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
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.
Total sovereign debt stands at a 50-year high – the equivalent of more than 200 per cent of global GDP. This year, developing countries must pay an estimated US$381 billion in debt service on medium- and long-term external debt, World Bank statistics show. The top 10 debtors alone owe almost 60 per cent of this debt service.
China is the largest bilateral creditor, accounting for half of bilateral debt and 66 per cent of debt-service payments owed to government creditors last year, according to the World Bank. That said, Chinese lenders’ share of debt has been shrinking, with loans to African governments falling from US$28.4 billion in 2016 to US$1.9 billion in 2020.
While China’s arrangements carry unusual confidentiality terms, similar blame could be pointed at other lenders. All this argues for what should be a top priority: an exhaustive inventory of debt obligations.
China did join the G20 Common Framework for Debt Treatments. Launched in 2020 to prevent borrowers falling into insolvency, this forum involves countries that are not members of the Paris Club, an informal group of creditor nations, the Group of 20 countries and private creditors to ensure fair burden-sharing in achieving a swift and comprehensive debt overhaul.
China – the reluctant debt relief leader in a debt-distressed world
Arguments over the need for reforms began almost immediately after the framework was founded. The process needs clear steps with more rigorous timelines. More incentives are needed to attract reluctant creditors, both public and private, and deepen their commitments.
The efforts of the G20 must extend beyond deal-making in two ways. They must build capacity in financial management within debtor nations’ governments and demand more rigour in everything from lending decisions to accountability in how the funds are used.
Many barriers extend beyond those impediments perceived to come solely from China. Getting beyond the China narrative will be an important step in addressing this urgent crisis and salving human suffering.
James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC