relief efforts. Instead, it focused on dealing with the problem bilaterally by providing emergency rescue loans or temporarily suspending repayments, assuming that its borrowers were only facing short-term liquidity challenges.
"Beijing is now learning that some of its Belt and Road borrowers are insolvent and short-term liquidity relief alone is not going to solve the problem," Parks said.
"If you go it alone and bail out a financially distressed government without requiring economic policy reform or a coordinated debt rescheduling with all major creditors," Parks said, "then you are effectively kicking the can down the road and leaving it to others to address the underlying solvency problem."
Secrecy around Chinese loans is another issue stalling progress on debt relief. Non-Chinese creditors, including private bondholders, are reluctant to take part in debt relief talks unless borrowers reveal all the terms and conditions that come with Chinese loans, fearing that Chinese creditors might get preferential treatment.
"If China insists upon being treated as a senior creditor whose debts need to be given first priority and other creditors are pushed to the back of the repayment line, then we will likely see years and years of gridlock," Parks said.
US-backed institutions should also take debt losses
China has rejected claims that it's stalling debt relief efforts. The country's state-backed Global Times newspaper said: "Such ill-intentioned accusations are sheer nonsense" — and added that the total debt service payments suspended by China are the largest among G20 members.
Beijing argues that, if it is to take a haircut on its loans, then even multilateral institutions such as the IMF and World Bank should also write off a part of their loans. The United States is the largest shareholder in both the lenders.
The IMF and World Bank haven't traditionally taken losses on their debt, arguing that doing so would hurt their preferred-creditor status, which enables them to extend loans to distressed countries at concessional rates.
"It's a very new thing for China to be such a large official creditor. This is a new role that China is playing in the world," Landers said. "The complexity here is how to get China used to and familiar with a multilateral framework that the entire multilateral system is comfortable with."
Landers suggests creating a Paris Club-like group of official creditors with China as a key decision-maker.
"It is kind of extraordinary that the Paris Club is the body that really sets the standards for restructurings and that one of the world's largest bilateral creditors to low-income countries is not part of this body," Landers said.
Rise of private bondholders
Buoyed by hard-won access to global debt markets, African countries issued billions worth of bonds to global investors looking to bet on Africa for rich returns. From 2007 through 2020, 21 African countries sold foreign currency bonds, many for the first time, according to the IMF. The stock of African foreign currency bonds reached $140 billion (€132 billion) in 2021.
The rise of private bondholders has added to the complexity of debt relief efforts as now borrowers have to also structure a relief program with them. In June, Zambia, the first African country to default during the pandemic in 2020, reached an agreement to restructure $6.3 billion in debt owed to official creditors, including China, but it hasn't been able to strike a deal with its bondholders.
The G20 group of countries has created a new common framework for debt restructuring, bringing together Paris Club members and other creditors. The unified approach has made some progress in recent months.
The IMF says it took Chad 11 months in 2021 to win a commitment from its creditors to provide the needed debt relief. In the case of Zambia, it took nine months, six months for Sri Lanka and five months for Ghana.
"It's still above the two or three months that we observed in the past. So it's still not where we would like to be, but it's still a huge progress," Guillaume Chabert, deputy director of IMF's Strategy and Policy Review department, told DW.
Edited by: Uwe Hessler