The View

Lenders must look beyond China narrative to fix developing world’s debt crisis

By any measure, the debt crisis of developing economies and emerging markets is enormous, unsustainable and escalating even looking past geopolitical tensions

More incentives are needed to get reluctant creditors to deepen their commitments while improving capacity and decision-making in debtor nations

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US Treasury Secretary Janet Yellen speaks during a visit to Mwalumina village in Zambia on January 24. Calls for greater debt relief and refinancing for developing countries such as Zambia have been hampered by geopolitical tensions and a lack of transparency. Photo: Reuters

James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC.

Published: 4:30pm, 1 Feb 2023

The Biden administration is stepping up pressure on China to restructure loans that are overwhelming poor countries. The latest salvo comes from US Treasury Secretary Janet Yellen, who singled out China last week as a “barrier” obstructing two years of multilateral talks to lessen Zambia’s debt burden.

During visits to capitals in sub-Saharan Africa – intended to reverse years of perceived neglect by Washington – Yellen walked a tightrope in her messages to China and her hosts.

She held to the narrative that casts Beijing as Africa’s largest and most onerous government lender while offering US support as a benevolent alternative. But she also pivoted towards her Chinese counterpart, Liu He, by acknowledging his evolving “constructive” approach as he signalled during their first face-to-face meeting before she left for Africa.

Meanwhile, in January China’s Export-Import Bank offered Sri Lanka a two-year debt moratorium, supported the island nation’s US$2.9 billion loan request to the International Monetary Fund (IMF) and encouraged all parties to join negotiations. At the start of the new year, China’s new foreign minister toured Africa, his predecessors’ tradition for three decades.

The geopolitics aside, by any measure the debt crisis of developing economies and emerging markets is enormous, unsustainable and escalating. The difficulties to avert default multiply in step with the US dollar’s appreciation, higher interest rates led by the US Federal Reserve, a slowing global economy, volatile commodity markets and inflation’s effects on imports of necessities from food to medical supplies to energy. “Time is not our friend,” IMF managing director Kristalina Georgieva has said.

These risks have forced down market values of distressed debt. Alarmed, investors withdrew a record US$70 billion from emerging market bond funds last year. Debt refinance costs are prohibitive, running at about 13 per cent. Meanwhile, extreme poverty conditions have engulfed increasing numbers of people.