Down Debt

President Biden set to increase developing country debt with Xi

President Biden reportedly plans to meet Chinese President Xi Jinping on the sidelines of the G20. He is expected to raise the issue of settling the debt of developing countries, much of which is held by China, an issue requiring a political solution.

Over the past 15 years, developing countries have increasingly borrowed from China and the “private sector,” a diverse set of financial actors. The COVID-19 shutdowns, Russia’s invasion of Ukraine, food and energy price spikes, and interest rate hikes in G-7 countries all mean we’re likely to witness a wave of defaults and political instability – unless something is done now.

Forty years ago, developing countries borrowed money from a handful of “monetary central banks”, from bilateral governments organized under the Paris Club framework, such as France and the United States, as well as development banks like the World Bank.

The big challenge now is China, which has lent money to these developing countries; China has a large surplus of dollars due to its export growth strategy and needs to recycle those dollars. China also has, for now, a cohort of people in the labor market who need jobs and state-owned enterprises looking for new markets. Outside groups such as AidData have provided information, but there are few official sources on China’s debt and its terms.

So far, China has resisted canceling any of the debt in its portfolio. First, it would be embarrassing for China — and for Xi personally — to admit bad debts abroad. Second, there are serious debt problems within the country; if China cancels its debt in Africa, it will face domestic debt holders who will demand that their domestic debt be cancelled. Third, China will almost certainly say, “We are a developing country; you should not treat us like a wealthy lending nation. Fourth, the Chinese say they don’t have “legal authority” to cancel debts. Fifth, China does not have a separation between the public and private sectors, so it does not understand why the United States cannot “order” a private financial institution to enter into a standstill agreement.

The G20 tried to solve this problem through an agreement called “Common framework for the treatment of debt”. The Common Framework has attempted to bring all the different debt holders – traditional holders as well as private sector actors and China – to the same table and all agree to the same terms. To be on the same page about the amount of debt and the chances that countries will be able to repay the debt, the World Bank and the IMF have put together debt sustainability analyzes of countries. Since its inception, Chad, Ethiopia, Ghana, Zambia and Sri Lanka have all sought to use the Common Framework. However, only three have managed to register: Chad, Ethiopia and Zambia. Sri Lanka was deemed ineligible and Ghana may have to restructure its debt to qualify.

In addition to the Common Framework, the G20 has put in place the Debt Service Suspension Initiative (DSSI) to respond to the immediate challenges of COVID. Apart from Zambia, China has not even come to the table to start negotiating. Another problem is that institutions such as the World Bank and the IMF are not able to “force” the Chinese or the various private sector actors to negotiate. Due to low interest rates over the past 10 years, creditors are tempted not to negotiate, hoping to get all their money back if countries return to growth.

The added challenge is that China is Africa’s and others’ largest trading partner – so if the IMF or the World Bank, at the instigation of the United States, forces a country to demand new conditions for Chinese debt, China could stop buying soybean meal. of Zambia or could collect the debt by taking a port as it did in Sri Lanka.

What is there to do?

First, we need a real “debt stop”, where all debt service payments of developing countries are stopped by public and private sector creditors of over-indebted countries. A status quo would relieve debtor countries during debt renegotiation and restructuring and encourage them to negotiate.

Second, the current arrangement needs to be corrected. For example, why does France permanently co-chair the International Financial Architecture (IFA) Working Group, the obscure debt regulation group of the G20? Clearly, France wants to master the process as an extension of the Paris Club. However, in many cases, France is not significantly indebted in the countries where the Common Framework is applied.

Third, the IMF and others have called for the common framework to be reformed. The World Bank and the IMF should play a much greater role in ensuring that the Common Framework works.

Finally, a group must be formed that can effect the debt reduction. There are debates about debt reduction. Debt restructuring will require much more effective cooperation than current efforts, and cooperation is more difficult when debt repayment costs are rising rapidly.

Debt crises are not new. In the late 1990s, at the instigation of poverty advocates, lending governments canceled the debt of poor countries. With American leadership and a handful of lenders, the “Heavily Indebted Poor Countries” (HIPC) process was put in place to enable debt cancellation. There was an explicit assumption that these same countries would not borrow money in the same way again. In less than 25 years, we find ourselves in a similar but more complex place. As then, only a political solution is possible.

Daniel F. Runde is Senior Vice President and William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS). He is also the author of the next book The American Imperative: Reclaiming Global Leadership Through Soft Power (Bombardier Books, January 17, 2023).