The growing debt burden of developing countries and the particular role of China

As COVID-19 continues to interrupt economic activities, induce increased government spending and reduce tax revenues, sovereign debt problems in emerging countries are worsening. The World Bank noted that the debt burden of low-income countries has increased by 12% to a record $860 billion in 2020.

Authors: Mengdi Yue and Christoph Nedopil, Fudan University

The International Monetary Fund (IMF) sounded the alarm in December 2021, warning that 60% of low-income countries are at high risk or already in debt distress, up from 30% in 2015.

Analysis of a Green Finance & Development Center report published in March 2022 shows that the stock of public external debt in most DSSI-eligible countries increased from 2019 to 2020. But some countries decreased their level debt, such as the Republic of Congo and Mozambique.

The stock of public external debt owed to China by 68 Debt Service Suspension Initiative (DSSI) countries increased from US$105 billion in 2019 to US$110 billion in 2020. This represented about 18% of the total outstanding public external debt of these countries and only the World Bank was a larger creditor (21%).

China was the largest official bilateral creditor in 17 DSSI countries, accounting for at least 40% of the total public external debt of Tonga, Djibouti, Lao PDR, Cambodia, Republic of Congo and Kyrgyzstan.

The data suggests that 26% of the total debt service to be paid by DSSI countries in 2022 will go to China. This compares to 17 percent at bondholders and 9 percent at the World Bank.

In response to debt challenges in low-income countries, the G20 launched the Debt Service Suspension Initiative (DSSI) in April 2020. As the largest bilateral creditor, Chinese lenders had deferred payments of approximately US$2.1 billion under DSSI in December 2020, or approximately 37% of the total deferred payments of US$5.7 billion under DSSI. By comparison, Paris Club members suspended $2.5 billion by December 2020.

Among Chinese lenders, official creditors such as CIDCA (China’s development agency) and China Exim Bank have suspended about US$1.353 billion, and China Development Bank, which considers itself a commercial lender, has suspended 748 million US dollars. In addition, China has also pledged to redistribute US$10 billion – 23% of its IMF Special Drawing Rights (SDRs) – to African countries, while various G20 countries have pledged to redistribute 20% of their SDRs. to emerging markets.

Despite these promises and initiatives, current approaches are slow to make a difference. The DSSI has not been extended beyond December 2021, while the broader “common framework”, which includes private lenders, has not delivered meaningful results.

One of the challenges is the complexity of sovereign liabilities, as commercial and non-traditional lenders play a larger role. Another is the lack of debt and creditor transparency, which undermines the willingness of creditors to restructure debt and the ability of borrowers to access new loans.

Debt classification also remains unclear—development bank loans are official bilateral debt due to the legal status of the lender, but may be considered commercial debt based on the terms of the loan. Finally, China argues that multilateral lenders should contribute equal shares to multilateral debt relief rather than insisting on repayment priority.

To accelerate debt relief and avoid further deterioration of sustainable development potential in DSSI countries, Chinese policymakers have an opportunity to play a greater role in improving current strategies and leading global efforts to debt relief.

Debt classification consistency and transparency can be improved by reaching greater agreement among bilateral and multilateral creditors on the category (official or unofficial) of outstanding debt. Debts that governments do not owe directly but for which they have contingent liabilities also need to be properly calculated. China’s official lenders could play a leading role in improving transparency by waiving certain confidentiality clauses, especially in cases of urgent debt relief.

Bilateral and multilateral creditors must also strengthen their coordination. This may require granting more powers to existing institutions such as the IMF, which is difficult but preferable to creating new institutions. China could help by developing a “joint” program of debt relief and restructuring.

Highly indebted countries with limited access to capital markets or high borrowing costs could be supported to issue sustainability-linked debt instruments to attract patient capital, with interest rates dependent on performance sustainability of the country. These instruments could be reinforced by public guarantees and default insurance with development.

For debt that is unlikely to ever be repaid, innovative solutions could trade some of it for environmental protection, health, or broader development, rather than debt-for-equity or debt-for-equity swaps. resources that carry higher political, economic and reputational risks. Some solutions have proven successful, such as debt-for-nature swaps in the Seychelles in 2015 and Belize in 2021, and a debt-for-health swap between Germany and Indonesia in 2021.

Chinese-invested infrastructure projects in Belt and Road countries could securitize project-based loans by aggregating and selling the securities on a secondary market or through a securitization fund. national/multilateral projects. This would facilitate the raising of capital through asset-backed securities while reducing the debt burden of debtor countries.

While the debt crisis alone hampers the prospects for sustainable development for many emerging countries, rising inflation and exchange rate volatility driven by rising energy and food prices, as well as the rise in interest rates in the United States, are a powerful accelerator of the existing challenges. Since many debtor countries need a specific mix of solutions to deal with the debt problem on their own, more efforts and better coordination are urgently needed to avoid a rapid escalation of the crisis. As G20 Finance Ministers and Central Bank Governors called for “faster, orderly and predictable” debt treatment at their recent meeting, particularly in Chad and Zambia, we hope that progress will continue. will produce soon.

Mengdi Yue is a visiting scholar at Green Finance & Development Center, Fudan University.

Christoph Nedopil is Associate Professor and Director of the Green Finance & Development Center at Fudan University.

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