Washington — The world has avoided a systematic debt crisis in a pandemic. However, the poorest countries continue to face serious debt problems, raising global concerns about increasing debt traps by creditors like China.
Addressing the increased risk of a systematic debt crisis in developing countries is one of the key themes of this week’s International Monetary Fund (IMF) and World Bank Virtual Spring Meeting.
Economists believe that addressing debt vulnerability in poor countries is important to prevent diverse recovery around the world. Therefore, IMF and World Bank officials are calling for extended debt relief to the most vulnerable countries to address the challenges posed by the pandemic.
“Poor countries have no way out of these very heavy debt burdens,” World Bank Governor David Malpas said at a press conference on April 7.
He said these countries are facing inequality in access to credit markets and the growing budget deficit is becoming a problem.
In addition, Malpas unnamed China’s controversial lending practices, and uncertain debt contracts and the imbalanced relationship between creditors and debtors complicate debt relief efforts. Said.
At a seminar entitled “Avoiding the COVID-19 Debt Trap,” IMF Managing Director Cristalina Georgieva said many countries have entered a pandemic as debt levels rise. And during the pandemic, economic activity collapsed and public debt reached 100 percent of the world economy.
According to Georgieva, “56% of low-income countries are at high risk of debt crisis or are already in debt crisis.”
Many of these heavy-duty countries “fall into debt traps,” she said. “They haven’t been able to generate enough growth to lower debt levels, and these debt levels are holding them back.”
And if interest rates rise globally, the situation in these countries “will be incredibly difficult” in terms of debt burden, she added.
Since the outbreak of the pandemic, the World Bank and the IMF have provided the world’s 20 wealthiest economies (G20s), including China, with a suspension of debt repayment to the world’s poorest countries to avoid a debt crisis. I asked you to do it.
Private creditors are also required to participate in these debt relief activities.
Finance Minister G20 countries agreed On April 7, the IMF’s reserves will be increased by $ 650 billion to further extend the debt repayment freeze in developing countries, allowing these countries to devote their money to vaccines and stimulus. Debt repayment suspension will continue until the end of 2021.
China is the largest creditor in the world, almost 65 percent Of official bilateral debt. However, China’s lending practices complicate relief efforts in countries in financial difficulty.
Beijing Secret Lending Program
new Aid Data-led research, The US Institute at William & Mary University has shown that China’s loan agreements with emerging markets “have extraordinary confidentiality clauses, collateral requirements, and debt renegotiation restrictions.”
Researchers have analyzed the legal terms of 100 Chinese loan agreements for 24 developing countries. Many participate in the Belt and Road Initiative (BRI).
AidData conducted a detailed investigation over 36 months and found that China’s loan agreement contained an unusual confidentiality clause. This prevented the borrowing country from disclosing the terms and, in some cases, even the existence of the loan.
Researchers also found that the contract also included a clause that positioned China’s state-owned banks as senior creditors to preferentially repay. An informal collateral arrangement puts Chinese creditors at the top of the repayment line.
In addition, Chinese lenders have been given the freedom to cancel loans and accelerate repayments if they disagree with the borrower’s policies.
According to Malpas, these extraordinary lending practices make it very difficult to restructure emerging market debt.
In recent years, China has led many countries into debt traps through BRI, one of the world’s most ambitious and controversial development programs. Since its launch in 2013, BRI has invested billions of dollars in infrastructure projects in Africa, Latin America, Eastern Europe and Asia.
Washington has repeatedly criticized Beijing for abusing the pandemic to further expand its geopolitical influence through predatory lending practices. Most of the BRI projects are funded through opaque Chinese state lenders, and borrowers are plagued by huge debt burdens. Beijing has also been accused of conducting “debt trap diplomacy” to seize control of strategic assets in emerging markets.
China Debt Repayment Suspension Initiative Last year, the G20 countries agreed. This initiative provided the poorest countries with a freeze on debt repayment upon request.But China Not very supportive More than any other G20 member would expect.
Trump administration officials have criticized Beijing for pulling back by imposing conditions on debt exemptions and restructuring.
Economists believe that the debt vulnerabilities of poor countries will hinder the recovery of the world.
According to the latest IMF forecast, global growth will be 6% in 2021 and 4.4% next year. Growth is stronger than the January Economic Outlook Report, with additional financial support in some developed countries and the deployment of vaccines to boost economic recovery.
However, the IMF warned that emerging economies could lag behind developed economies and perpetuate the widening gap between society in rich and poor countries. According to the IMF, uneven access to vaccines has also hampered the recovery of poor countries, emphasizing the urgency of providing debt relief to these countries.