China’s stance on debt relief actually makes sense: diplomat

Over the past few weeks, China has again called on multilateral development banks (MDBs) to play a more active role in debt relief in Africa and beyond. For example, Chinese Foreign Ministry spokesperson Mao Ning urged ICBMs for Zambia’s debt relief, where they constitute 19 percent external debt.

These calls were interpreted with great skepticism from a number of expertsespecially ahead of the closed 20-person Sovereign Debt Roundtable, including six borrowing countries, three of which are African (Ethiopia, Ghana and Zambia). The first session took place virtually last Friday, and the second in-person session will take place on the sidelines of the G-20 meeting in India.

The topic is hot. Some coverage suggests that China is using this stance as a deliberate excuse to avoid itself. push from the US and the IMF for debt relief. A recent article in the Financial Times even Misquoted Zambian finance minister perspectives on the problem. (The Zambian government hastily issued a very clear correction).

However, China’s point of view on the participation of ICBMs is not new and not only Chinese. This is also an African view – and for good reason.

In the early days of the COVID-19 pandemic in 2020, the G20 launched the Debt Service Suspension Initiative (DSSI) to support low-income countries as they weather the storm of additional medical and economic spending needed to fight the pandemic. In agreeing to participate, the Chinese government mentioned that in order to most effectively Debt service to MDBs should be suspended, along with debt service to bilateral and private creditors. After that, last August, Tsinghua University report reiterated the problems faced by African countries in connection with the payment of private debts.

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But others outside of China were equally of the view that it was not just bilateral creditors who needed to act, but other actors as well. In 2020, on behalf of the African Union, South African President Cyril Ramaphosa urged ICBMs Join DSSI in warning of the impact of the COVID-19 pandemic on African debt levels. Letters from Ethiopian Prime Minister Abiy Ahmed, written in April 2020 — long before the country had to apply for restructuring under another G-20 program — urged bilateral and private lenders not only to suspend debt, but also to write it off in the interests of post-COVID-19 recovery. He too specially mentioned that Africa “welcomes all debt relief initiatives from the multilateral financial institutions, especially the World Bank and the IMF.”

These calls, whether from China or African countries, have significant logic.

Approximately A third of Africa’s debt is held by multilateral creditors, with the World Bank and the African Development Bank currently the largest multilateral financiers. Low-income African countries such as Ethiopia (at least countries that are not yet indebted to the World Bank or the IMF) have been able to obtain highly concessional loans from various MDB funds. For example, loans for low-income countries under the IMF’s Extended Credit Facility have a zero interest rate and a grace period of 5.5 years, but have a repayment period of 10 years.

However, other middle-income African countries such as Ghana, Egypt and Angola must borrow from other MDB funds offered at more commercial interest rates, albeit sometimes with longer repayment periods or grace periods. For example, Ghana’s current statutory interest rate on World Bank loans is about 5-5.5 percent.

In 2020 general debt service for all low- and middle-income countries was $437 billion, of which 27 percent was debt to Chinese shareholders (such as China Exim Bank) and 33 percent was debt to multilateral creditors. The rest fell on debt to governments and the private sector of OECD countries (including payments on “Eurobonds”). With current trends by 2028 MDBs forecast become the largest group of creditors for the group of “most vulnerable” or “V20” countries.

Meanwhile, our firm Development Reimagined has calculated that African governments have spent $130 billion in total for COVID-19 response in 2020 and 2021 to protect and support millions of citizens, thereby preventing a significant increase in poverty. This was equivalent to just 2.5 percent of GDP and therefore significantly lower than the amounts spent by the rest of the world. For example, it is estimated that Asian countries spend 7 percent of their GDP on similar activities, and the G7 more than 13 percent of GDP). However, the suspension or relief of debt service by all creditors—bilateral, multilateral, and the private sector—over the same period and for low- and middle-income countries would significantly change the prospects for economic growth and poverty reduction on the continent. .

So, given these appeals and the costs that African and other low- and middle-income regions have suffered, what is the reason for excluding the MDBs from debt suspension, relief or restructuring discussions, thus treating them as “preferred creditors”?

Three arguments are usually put forward. First, MDB loans are highly concessional, meaning that they are cheaper than Chinese loans, for example, and therefore more “worthy” of repayment. Second, MDBs need an AAA credit rating to provide such low-cost loans, and engaging in debt relief could put the rating at risk and therefore set an “own target” for low- and middle-income countries that will need cheap loans in the future. loans . Thirdly, MDB assistance is offset by the fact that MDBs effectively and consistently issue new cheap loans.

All three arguments are dubious.

First, as explained above, MDB concessional rates vary greatly depending on a country’s income. This means that it is difficult to make general comparisons between lenders. It should be calculated for each country separately, taking into account counterfactual data. For example, some African countries that have applied for loans from China’s Eximbank have achieved interest rates of less than 2 percent with maturities of more than 20 years and grace periods of more than 7 years.

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This means that it is misleading at best and downright misleading at worst to suggest that China is in all cases more heavily indebted than the MDBs. In 2020 55 percent Nigeria’s debt service payments came from Eurobond holders, followed by the World Bank and the African Development Bank Group (ADB).

A 157-country analysis comparing World Bank and China lending over the period 2000–2014 found that while China’s lending terms were less concessional than World Bank project lending terms, China’s lending terms were more concessional than private sector lending terms. The authors also found that loans from Chinese institutions tended to be larger than loans from the World Bank (average loan size was US$307 million and US$148 million, respectively), while 30 countries were able to obtain loans from China, but not from the World Bank. which may explain the difference in costs.

Simply put, the argument that MDB loans are “cheap” and therefore unforgivable does not stand up to scrutiny.

The second argument, related to equity ratings, is just as shaky, both on the basis of history and recent analysis. The fact is that, as in China, MDBs have already written off debts. In the late 2000s, the World Bank, IMF, and AfDB canceled $26.7 billion of global debt. By comparison, Paris Club creditors spent about $27.7 billion. Overall, between 1970 and 2021, the World Bank has written off at least $38.4 billion of African debt, followed by the AfDB with $9.4 billion and the IMF with $5.8 billion, with Ghana, Tanzania, Ethiopia, Uganda and Zambia having benefited from the largest cuts. For some MDBs, forgiveness itself has been offset from other parts of the system. For example, the IMF compensated ADB for lost refinancing over a 50-year period (2004–2054).

Moreover, recent independent report commissioned by G-20and under the guidance Tanzania consultant Frannie Lautier, who previously worked at very high levels at the World Bank and the AfDB, found that 15 MDBs, 10 of which have AAA ratings, have significant potential to reduce risk aversion and ease capital requirements without losing those ratings. To date, Leotier’s report used by international NGOs to argue for “trillions” of new fresh funding from the MDBs without additional pledges of funding from G7 donors, but the corollary also applies to the possibility of a less painful suspension, relief, or debt rescheduling by the MDBs.

And what about the last argument – ​​that the MDBs issued fresh funding during the pandemic years, and this compensated for the payments?

Unfortunately, the data show that this was not necessarily the case for all African countries. For example, we estimate that over the period 2020 and 2021, the 48 African governments for which data are available borrowed a total of $20 billion from the World Bank. It was a small amount compared to their spending on the COVID-19 response, but of course it was useful. However, governments also had to pay $1.6 billion to the Bank and charge about $200 million in new interest payments. This meant that, although the overall situation for the continent was positive, the countries lost almost 10% of the inflow of loans.

In addition, six economies of varying size—Burundi, Chad, Mauritius, Sao Tome and Principe, South Africa, and Sudan—have paid more to the World Bank than they received in new loans. So certainly the World Bank could at least do more.

In this context, what can the new sovereign debt round table achieve for African borrowers? Although in 2023 Economic growth expected to accelerate in the African region, domestic incomes are still recovering from COVID-19 and other global shocks, and efforts to reduce poverty must become a priority. This is why several African governments have sensibly called on all creditors, including the MDBs, to support suspension, debt relief and debt restructuring.

But a significant gap remains in understanding and defending African views on MDB participation. Experience suggests that the longer they find arguments to exclude their lending from discussion, the more problems all lenders and borrowers will face.

It is time for all creditors to really listen and respond to African leaders, rather than dismissing their position out of the blue because they realize that honoring commitments can benefit China.

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