Lenders must look beyond China narrative to fix developing world’s debt crisis

By any measure, the debt crisis of developing economies and emerging markets is enormous, unsustainable and escalating even looking past geopolitical tensions
More incentives are needed to get reluctant creditors to deepen their commitments while improving capacity and decision-making in debtor nations

James David Spellman

Published: 4:30pm, 1 Feb 2023

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The Biden administration is stepping up pressure on China to restructure loans that are overwhelming poor countries. The latest salvo comes from US Treasury Secretary Janet Yellen, who singled out China last week as a “barrier” obstructing two years of multilateral talks to lessen Zambia’s debt burden.

During visits to capitals in sub-Saharan Africa – intended to reverse years of perceived neglect by Washington – Yellen walked a tightrope in her messages to China and her hosts.

She held to the narrative that casts Beijing as Africa’s largest and most onerous government lender while offering US support as a benevolent alternative. But she also pivoted towards her Chinese counterpart, Liu He, by acknowledging his evolving “constructive” approach as he signalled during their first face-to-face meeting before she left for Africa.

Meanwhile, in January China’s Export-Import Bank offered Sri Lanka a two-year debt moratorium, supported the island nation’s US$2.9 billion loan request to the International Monetary Fund (IMF) and encouraged all parties to join negotiations. At the start of the new year, China’s new foreign minister toured Africa, his predecessors’ tradition for three decades.

The geopolitics aside, by any measure the debt crisis of developing economies and emerging markets is enormous, unsustainable and escalating. The difficulties to avert default multiply in step with the US dollar’s appreciation, higher interest rates led by the US Federal Reserve, a slowing global economy, volatile commodity markets and inflation’s effects on imports of necessities from food to medical supplies to energy. “Time is not our friend,” IMF managing director Kristalina Georgieva has said.

These risks have forced down market values of distressed debt. Alarmed, investors withdrew a record US$70 billion from emerging market bond funds last year. Debt refinance costs are prohibitive, running at about 13 per cent. Meanwhile, extreme poverty conditions have engulfed increasing numbers of people.

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Total sovereign debt stands at a 50-year high – the equivalent of more than 200 per cent of global GDP. This year, developing countries must pay an estimated US$381 billion in debt service on medium- and long-term external debt, World Bank statistics show. The top 10 debtors alone owe almost 60 per cent of this debt service.

Already, 15 per cent of low-income countries are in debt distress and another 45 per cent could be in danger, Georgieva said in an IMF blog post. Among emerging markets, 25 per cent are at high risk and the dangers are “metastasising to middle-income countries”. By another measure, one in five people live in countries at risk of default.

China is the largest bilateral creditor, accounting for half of bilateral debt and 66 per cent of debt-service payments owed to government creditors last year, according to the World Bank. That said, Chinese lenders’ share of debt has been shrinking, with loans to African governments falling from US$28.4 billion in 2016 to US$1.9 billion in 2020.

It holds roughly one-fifth of the debt of 48 African countries while 35 per cent is owed to the World Bank and other multilateral institutions, 32 per cent to private creditors and the remaining 13 per cent to Paris Club members. Rather than being monolithic and coordinated, Chinese lenders sometimes compete against each other for loan deals.

These numbers, though, fail to tell the full story since more than half of China’s lending to sub-Saharan Africa isn’t fully reported, according to an AidData report. Similarly, debts owed to private banks are not fully captured. Transparency is further hindered by borrowing governments’ poor accounting and alleged corruption.

While China’s arrangements carry unusual confidentiality terms, similar blame could be pointed at other lenders. All this argues for what should be a top priority: an exhaustive inventory of debt obligations.

China did join the G20 Common Framework for Debt Treatments. Launched in 2020 to prevent borrowers falling into insolvency, this forum involves countries that are not members of the Paris Club, an informal group of creditor nations, the Group of 20 countries and private creditors to ensure fair burden-sharing in achieving a swift and comprehensive debt overhaul.

China – the reluctant debt relief leader in a debt-distressed world

China’s bargaining positions are a key reason the framework’s success has proven elusive. Beijing insists that secrecy is paramount in any agreement and wants the World Bank and the IMF to take haircuts akin to those for China’s lenders.

But the framework’s process was beleaguered from the start by problems that have long troubled the history of sovereign debt negotiations. Getting all key creditors at the table is tough as many hope to cut more lucrative deals on the sidelines. Figuring out the scope of negotiations is fraught with disclosure hurdles. The size of lenders’ exposures determines their motivation for settlement.

Chinese Foreign Minister Qin Gang addresses a joint press conference with the chairperson of the African Union Commission Moussa Faki Mahamat (not in the picture) in Addis Ababa, Ethiopia, on January 11. China is the world’s largest bilateral creditor, accounting for half of bilateral debt and 66 per cent of debt-service payments owed to government creditors last year. Photo: Xinhua

Arguments over the need for reforms began almost immediately after the framework was founded. The process needs clear steps with more rigorous timelines. More incentives are needed to attract reluctant creditors, both public and private, and deepen their commitments.

The efforts of the G20 must extend beyond deal-making in two ways. They must build capacity in financial management within debtor nations’ governments and demand more rigour in everything from lending decisions to accountability in how the funds are used.

Many barriers extend beyond those impediments perceived to come solely from China. Getting beyond the China narrative will be an important step in addressing this urgent crisis and salving human suffering.

James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC