Zambia is a poster child for a new and worrying development among debt-laden developing nations, as its hard-pressed finance minister illustrated on February 13.
Situmbeko Musokotwane has been doing what he can to restructure about $17bn in foreign debt, a third of it owed to China. US Treasury officials have intervened, seeking a deal acceptable to all creditors while making clear that the failure to reach an agreement so far was attributable to Beijing, which has been making some eye-popping demands; these essentially require that Western taxpayers subsidize bad loans made by the Chinese state.
When the Financial Times reported that Musokotwane had expressed frustration with China’s role, the Zambian government was quick to clarify. The problem, it said in a statement, was slowness, not China. “Zambia remains appreciative of the significant effort being asked of all Zambia’s creditors — and particularly our Chinese creditors,” the statement said.
Zambia’s desperation is understandable. Janet Yellen, US Treasury Secretary said during a recent visit to the country that its government was making every effort to get back on track, but that the debt overhang is proving a serious problem. The country needs debt relief, and quickly.
It’s not alone. There is a more general problem of debts owed to China by a host of low-income counties as part of its One Belt One Road (OBOR) program.
In the era of the commodity super cycle, China’s model appeared a no-brainer. Low-income countries typically had assets in demand by China — commodities in the case of Ghana or Zambia, or deep-water ports in the case of Pakistan or Sri Lanka. But they lacked the financial resources to develop these assets. China had the cash in the form of a huge foreign exchange reserve buffer, it had the technology and know-how to fast-track infrastructure development to bring emerging market commodities to their market in China.
It was China’s strategic priority to access key commodities and the ports and infrastructure to deliver them to its industry. As a result, numerous low-income countries took multibillion-dollar loans from Chinese banks and state-owned enterprises in the hope of fast tracking their development. The numbers are enormous — according to a 2020 report, China has lent $1.5 trillion to 150 countries, and in the process become the world’s largest official creditor. Interest rates charged on these loans were often set at commercial, rather than concessionary rates, but the assumption was that growth would step up a gear making future repayment easy.
It has not worked out that way. Even before the triple shock of Covid-19, the war in Ukraine, and now global interest rate rises in response to high inflation, growth assumptions proved over-optimistic. Perennial problems in many of these countries — corruption, trade barriers, political and social unrest — had not been resolved. Perhaps also, the absence of much conditionality attached to loans from China accentuated the problems.
In the event many recipient countries of China OBOR loans ended up saddled with unsustainable debts, and with limited growth or export earning potential to meet now seemingly exorbitant debt service costs. Problems were perhaps accentuated by often onerous market access conditions — China often negotiated preferential trade access terms into these low-income country markets, which on occasion destroyed competitor domestic industries, crimping their ability to earn foreign exchange revenues to pay back loans. A case in point is the Pakistan shoe industry, with the country now swamped with cheap Chinese shoe imports.
So now countries as diverse as Surinam, Chad, Ghana, Zambia, and Sri Lanka (and potentially Pakistan) are in default and trying to work with creditors, including the International Monetary Fund (IMF) to put their debts on a more sustainable footing.
China has had little experience in sovereign debt restructuring, as a creditor at least. But it has little choice but to take part given it is now a major player, with outstanding credits exceeding those of traditional Western bilateral creditors, the so-called Paris Club.
In 2020, the G20 recognized the problem and agreed to the so-called Common Framework in dealing with debt distress in low-income countries. This seeks the broad participation of creditors, with fair burden sharing but, on a case,-by-case basis. The language is vague, but the intention was clear — to force new creditors such as China and India to join the traditional Paris and London Club creditors
Using the framework, the IMF has brought debt resolution close in countries such as Zambia, Ghana, and Sri Lanka. The Fund, the Paris Club, many Western commercial creditors, and even non-Paris Club members such as Hungary, India, and Saudi Arabia, appear broadly united on the need for far-reaching debt relief, often including haircuts (debt write-downs), to provide longer-term debt sustainability and enable new IMF reform programs.
China though seems to be foot-dragging. In particular, the country has an apparent aversion to haircuts, and a preference for “extend and pretend”, whereby the loan term is lengthened without any real examination of long-term affordability.
The Chinese have been throwing a tantrum, demanding preferential terms in the debt restructuring talks. In the case of Sri Lanka, for example, they are offering only a two-year standstill on debts, whereas the weight of the other creditors (including Hungary, Saudi Arabia, and India) suggests something more substantive is required. In the case of Zambia, and one assumes also Sri Lanka et al, the Chinese are calling for global norms to be discarded and for multilateral development institutions to suffer comparable treatment to bilateral and commercial creditors. This is a revolutionary proposal since multilateral institutions like the IMF are lenders of last resort and therefore excluded.
The message now seems to be that China is in fact a poor, developing country (albeit with over $2 trillion in foreign exchange reserves) and simply cannot afford to offer generous relief.
China lent for strategic and commercial gain, often charging above market rates. The idea now that it should be put in a similar basket to multilateral development organizations, and its debt being ringfenced is ridiculous. Why should Western taxpayers, in effect, subsidize the Chinese state, a Western rival, and (now) adversary?
Likewise, why should Western pensioners, the ultimate oligor of most private sector liabilities to low-income countries, receive less preferential treatment to Chinese entities who lent on commercial terms?
This disagreement is causing real concern about broader social, economic, and political fallout as low-income countries are left in suspended animation, suffering extended debt defaults.
One solution is to walk away from talks with China, park its debt issue, and allow IMF programs to get to work. The assumption is that agreement can be reached with Paris Club and commercial creditors in the interim.
But that assumes China will agree in the future. This would not be kicking the can down the road but allowing China to pick it up and run off with it.
China must be called to account by low-income countries and the rest of the developing world. There should be no special treatment, and Western taxpayers and pensioners cannot be asked to bail China out for its bad credit decisions in the past.
If this means delaying ongoing debt restructuring, for now, that might have to be the price paid. But China should be identified, in public, as the holdout.
Timothy Ash an Associate Fellow at Chatham House on its Russia and Eurasian program.
The opinions in this article are those of the author.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.