The new coronavirus has crippled the global economy. Global growth is expected to drop from 2.9% last year to deeply negative territory in 2020, the only year after 2009 that this has happened since World War II. Recovery is likely to be slow and painful. Government restrictions aimed at preventing the resurgence of the virus will inhibit production and consumption, as will defaults, bankruptcies and staff cuts that have already produced record unemployment claims in the United States.
But not all countries will endure the pain of the global recession equally. Low-income countries suffer from poor health infrastructure, hampering their ability to fight the coronavirus, and many of them had dangerously high debt levels even before the pandemic required emergency spending massive. Foreign investors are now withdrawing capital from emerging markets and sending it back to the rich world in search of a safe haven. As a result, countries like South Africa, Kenya and Nigeria see their currencies drop in value, making it difficult, if not impossible, to service foreign loans.
Faced with the threat of financial ruin, poor countries have turned to multilateral financial institutions such as the International Monetary Fund and the World Bank. The IMF has already released emergency funds in at least 39 countries and, by the end of March, more than 40 more had approach there for help. The World Bank has accelerated $ 14 billion for crisis relief efforts. Yet even if they offer extraordinary amounts of aid, the IMF and the World Bank know that these amounts will be far from sufficient. For this reason, they called on the Group of 20 creditor countries to suspend the collection of interest payments on loans they have made to low-income countries. On April 15, the G-20 pledged: all of its members agreed to suspend these repayment obligations until the end of the year – all but one member, that is.
China has adhered to the G-20 pledge but added caveats that mock it. China is effectively excluding hundreds of large loans made under its Belt and Road Initiative (BRI) for infrastructure development. “Preferential loans,” such as those granted by the Import-Export Bank of China (EximBank), “are not applicable to debt relief,” the Beijing spokesperson said. World time the day after the G-20 announcement. EximBank has funded more than 1,800 BRI projects in dozens of countries. By continuing to demand interest payments on loans, China will force poor countries to choose between servicing their debts and importing essentials such as food and medical supplies.
PREFERENTIAL OR PREDATORY?
Based on the information we have gathered from a wide range of sources, we estimate that between 2013 and 2017, China lent more than $ 120 billion to 67 countries, mostly developing, through the BIS. Exact figures are impossible to obtain due to the opacity of these loan agreements. But the loan growth that China reported for 2018 and 2019 suggests that these countries’ BIS debts now total at least $ 135 billion.
China has granted nearly half of all new loans to countries considered to be at high risk of default.
Figures like these put China as the number one international lender. In 2017, Pakistan, for example, had borrowed at least $ 21 billion from China, or 7% of its GDP. South Africa had borrowed about $ 14 billion, or 4% of its GDP. Both countries, like many others, owe much more to China than to the World Bank. Other countries owe China even more as a percentage of GDP. We estimate that in 2017, Djibouti’s debts to China totaled 80% of GDP; Ethiopia accounted for almost 20% of the GDP. And Kyrgyzstan, one of the first countries to receive IMF funds for the coronavirus, owed China more than 40% of its GDP. Since 2013, China has provided almost half of all new loans to countries considered to be at high risk of default.
China charges substantial interest on its loans. Although Beijing calls its rates “preferential,” some BRI projects, especially the larger ones, bear interest rates. more than three percentage points higher than the cost of capital of Chinese banks, about four to six percent. World Bank dollar loans to low-income countries, on the other hand, tend to have low rates. just above one percent. And given that China itself is one of the World Bank’s biggest borrowers, with $ 16 billion in outstanding loans, the country effectively borrows cheaply from the developed world and repays, through the BIS, a significant increase.
AN IMPOSSIBLE CHOICE
Chinese low-income borrowers depend on the dollar, the euro, and other major foreign currencies to pay for their imports and repay their debts. But many lack sufficient reserves to cover both. Zambia, a BRI client who has borrowed more than 6 billion dollars from China, has enough reservations cover only two-thirds of the foreign payments it will have to make in the coming year. Imports and debt servicing over the next year are expected to wipe out South Africa’s total reserves. If these countries default on their sovereign debt, which increasingly seems likely, they would be excluded from international credit markets and unable to manage the fiscal and trade deficits needed to curb the pandemic.
If the developing world cannot repay its debts, the global health and economic crisis will only worsen.
However, these countries are not the only ones to suffer from it. Even if defaults only start in a few countries, they will spread widely as investors flock to US Treasuries, German Bunds, gold and other traditional safe havens. At the beginning of April, foreign investors had already took of over $ 96 billion from all emerging markets, an exit rate well above that of the last financial crisis. As a result, the South African rand and the Brazilian real have each fallen 25% so far this year. Additional capital outflows will push these currencies down any further, the costs of sending essential imports are skyrocketing. Food prices are already prick across Africa. The United Nations projects that the continent will need to spend an additional $ 10.6 billion on health care this year to fight the pandemic, with foreign medical supplies and pharmaceuticals making up a large part of that. Increased capital flight therefore means greater malnutrition, faster disease transmission and more migration.
In short, if the developing world cannot repay its debts, the global health and economic crisis will only get worse. China, where the pandemic started, has certainly taken an economic hit. But with over $ 3 trillion in foreign exchange reserves and a currency that has remained stable throughout the crisis, it is much better positioned to weather the storm than most of its borrowers. These borrowers, with plummeting currencies, capital flight and threatening medical bills, are unable to repay the BIS to China.
Although commentators have long compared the BIS to a Marshall Plan for developing countries, the two initiatives could not be more different in their approach. The size of the funding may be comparable (US Marshall aid was worth about $ 145 billion in current dollars), but the similarities end there. Marshall aid consisted entirely of grants, while BIS funding consisted almost entirely of debt. This debt is now choking developing countries as they struggle to emerge from a devastating pandemic. Rather than adding to their woes, China should do its part to help lift these nations out of the crisis. It can start by declaring a full moratorium on BIS debt repayment until at least mid-2021.