The burden of large foreign loans, particularly from China, has put twelve impoverished countries at risk of economic instability and possible collapse. According to an Associated Press analysis, these countries, which include Pakistan, Kenya, Zambia, Laos, and Mongolia, are increasingly concerned as their tax revenues are diverted towards debt repayment, affecting essential services such as education, electricity, and basic necessities. Furthermore, China’s unwillingness to forgive debt, combined with its opaque lending practices, has prevented other major lenders from stepping in to help, leaving debtor countries in a precarious position. China’s actions are creating a massive debt crisis, but its own debt suggests the country is covering its own short-comings.
China’s dominance and secrecy
China is the world’s largest and most lenient government lender, making it a significant source of foreign loans for developing countries. However, concerns have been raised about China’s lack of transparency regarding the size of its loans and the terms attached to them.
Other major lenders, such as the US, Japan, and France, have historically negotiated debt forgiveness arrangements in such cases, ensuring transparency and fair treatment. China, on the other hand, has avoided these practices by engaging in separate negotiations and insisting on confidentiality, preventing debtor countries from disclosing loan terms to non-Chinese lenders or determining China’s position in the repayment line.
Debilitating effects on economies
Despite recommendations from the International Monetary Fund (IMF) and the World Bank, China’s refusal to forgive significant amounts of debt has left debtor countries burdened with interest payments. This situation stifles economic growth and the ability to repay debts, resulting in a vicious debt cycle.
Foreign cash reserves in the twelve countries the Associated Press studied have declined significantly, with an average decrease of 25% within a year. The Republic of Congo and Pakistan saw more than a 50% drop. As a result, these countries have limited foreign currency reserves, which could lead to food and fuel shortages in the absence of outside assistance.
Developing countries facing debt problems have faced additional challenges as a result of unexpected events. The Ukraine war, which has caused a spike in grain and oil prices, as well as the US Federal Reserve’s consecutive interest rate hikes, have made variable rate loans more expensive. These factors, together with government mismanagement, corruption, and economic vulnerabilities, have exacerbated the situation for debtor countries, resulting in foreign currency shortages, high inflation, unemployment, and widespread hunger.
China claims
China claims to have provided relief measures such as loan extensions, emergency loans, and the cancellation of some no-interest loans to African countries. Experts, however, question the significance of these claims, pointing out that the canceled loans are mostly from more than two decades ago and represent a small portion of China’s overall lending portfolio.
According to reports, during recent high-level talks in Washington, China considered dropping its demand for debt forgiveness from the IMF and World Bank in exchange for grants and aid to troubled nations. However, no official announcement has been made, and both lenders have expressed their displeasure with China’s strategy.
Beijing’s admission of serious financial problems comes after a long period of hesitation. The Chinese government recently took steps to address liquidity issues in its troubled property sector, which has provided some temporary relief.
According to Liu Guoqiang, Vice Chair of the People’s Bank of China (PBOC), a new financial stability law has been announced with the goal of controlling risk. While these measures provide temporary relief, they do not address China’s underlying economic challenges, which are reflected in its financial markets.
A foreign solution to a domestic problem
China’s debt burden dwarfs that of the United States by a wide margin. Although the US had a higher debt-to-GDP ratio than China as recently as 2020, the situation has since shifted. China’s relative debt burden is 40% greater than that of the United States as of mid-2022. This disparity is notable, given that wealthier developed nations tend to have higher relative debt burdens, which they can more easily sustain than less developed economies.
The primary cause of China’s own massive debt crisis is the country’s local governments. It is important to note that localities have not adopted wasteful policies on their own, but are rather instruments of Beijing’s central planners.
When central planners launch large-scale spending programs, such as recent infrastructure construction plans, they require local governments to issue debt to fund these endeavors. As a result, local government debt has risen by 11% through mid-2022, outpacing the modest declines in private borrowing caused by the uncertain economic outlook.
So, while China’s steps to address immediate liquidity concerns and promote financial stability exist, the country’s massive debt crisis remains a major concern. China faces significant challenges in managing its debt burden, with total debt exceeding the size of its economy.
An ongoing issue
It seems China is aggressively calling in debts on loans to poor countries in order to cover its own deficits. The heavy debt burden on these impoverished countries poses an imminent threat to their economic stability. Because of China’s secretive lending practices, reluctance to forgive debt, and the resulting diversion of tax revenues, these countries have struggled to provide basic services while repaying their debts.
The lack of transparency and fair treatment has prevented other major lenders from stepping in to help. It is critical for international financial institutions and China to find a balanced solution that ensures long-term development while avoiding further economic hardship for debtor countries.
