Debt distress is rising throughout many low-income countries and emerging markets. It may not risk a systemic global meltdown, but problems are acute. The International Monetary Fund states that 60% of LICs face debt distress and EMs such as Sri Lanka and Pakistan pose significant challenges.
Debt profiles vary, and multilaterals – rightly preferred creditors – and the private sector are key actors. But China is often a dominant external creditor. Ideally, China would work with the international community to help these countries secure debt sustainability. Without China’s co-operation, the IMF and its shareholders face difficult choices.
In the past, the Paris Club restructured or eliminated official debts. Now, non-traditional official creditors such as China and India often constitute the major share of official bilateral debt. The G20 common framework for LICs offers a framework for non-traditional creditors to pursue a Paris Club-like approach for debt treatment. But it has so far been a flop. Making it work would be a major deliverable for India’s G20 presidency.
Chad was a sui generis case given the dominant role of Glencore, taking two years to reach a ‘deal’ that didn’t provide debt relief. Ethiopia has been locked in civil war.
Zambia moves glacially. IMF staff reached agreement in principle on a programme in December 2021; a creditor committee offered financing assurances in July 2022, allowing programme approval in September 2022. To date, however, a concrete restructuring deal has not been reached. China accounts for over 40% of Zambia’s non-multilateral institution external debt. Ghana has also requested common framework relief.
Outside LICs, Sri Lanka, long in dire straits, reached an IMF staff level agreement in September 2022, but the programme still awaits board approval. China, India and the private sector are large creditors. India offered satisfactory financing assurances. So did the Paris Club. China offered a two-year debt moratorium, which was insufficient as there is no up-front debt treatment pledge nor clarity regarding what happens after two years.
Pakistan, also facing dire straits, is scrambling to agree an IMF programme. Chinese official and private creditors account for over half of Pakistan’s non-multilateral external debt.
What is to be done? Without Chinese willingness to reach concrete debt deals, there are no good options. Progress with China would also accelerate private sector deals.
China’s situation is complex. Debt contracts are opaque and authorities may lack data, especially on private sector activity. China is not a Paris Club member and asks why it should follow Paris Club-like policies when it’s a key or dominant creditor. The China Development Bank claims implausibly that its loans are private. Chinese lenders are understandably wary of taking losses, not just due to financial reasons but also fears over public wrath. They have shown a propensity to extend loans, but adamantly oppose writedowns, even when debt is unsustainable.
IMF shareholders also face a messy situation. They don’t want to leave distressed countries dangling and could invoke the Fund’s ‘lending into official arrears’ framework for bilateral creditors. But that is fraught with risk. Shareholders would do so assuming that the official creditor and debtor country would reach an agreement on debt treatment consistent with the programme’s parameters. But that assumption could be specious.
Shareholders could accept that an official creditor would consent to let the debtor run arrears during the programme, yet that would raise the risk that, afterwards, the recalcitrant creditor could be repaid with IMF and other creditors’ funds disbursed during the programme. In short, the financing assurances needed for a programme to move forward might be regarded as lacking credibility to Fund shareholders. Many of these concerns have played out in Suriname’s IMF programme.
IMF management and staff also face hard choices. While they undoubtedly feel caught between China and major shareholders, they are wary of getting on China’s wrong side. Fund management and staff have invested considerable energy into quiet diplomacy with China, explaining financing realities and policies. The IMF-led roundtable to bring all parties together is a good idea. But the Fund’s ‘long game’ is not bearing fruit in delivering timely relief to these distressed nations. Whether that is because China needs more understanding of international norms – a doubtful explanation – or is simply recalcitrant – more likely to be the case – is no longer relevant.
The international community urgently needs to make a more concerted, forceful and vocal public push to the highest level of government to exhort China to participate in the G20 common framework and other debt cases. The IMF should take the lead and stop pulling its punches. The US cannot play this role alone, especially given US-China tensions.
It’s worth noting that in 2005 and beyond, the US forcefully pushed China in public on its harmful foreign exchange practices and undervaluation of the Chinese currency. While this created much international tension and animosity, the issue was squarely placed in front of China’s leadership and progress was achieved.
The IMF and shareholders, though, would be wrong to leave debt distressed countries – hit by global shocks, undertaking reforms and working in good faith to negotiate debt treatment with recalcitrant creditors – in the lurch. They may need reluctantly to let the IMF invoke its lending into official arrears policies and deal with the consequences and risks.
Something must give for the good of the distressed countries.
Mark Sobel is US Chair of OMFIF.