Are China’s loans sending emerging countries into default?
Not only Zambia: more than ten developing countries have fallen into China's "debt trap". Here's what the Associated Press investigation says
There are at least a dozen developing countries in the world on the verge of default due to the mountain of debt accumulated with China, an inclement country that refuses to respond to calls by the IMF and the World Bank to renegotiate those debts to avoid a spiral of poverty and social and political instability. This is what emerges from an investigation by the Associated Press , which also discovered how a portion of those loans, linked above all to the construction of ambitious infrastructure projects whose costs the contractors were unable to bear, was granted in an unlawful way transparent and with secret conditions.
What emerges from the AP investigation
There are a dozen countries identified by the AP survey whose economies are at risk of collapse under the weight of unsustainable external debt, worth hundreds of billions of dollars, much of which is lent by China.
The payment of this debt by countries such as Pakistan, Kenya, Zambia, Laos and Mongolia is eroding tax revenues to the point of making it increasingly difficult to provide essential services such as education and health care. Furthermore, to pay interest, these countries are forced to withdraw large sums from foreign exchange reserves which are dwindling alarmingly.
This serious situation has arisen mainly due to the combination of two factors, all linked to Chinese behavior: on the one hand, Beijing's reluctance to forgive its debts, on the other, the extreme secrecy in which Chinese loans and their terms are shrouded. The combination of these factors helps to keep away any lenders of last resort, fearful of discovering so much debt behind the scenes as to make any repayment impossible.
To aggravate the picture is also the discovery made by the PA: the beneficiaries of the loans are required to deposit large sums in secret bank accounts with the aim of ensuring China a safe repayment channel.
According to the AP analysis, at least 50% of foreign loans disbursed in favor of these countries are of Chinese origin, and the same countries are allocating a third of their tax revenues to repay them.
Two of them, Zambia and Sri Lanka, have already declared default as they are no longer able to pay interest. The situation is also very serious in Pakistan and Kenya where it is no longer possible to pay for electricity consumption and the salaries of public employees.
The experts consulted by AP are convinced that, if China does not change its attitude towards its debtors, a wave of new defaults must be expected, with consequent political instability in the countries that will fall victim to them.
China and the suffocating debt
China's unwillingness to accept even the slightest loss on the hundreds of billions of dollars of loans granted to developing countries, as insistently requested by the IMF and the World Bank, is choking the economy of these countries forced to pay unsustainable disbursements .
In ten of the countries monitored, foreign exchange reserves have fallen by 25% this year, according to the PA calculation, while in Pakistan and the Republic of the Congo the decline has been as much as 50%.
Without an urgent bailout, many of these countries will be forced to default. In Mongolia in particular, only eight months remain before exhausting all the resources available, while for Pakistan and Ethiopia the time is reduced to even two months.
These countries are not new to crises that combine foreign exchange shortages, hyperinflation, spikes in unemployment and poverty. But never before have they faced such a catastrophic picture.
In addition to the usual corruption and mismanagement on the part of governments, two factors with a devastating impact have intervened to further complicate the situation: the war in Ukraine, which led to a dramatic rise in the prices of grain and oil, and the series of interest rates set by the US Federal Reserve.
Extreme choices
Now on the brink of the abyss, these countries find themselves forced to take into account decisions with a profound geopolitical impact. This was the case for Honduras, which in March, justifying itself with "financial pressures", decided to cut ties with Taiwan and to establish formal diplomatic relations with the People's Republic: a painful but necessary step to secure Beijing's clemency .
No less desperate was the move by Pakistan which, paralyzed by the continuous blackouts caused by the rise in energy prices, was forced to break ranks with the West in the sanctions squeeze against Russia.
The emblematic case of Zambia
The case of Zambia appears to be paradigmatic, a country which in the last twenty years has benefited from substantial loans from Beijing linked to ambitious infrastructure projects.
If at first the Zambian economy was positively affected by these liquidity injections, the subsequent increase in interest rates emptied the state coffers forcing it to make drastic cuts in social spending and in the purchase of seeds and fertilizers for the agricultural sector.
In the past, notes the AP, the crisis in Zambia would have been tackled thanks to the intervention of other lenders such as the US, Japan or France. But the lack of transparency that characterizes Chinese loans and which hides the real extent of the financial exposure has meant that these countries have become reluctant to intervene.
The same attitude of China, which has refused to participate in multilateral talks organized to attempt the consolidation of Zambia's accounts, has not contributed. Beijing, on the contrary, has insisted on negotiating directly and secretly with that country, demanding maximum secrecy on the negotiations. not exactly reassuring behavior.
This is why in 2020 the other creditors of Zambia refused to meet the desperate appeals of the government which asked to suspend, at least for a few months, the payment of interest. Their refusal has caused Zambia's foreign exchange reserves to erode further, reducing the amount of dollars used both to pay interest on loans and to buy commodities such as oil. In November 2020, therefore, the suspension of the payment of the interests due from Zambia was triggered, determining its default.
Now Zambia is in desperate conditions, with inflation soaring to 50% and the value of the national currency, the kwacha, eroding by 30% in just seven months. According to a United Nations estimate, the number of people without enough food has tripled this year.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/cina-trappola-debito-zambia/ on Fri, 02 Jun 2023 05:11:42 +0000.