By Ding Heng
In the post-pandemic era, one of the immediate challenges is a looming debt crisis in the developing world. The IMF estimates that 60% of low-income countries are in, or at high risk of, debt distress, double the level in 2015. 25 developing economies are currently spending more than 20% of government revenues on debt servicing, which could drastically curtail their spending in key areas such as social welfare. Addressing this challenge requires international coordination and trust-building. Unfortunately, US officials have repeatedly blamed China over what they consider to be “foot-dragging” on debt relief.
First of all, this challenge is not a China-inflicted problem. Both the pandemic and the Ukraine war have dealt a heavy blow to low income countries. Because their foreign debts are mostly denominated in US dollars, the US Federal Reserve’s aggressive actions in hiking interest rates have further intensified their financial pressures, as stronger US currency raises the cost of meeting debt obligations. Jubilee Debt Campaign (JDC), a British non-profit organization, warned in early 2022 that rate hikes from the Fed were likely to worsen a global debt crisis. Retrospectively, warnings like that didn’t seem to have been taken seriously.
It’s true that China has become the world’s largest bilateral creditor through its loans associated with the Belt and Road Initiative, but China is far from being the dominant player. Of all the foreign debt payments owed in 2022 by low and lower middle-income countries, only 12% were to China, according to JDC figures. Other than China, 47% were owed to private lenders, 27% to multilateral institutions, and 14% to other governments. Common sense tells us that China’s debt relief position, which calls for a multilateral solution, is not unreasonable.
An argument is being made against China’s position that multilateral banks ought to be more active in debt restructuring. Multilateral lenders, it’s been suggested, are preferred creditors with excellent credit ratings, so their engagement in debt relief could lead to ratings downgrade, which would then mean higher costs for all of their borrowers. Ratings downgrade is of course in no one’s interests. However, according to a study commissioned by the G20 and conducted from 2021 to 2022 by a team led by Tanzanian consultant Frannie Léautier, multilateral development banks (MDB) could greatly expand lending using their existing capital. In fact, analysts at S&P estimated in 2016 that, other things being the same, the 19 MDBs the agency rated could have increased their lending by two thirds without losing their triple-A ratings.
In particular, serious reflection is needed regarding how come private lenders, mostly based in the West, take up such a high portion in low-income economies’ external debt. According to a report released by Tsinghua University last year, the overall size of the sovereign bonds issued by low and lower middle-income countries ballooned by almost 400% between 2008 and 2020. Loans from private lenders tend to have higher interest rates and shorter maturity than those provided by MDBs and China, and this inevitably means a heavier burden for low income countries. In the case of Sri Lanka which last year saw its first default since gaining independence in 1948, loans from private creditors account for over 40% of the government’s external debt, compared to the 20% held by China. In Zambia, which represents the first case of sovereign debt default in Africa after the pandemic began, private lenders account for 46% of external debt, compared to the 31% held by China.
The reality is that our existing global financial architecture has, somewhat recklessly, encouraged poor economies to access international capital markets to finance their development needs. While US officials criticize China over its lending actions, they have largely remained silent about private lenders, many of which are American investment banks. In times of global economic woes, this financial system seems to be more of a problem, rather than a force for good, to poor countries. This is partly why emerging economies such as the BRICS embrace dedollarization and call for global financial reforms.
Insisting on a multilateral approach doesn’t mean that China is shunning from the responsibilities it ought to shoulder. Responding to the pandemic’s economic shocks, China has participated in a G20 initiative to suspend payments for 73 low income economies’ government-to-government loans. Research conducted by Johns Hopkins University’s China Africa Research Initiative shows that, under that initiative, China provided 63% of the suspensions despite holding only 30% of all debt service claims.
In 2021 alone, China spent $40.5 billion on emergency loans to bail out countries in financial distress, according to a joint study by AidData, the World Bank, the Harvard Kennedy School, and the Kiel Institute for the World Economy. By comparison, the IMF lent $68.6 billion to countries in financial difficulties in the same year. Despite various interpretations of this phenomenon, it is an absolute sign that China is fulfilling its role in addressing low income countries’ debt crisis. In contrast, the US Treasury’s last sizable bailout loan to a middle-income country was a $1.5 billion credit to Uruguay in 2002. Currently, the Federal Reserve only provides short-term financing to industrialized economies when they need extra dollars for a few days or weeks. Washington seems to be in a weak position to criticize Beijing for not doing enough.
In their latest meeting, G20 finance ministers and central bank governors recognized the urgency in strengthening multilateral coordination to address the debt crisis of poor countries. This is a step in the right direction, but much more needs to be done. If the US really cares about low income economies, it has to put away a geopolitical sentiment and seek cooperation with China under platforms such as the G20. An old cliché surrounding the so-called “debt trap diplomacy” is certainly not helpful. And on China’s part, focusing on doing the right thing is perhaps more important than reacting to the criticism that doesn’t bear good intentions.
[The author is a host with CGTN Radio. The opinions expressed in the articles are the author’s own. Contact the author: dinghengcri@foxmail.com]
