Rising debt is “sand in the wheels” to the world’s poorest countries

The world’s poorest countries owe nearly $1 trillion to private investors and other countries. Debt service payments are estimated by the World Bank to reach $62 billion in 2022 alone. China owes about half of the debt owed to other countries, and this has become another point of friction between China and the United States.

Treasury Secretary Janet Yellen recently met with Chinese Vice Premier Liu He in Zurich to discuss, among other things, Zambia’s debt to China.

“I think a lot of countries were too optimistic about their prospects,” said David Dollar, a senior fellow at the Brookings Institution’s John L. Thornton China Center, in an interview with Marketplace’s Sabri Ben Achor. “Usually that way you get into debt trouble for the whole country. China has financed a lot of infrastructure in the developing world.”

Below is an edited transcript of their conversation.

Sabri Ben Achour: So first, how and why did so many low-income countries, especially China, become indebted?

David Dollar: I think a lot of countries were too optimistic about their prospects. Thus, you usually end up in debt trouble for the entire country. China has financed much of infrastructure across the developing world. And a lot of it requires power stations, transport infrastructure. I visited the great expressway they are building from Entebbe – Kampala in Uganda for example. But how much you can take depends on your financial possibilities. Chinese loans are somewhat more concessional than the terms of private lenders, but not too concessional. So you have to grow very well to service the amount of debt that countries have taken. I think they are very optimistic. And then the COVID pandemic and the global recession hit these countries, commodity prices fell, and they couldn’t service their debt. This is a fairly common story.

Ben Achor: Some have criticized the way China has structured its loans to developing countries. They are not allowed in some cases to disclose the money or leave China to get rid of the debt. What is the argument there?

dollar: Well, China is pretty secretive about these kinds of things. I think it’s their, basically their Stalinist tradition, but they can’t stop countries from promoting it. So as you say, you know, the IMF, the World Bank, you know, they have pretty much perfect data on all of these things. It is better to be transparent about this. It is better to be transparent about terms and amount. Most of these countries are democracies, and people deserve to know what is going on. So I think Chinese secrecy is really counterproductive at this point.

Ben Achor: As Zambia defaulted on its debt in 2020, the IMF offered a loan to help the country. But he basically said, “We’ll help you with your debt. But you have to restructure your debt first. Talk to China about it. Why is this a US-China problem?”

dollar: Well, the US is the largest shareholder in the IMF. And in some ways, America is kind of the gatekeeper of global finance, we’ve taken the lead in creating a system that has worked, obviously, very well for many different countries. So we are interested in seeing a country like Zambia succeed. We certainly don’t want to see it fail, become a failed state humanitarian tragedy, refugees fleeing terrorism, failed states have all kinds of things that we want to avoid. So we’re interested in successful countries, and the IMF can step in and help a country like Zambia, you know, once it gets an economic program, it makes sense. But the IMF will not lend to a heavily indebted country that then simply turns around and pays its creditors 100%. So the IMF is looking for borrowers to essentially take a haircut. And China has agreed to do so in principle. But they have been too slow to negotiate specific terms with Zambia, or talk to other creditors about what a realistic approach would be.

Ben Achor: Treasury Secretary Janet Yellen has complained that it has taken too long to resolve. What is the sticking point? What is the hold up?

dollar: Well, China has its own politics. We are very aware that this is an authoritarian country, but there are different interest groups, you have different banks involved. And these different players don’t want to receive clear texts that very clearly indicate that they have lost money. And that’s part of the debt negotiation game, you know, we recognize that. So the solution might be, for example, for some of these Chinese banks to extend long-term loans at lower interest rates, which is a type of debt forgiveness, but you still write it on your books. But can take it to 100%. So there’s a lot of internal politics going on in China about what the approach is and what’s needed, and China needs to coordinate with other creditors. There are many private lenders for a country like Zambia. China wants to see other creditors make commitments. In this situation, you don’t want to be the only creditor who gives relief and revives the country economically, because you don’t want to see other creditors get paid 100% when you get paid. Say 80%. On the dollar, 80 cents on the dollar. So I think that both internal politics and then international negotiations are unfamiliar to China. It is usually led by what we call the Paris Club of Creditors. These are mainly rich democracies. You know, China is not a member, doesn’t really want to try to join. So I understand that China resents being dragged into this international coordination. It’s not really a power player in this system.

Ben Achor: Well, what do you think needs to happen to increase cooperation? How can we get out of it?

dollar: Well I think Chinese leaders have to show clear leadership. You know, as an authoritarian country, you would think that Xi Jinping could just give a few nods and get the Chinese financial institutions … they are Zambia’s biggest lenders … to lead and offer. . They can do their analysis and decide, well, a 20% haircut will restore Zambia’s health, and they can make a deal. And then basically, it can depend on other creditors so China can play a major role in that. It’s just something they’re not used to. They’re, you know, relatively quiet and kind of on that diplomatic front. So things just dragged on for years. And meanwhile, in a poor country like Zambia, it has real repercussions, and is the poster child for the problem. Many developing countries have similar problems.

Ben Achor: Yes, we talked about creditor countries, you know, but ultimately, what’s in it for these heavily indebted low-income countries that owe so much money?

dollar: Well, when you get into that kind of debt situation, then it becomes difficult for Zambia to get any new debt, as you can imagine, you know, who is Zambia in that situation? will give loans when they have already defaulted. Their existing debt and that means that a lot of normal things like trade credit, you know, you need to import some food, it’s usually facilitated by trade credit. You basically can’t get it. What you need to worry about is that if you have a state-owned airline, if your planes fly all over the world, they can be seized as an asset. So it creates real sand in the wheels of the economy, and essentially contributes to human tragedy. Basically, these are poor countries struggling under the best of circumstances. And now they have this extra difficulty. So it is difficult for them to provide basic social services, it is difficult for them to work to improve people’s lives. And I think it’s a positive thing that the United States takes this whole thing very seriously and is generally a major force in debt restructuring or debt relief for these countries.