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As the COVID-19 pandemic continues causing economic havoc across the globe, more than 70 developing countries are at high risk of defaulting on their debt. These countries are facing the double whammy of high debts and low revenues, leading to a financial crisis. Amidst this crisis, pressure is mounting on China, the world’s largest creditor, to offer debt relief to these countries.
China’s lending to developing countries has surged over the past decade, making it the largest creditor to poorer nations. The Belt and Road Initiative (BRI), which aims to link Asia, Africa, and Europe with a network of ports, highways, and railways, has played a critical role in China’s international lending. However, the COVID-19 pandemic has disrupted BRI projects and revenue streams, causing growing concerns over the ability of these developing countries to service their debts.
The global community, including the IMF and the World Bank, is urging China to offer significant debt relief efforts as it has become clear that these countries are unable to service their debts. Their economies have taken a severe hit from the pandemic, with GDP growth rates plummeting to unprecedented levels. The pandemic has caused a decline in commodity prices, leading to deterioration in revenues for many commodity-dependent countries. But it is not just the pandemic; many of these countries have borrowed beyond their means, without considering the sustainability of their debts or carefully considering the impacts of these debts.
Debt-servicing obligations are the largest expense for many developing countries, often dominating their budgets through principal repayments and interest payments. Debt relief is essential to help these countries recover and invest in their economies. China is expected to take the lead in offering debt relief to these countries, given it is now their largest creditor, but it has been hesitant to do so.
China has raised queries about the legitimacy of debt relief and the need for more transparency regarding debt traps. In some cases, debt relief can create moral hazards, where governments may borrow beyond their means or misuse the funds provided in the guise of debt relief. Additionally, China has concerns about loss of revenue and concerns over credit ratings, among other issues.
The global community has suggested a few ways to mitigate China’s concerns. One step is to work toward debt restructuring. For instance, debt maturities could be extended for a longer period, thereby reducing the immediate debt servicing burden on these countries. Other solutions such as swapping existing loans to lower interest rates or converting them to long-term investments may also be considered.
Moreover, HIPC (Heavily Indebted Poor Countries) Initiative, that ran between 1996 and 2005 and facilitated debt write-offs for a total of $100 billion in debt for eligible countries, can be revisited. In this model, a consortium of donors come together to repay a percentage of the debt owed by impoverished countries to multilateral organizations like the World Bank, IMF, and African Development Bank. Countries that qualify would have their debts reduced, and the savings would be redirected to development projects in those nations.
However, as the global community is pressuring China to offer debt relief, it is also worth remembering that this should not be a one-sided request. The global responsibility to solve the debt burden must be shared, and every country should do its part. It is also essential to remember that the problem of unsustainable debts was created jointly, with both borrowers and lenders responsible for the situation.
Furthermore, China has provided many of these developing countries with loans to finance projects that were inclusive and productive, providing employment and infrastructure for population growth the region. To this end, giving debt relief for non-productive debts will only harm future creditors to Africa, causing the cycle to continue even further. China has called for productive investments, which has turned China’s aid fund into innovative projects, improving many African local technologies while increasing local production of goods.
In conclusion, debt relief is essential for developing countries facing default, particularly now during the COVID-19 pandemic. China, as their largest creditor, has a significant role to play in providing debt relief. However, it is not a one-way request, and every country, including China, should do its part. We must not forget that the burden of unsustainable debts was created jointly, with borrowers and lenders responsible for the situation. Debt restructuring models such as HIPC should be revisited, and every effort should be made to ensure transparency and address the underlying concerns of China. As the WHO Director-General once said, “we are all in this together, and we will get through this together,” and the same applies to debt relief.
