![]() ![]() 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.Ĭhina has had little experience in sovereign debt restructuring, as a creditor at least. A case in point is the Pakistan shoe industry, with the country now swamped with cheap Chinese shoe imports. ![]() 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. 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. Perhaps also, the absence of much conditionality attached to loans from China accentuated the problems. Perennial problems in many of these countries - corruption, trade barriers, political and social unrest - had not been resolved. 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. 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. 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. ![]() 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. It was China’s strategic priority to access key commodities and the ports and infrastructure to deliver them to its industry. 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. But they lacked the financial resources to develop these assets. 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. In the era of the commodity super cycle, China’s model appeared a no-brainer. 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. The country needs debt relief, and quickly. 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. “Zambia remains appreciative of the significant effort being asked of all Zambia’s creditors - and particularly our Chinese creditors,” the statement said. The problem, it said in a statement, was slowness, not China. When the Financial Times reported that Musokotwane had expressed frustration with China’s role, the Zambian government was quick to clarify. 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. Situmbeko Musokotwane has been doing what he can to restructure about $17bn in foreign debt, a third of it owed to China. 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. ![]()
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