Under the weight of hundreds of billions of dollars in foreign loans, a large portion of which are from China, the largest and most forgiving government lender in the world, twelve poor countries are at risk of experiencing economic instability and even collapse.
A survey of the 12 nations most indebted to China, including Pakistan, Kenya, Zambia, Laos, and Mongolia, revealed that the tax revenue required to maintain public education, provide energy, and pay for food and gasoline is increasingly being used to pay off this debt. Furthermore, it depletes the foreign exchange reserves that these nations use to pay the interest on their loans, leaving some of them with only a few months’ worth of reserves.
The main reason why other large lenders haven’t stepped in to provide money is China’s reluctance to forgive the debt and its excessive secrecy about how much money it has loaned and under what conditions. The latest discovery that borrowers were obliged to deposit money in secret escrow accounts, which elevates China to the head of the list of creditors to be paid, is added on top of that.
Research shows that countries received up to 50% of their foreign loans from China, and the majority of them used more than a third of their tax revenues to service their debt. Two of them, Zambia and Sri Lanka, have already entered default because they are unable to pay even the interest on loans used to build ports, mines, and power plants.
Millions of Pakistani textile workers have been laid off as a result of the nation’s excessive foreign debt, which prevents it from affording to keep the lights on and the machines operating.
In order to preserve money to pay back foreign debts, the Kenyan government has withheld paychecks from thousands of civil servants. Last month, the main economic adviser to the president tweeted, “Salaries or default? Make your choice.
According to experts, if China doesn’t start to relax its attitude toward lending to underdeveloped nations, there could be a wave of additional defaults and political upheavals.
The clock has struck midnight in many parts of the world, according to Harvard economist Ken Rogoff. “China has moved in and left this geopolitical instability that could have long-lasting effects.”
WHAT IS HAPPENING
Zambia, a landlocked nation of 20 million people in southern Africa, is a case study of how it has played out. Over the past 20 years, Zambia has borrowed billions of dollars from Chinese state-owned banks to construct dams, trains, and roads.
The loans helped Zambia’s economy, but they also increased foreign interest payments to such a high level that the government had to reduce spending on social services, healthcare, and subsidies for fertilizer and seed to farmers.
Large government lenders in the past, including the U.S., Japan, and France, would negotiate accords to erase some debt in such situations, with each lender making it plain what they were owed and under what conditions so no one would feel duped.
China, however, didn’t adhere to them. It initially refused to even participate in multilateral discussions, engaging in separate negotiations with Zambia and insisting on confidentiality, which prevented the government from disclosing to non-Chinese lenders the conditions of the loans or whether China had come up with a strategy to jump ahead in the payback line.
In the midst of this chaos in 2020, a number of non-Chinese lenders rejected Zambia’s frantic requests to halt interest payments, even for a short period of time. Zambia’s foreign cash reserves, which were primarily made up of US dollars and were required to pay loan interest and purchase important commodities like oil, were further depleted as a result of this denial. Zambia ran out of reserves by November 2020 and ceased making the interest payments, locking it out of the borrowing market and starting a vicious cycle of spending cuts and increased poverty.
Since then, Zambia’s inflation has increased by 50%, the country’s unemployment rate has reached a 17-year high, and the kwacha, the currency, has lost 30% of its value in just seven months. According to a UN estimate, the number of Zambians who do not obtain enough food has nearly tripled this year.
The welfare payments for Marvis Kunda, a 70-year-old blind widow in Zambia’s Luapula province, were recently reduced. “I just sit in the house thinking what I will eat because I have no money to buy food,” she said. I occasionally just eat once a day, and if no one remembers to bring me food from the neighborhood, I simply go hungry.
Researchers discovered that Zambia owed Chinese state-owned banks $6.6 billion, more than double what was initially believed and accounting for almost a third of the nation’s entire debt, a few months after Zambia went into default.
“We’re flying blind,” admitted Brad Parks, executive director of AidData, a research lab at the College of William & Mary that has discovered thousands of covert Chinese loans. “You suddenly realize, ‘Oh, there’s a lot of stuff we overlooked,’ when you look beneath the couch’s cushions. The situation is actually far worse.
DEBT AND CHANGE
Due to China’s resistance to accepting significant losses on the hundreds of billions of dollars it owes, as recommended by the International Monetary Fund and the World Bank, many nations are stuck paying interest, which stunts their ability to build their economies and pay off their debt.
In ten of the twelve countries analyzed by reporters, foreign currency reserves have decreased, falling by an average of 25% in just one year. In the Republic of Congo and Pakistan, they have decreased by more than 50%. Several nations have only a few months’ worth of foreign currency left to pay for imports of food, fuel, and other necessities without a bailout. Eight months remain for Mongolia. Ethiopia and Pakistan are around two.
According to Patrick Curran, senior economist at research firm Tellimer, “the adjustment happens right away when the financing taps are turned off.” “The economy weakens, inflation soars and food and fuel prices soar.”
Mohammad Tahir, who lost his work at a textile mill in the Pakistani city of Multan six months ago, claims he has thought about killing himself because he can no longer bear to watch his family of four go to bed without meals every night.
Tahir, who recently learned that Pakistan’s foreign cash reserves have decreased so significantly that it is no longer able to purchase raw materials for his plant, said, “I’ve been facing the worst kind of poverty.” “I don’t know when we would start working,”
Prior to last year, foreign currency shortages, high inflation, increases in unemployment, and widespread hunger were exceptional in developing nations.
The crisis in Ukraine, which has driven up grain and oil prices, and the U.S. Federal Reserve’s decision to hike interest rates 10 times in a row, the latest this month, are two unexpected and terrible developments that have added to the typical mix of governmental mismanagement and corruption. As a result, variable-rate loans to nations have become significantly more expensive.
It’s all causing internal political unrest and dissolving strategic ties.
In March, financially strapped Honduras announced that it will formally establish diplomatic relations with China and break up those with Taiwan. Honduras claimed “financial pressures” as the reason for this move.
Last month, Pakistan broke with the U.S.-led campaign to cut off Vladimir Putin’s funding in order to purchase inexpensive oil from Russia. Pakistan was so eager to stop further blackouts that it did so.
In Sri Lanka, rioters descended on the country’s streets in July of last year, torching the residences of government officials, assaulting the presidential palace, and forcing the exile of the country’s leader who had signed burdensome agreements with China.
CHINA’S REACTION
In a statement, the Chinese Ministry of Foreign Affairs refuted the idea that China is an unforgiving lender and reiterated earlier claims that the Federal Reserve was to blame. It asserted that if the IMF and World Bank, which it considers American proxies, are to agree to its requests to cancel a portion of its loans, then so must those multilateral lenders.
According to the principle of “joint action, fair burden,” “we call on these institutions to actively participate in relevant actions and make greater contributions to help developing countries tide over the difficulties,” the ministry statement read.
In addition to being the largest contributor to a program to temporarily postpone interest payments during the coronavirus pandemic, China claims it has provided relief in the form of delayed loan maturities, emergency loans, and other forms of assistance. It also claims to have canceled 23 no-interest loans to African nations, but according to AidData’s Parks, these loans are primarily from more than two decades ago and represent fewer than 5% of all loans the company has made.
China was reportedly considering waiving its demand that the IMF and World Bank cancel loans during high-level talks in Washington last month if the two lenders agreed to promise grants and other aid to distressed nations. However, no announcement has been made in the weeks that have passed, and both lenders have voiced their displeasure with Beijing.
IMF Managing Director Kristalina Georgieva stated earlier this month, “My view is that we have to drag them—maybe that’s an impolite word—we need to walk together.” “Because if we don’t, many, many nations will face catastrophe.”
The IMF and World Bank claim that accepting losses on their loans would upset the established strategy for handling sovereign crises, which gives them unique treatment because, unlike Chinese banks, they already provide low-interest financing to help struggling nations recover. However, the Chinese foreign ministry pointed out that the two multilateral lenders had previously broken the rules by forgiving loans to numerous nations in the mid-1990s to prevent their collapse.
Some officials are pleading for concessions as time is running short.
According to Ashfaq Hassan, a former debt official at Pakistan’s Ministry of Finance, the IMF and World Bank cannot afford to wait much longer given the size of his country’s debt load. He also demanded changes from the private investment firms that provided loans to his nation by buying bonds.
Every stakeholder will need a haircut, according to Hassan.
China has also disputed the notion that it has engaged in “debt trap diplomacy,” loading up nations with debt they cannot repay so that it might seize ports, mines, and other critical assets. This idea gained traction under the Trump administration.
Experts who have carefully examined the situation have sided with Beijing on this point. Chinese financing is far too disorganized and careless to have been centralized from the top and has originated from hundreds of institutions on the mainland. They claim that Chinese banks are not actually experiencing losses since the timing is terrible, as they are already facing significant losses due to imprudent real estate lending within their own nation and a sharply declining economy.
Experts are eager to warn, however, that a less nefarious Chinese position is not one that is any less terrifying.
Teal Emery, a former sovereign loan analyst who now heads consultancy firm Teal Insights, declared that “no one person is in charge.”
Parks from AidData adds information about Beijing. They essentially make it up as they go. There is no grand scheme.
Loan stealing
Parks deserve a lot of respect for exposing China’s covert debt, as he has faced numerous obstacles, deceptions, and obstacles from the authoritarian regime over the past ten years.
A top World Bank economist asked Parks to take over the task of examining Chinese loans in 2011, which sparked the search. In a few of months, Parks and a few other researchers found hundreds of loans that the World Bank was unaware of using internet data-mining techniques.
At the time, China was stepping up loans that would later become a component of its $1 trillion “Belt and Road Initiative” in order to ensure supplies of essential minerals, win over allies abroad, and increase the value of its holdings of U.S. dollars. Many emerging nations were clamoring for American cash to expand their mining operations and create ports, highways, and power plants.
But after a few years of uncomplicated loans from the Chinese government, those nations found themselves deeply in debt, and the situation looked terrible. They worried that adding new loans on top of existing ones would appear careless to credit rating agencies and increase the cost of borrowing in the future.
As a result, China began establishing front firms for some infrastructure projects and lending to them instead, enabling highly indebted nations to avoid recording that additional debt on their books. No one would know the loans were government-backed even if they were.
For instance, a $1.5 billion loan from two Chinese banks to a fictitious company in Zambia to construct a sizable hydroelectric project didn’t show up on the nation’s books for years.
Chinese financing totaling $4 billion for the construction of a railway in Indonesia likewise never showed up on the government’s open books. All of that changed a few years later when the Indonesian government was compelled to double-bail out the railroad because it had run $1.5 billion over budget.
What was advertised as a private obligation becomes a public debt when these initiatives fail, according to Parks. “Projects like this exist everywhere in the world.”
At least $385 billion of secret and underreported Chinese debt in 88 nations was discovered in 2021, ten years after Parks and his team started their investigation, and many of those countries were in a much worse situation than anybody had previously realized.
One of the revelations was that China had given Laos a $3.5 billion loan to create a railway network, which would require over a fourth of the nation’s yearly GDP to repay.
Around the same time, a different AidData analysis claimed that a lot of Chinese loans flow to initiatives in nations favored by powerful leaders, typically just before crucial elections. Some of the things that were constructed had numerous issues and made little economic sense.
A Chinese-funded airport in Sri Lanka that was constructed in the president’s hometown far from the majority of the nation’s population is so little used that elephants have been seen ambling on its tarmac.
Hydroelectric installations in Uganda and Ecuador, where the government in March received legal clearance for corruption charges related to the project against a previous president currently in exile, are showing signs of wear and tear.
A power station in Pakistan had to be shut down because of the possibility of its collapse. Due to inadequate planning and a lack of funding, the final crucial miles of a railway in Kenya were never built.
SPLITTING THE LINE AT THE FRONT
When Parks looked into the loans’ specifics, he discovered something troubling: clauses requiring borrowing nations to put dollars or other foreign currencies in escrow accounts Beijing might seize if they stopped making loan payments.
In essence, China has moved ahead of other lenders to get payment in secret.
Parks disclosed that a loan for Uganda’s main airport expansion had an escrow account with a maximum balance of $15 million. The main investigator in a legislative investigation argued that the finance minister ought to be charged with a crime and put in jail for accepting such conditions.
Parks don’t know how many of these accounts have been opened, but it’s unusual for sovereign lenders to demand collateral of any type, much less actual cash. Additionally, the very fact that they exist has alarmed non-Chinese banks, bond investors, and other lenders, who are now reluctant to accept less than they are due.
“We’re not going to offer anything if China is, in effect, at the head of the repayment line,” the other creditors are saying, according to Parks. The result is paralysis. “Everyone is assessing each other and wondering, ‘Am I going to be a chump here?'”
“CURRENCY EXCHANGES” AS LOANS
Beijing has adopted a new form of covert lending in the meantime, which has increased uncertainty and mistrust. According to research by Parks and others, China’s central bank has essentially been lending out tens of billions of dollars through transactions that seem to be standard foreign exchanges.
Swaps are foreign exchange transactions that let nations borrow more commonly used currencies like the US dollar to fill short-term gaps in their foreign reserve holdings. They only survive a few months and are only meant to be used for liquidity, not for construction.
But because they continue for years and have higher interest rates than usual, Chinese swaps resemble loans. Furthermore, they are not recorded on the books as loans, which would increase a nation’s total debt.
Such swaps have been taken out by Mongolia for a total of $5.4 billion, or 14% of its overall debt. In three years, Pakistan borrowed around $11 billion, whereas Laos borrowed $600 million.
The swaps can prevent default by restocking currency reserves, but they can also exacerbate a collapse by piling new loans on top of existing ones, similar to what occurred in the years leading up to the 2009 financial crisis when U.S. banks continued to offer bigger and bigger mortgages to homeowners who couldn’t afford the first one.
Some developing nations who have been trying to repay China are currently caught in a kind of loan limbo since China won’t agree to take losses and the IMF won’t provide low-interest loans if the money will only be used to pay interest on Chinese debt.
Since IMF rescue packages for Chad and Ethiopia were approved in so-called staff-level agreements, it has been more than a year, yet almost all of the money has been withheld as the debtors’ negotiations drag on.
Parks attributed it partly to China’s astounding transformation in just a generation to being the world’s largest creditor from a net beneficiary of foreign aid. “You’ve got a growing number of countries that are in dire financial straits,” Parks said.
He remarked, “Somehow they’ve done all of this away of sight. We won’t ever be able to resolve these difficulties unless people have a thorough understanding of how China lends and how its lending processes operate.
