Before the end of the year, developing countries have to pay $35 billion of foreign debt: 40% is owed to China. Dialogue between the Chinese, the World Bank and the Monetary Fund on debt cancellation or restructuring is difficult. Beijing risks losing prestige (or throwing state banks into crisis).
Beijing () – With the global economic crisis looming, China risks losing billions of dollars lent to poor countries struggling with the effects of the Covid-19 pandemic and the Russian war against Ukraine. . According to data from the World Bank, of the 35,000 million dollars of debt that developing countries have to pay before the end of the year, 40% is owed to China.
Beijing is the world’s leading lender. The United States and its allies claim that Chinese loans are actually “debt traps” for the most vulnerable states. Indeed, many loans from Chinese state-owned creditors have received “collateral” guarantees from client governments.
Various studies have shown the opacity of Chinese financial schemes: almost nothing is known about the actual conditions under which loans are granted or how repayment problems are addressed. The researchers found that, in order to grant the loan, Chinese state-owned banks require client countries to give priority to repaying debts owed to them.
In addition, the real amount of the sums lent is unknown. Last September, AidData revealed that to the “official” debt of poor countries with China must be added a “hidden” part, not declared by the governments concerned -nor by Beijing- to the control system of the World Bank debt, which in total is around 350 billion dollars.
Like the world’s other major economies, Beijing is under pressure to write off or restructure the debt of poor countries, 60% of which have debt problems, according to estimates by the International Monetary Fund. However, analysts point out that on this issue there are problems in the dialogue between the Chinese government, the World Bank and the Monetary Fund.
The most striking case of foreign debt default at the moment is that of Sri Lanka. Colombo accumulates debts with foreign institutions for 38,600 million dollars, 47% of the national GDP, and about 10% corresponds to China. At the beginning of the year, Sri Lanka did not pay an overdue debt of 7 billion dollars. When the Gotabaya Rajapaksa government failed to reach an agreement with China on debt cancellation or restructuring in April, Colombo suspended payments to some of its foreign creditors pending a review of terms.
Minxin Pei, an expert on China affairs at Claremont McKenna College in the US, points out that China now faces a dilemma: if it puts pressure on troubled debtors like Sri Lanka, it will not get back what it borrowed while destroying its international reputation. ; but if it writes off the debt, it will put its state-owned banks in crisis, forcing the government to cover the losses.
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