The world’s poorest countries owe close to $1 trillion in debt to private investors and to other countries. The debt-service payments alone in 2022 are projected by the World Bank to have reached $62 billion.
About half of the debt owed to other countries is owed to China, and that has become yet another point of friction between China and the U.S. Treasury Secretary Janet Yellen recently met with Chinese Vice Premier Liu He in Zurich to discuss, among other things, the debt that Zambia owes to China.
“I think a lot of countries were a little too optimistic about their prospects,” said David Dollar, a senior fellow in the John L. Thornton China Center at the Brookings Institution, in an interview with Marketplace’s Sabri Ben-Achour. “That’s generally how you get into debt trouble for the whole country. China has financed a lot of infrastructure around the developing world.”
Below is an edited transcript of their conversation.
Sabri Ben-Achour: So first, how did and why did so many low-income countries become indebted to China in particular?
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David Dollar: I think a lot of countries were a little too optimistic about their prospects. That’s generally how you get into debt trouble for the whole country. China has financed a lot of infrastructure around the developing world. And a lot of that is needed power stations, transport infrastructure. I visited that nice expressway they’re building from Entebbe — Kampala, in Uganda, for example. But how much you can take on depends a lot on your economic prospects. The Chinese loans are somewhat more concessional than private lenders terms, but not very concessional. So you have to grow pretty well in order to service the amount of debt countries have taken on. I think they got too optimistic. And then the COVID pandemic and the global slowdown has hit these countries, commodity prices dropped, and they can’t service their debt. It’s a pretty common story.
Ben-Achour: Some have criticized the way China structures its loans to developing countries. They aren’t allowed, in some cases to disclose the amount or go outside of China to get relief from that debt. What’s the rationale there?
Dollar: Well, China’s pretty secretive about these sorts of things. I think it’s their, essentially their Stalinist tradition, but they can’t stop countries from publicizing this. So as you say, you know, the IMF, the World Bank, you know, they have pretty accurate complete data on all these things. It’s better to be transparent about this. It’s better to be transparent about terms and amounts. Most of these countries are democracies, and people deserve to know what’s being taken on. So I think that Chinese secrecy is really counterproductive at this point.
Ben-Achour: So Zambia defaulted on its debt in 2020, the IMF offered a loan to help the country out. But it basically said, “We will help you with your debt. But you have to go restructure your debt first. Go talk to China about that.” Why is this a U.S.-China issue?
Dollar: Well, the U.S. is the largest shareholder in the IMF. And in some ways, the U.S. is kind of the gatekeeper of global finance, we’ve taken the lead in creating a system that has worked quite well, frankly, for a lot of different countries. So we have an interest in seeing a country like Zambia succeed. We certainly don’t want to see it fail, become a failed state- generate human tragedy, migrants fleeing terrorism, all kinds of things happen in the failed states that we want to avoid. So we have an interest in countries succeeding, and the IMF can step in and help a country like Zambia, you know, once it’s got an economic program, that makes sense. But the IMF will not lend money to a heavily indebted country that then just turns around and pays off its creditors 100%. So the IMF is looking for the creditors to basically take a haircut. And China is, has agreed in principle to do this. But they’ve been very slow to negotiate specific terms with Zambia, or to talk to other creditors about what would be a realistic approach.
Ben-Achour: Treasury Secretary Janet Yellen has complained that it’s taken far too long to resolve this. What is the sticking point? What’s the holdup?
Dollar: Well, China has its own politics. We’re very aware it’s an authoritarian country, but it has different interest groups, you have different banks involved. And these different players that they don’t want to take explicit write-offs that indicate very clearly that they’ve lost money. And that’s part of the debt negotiation game, you know, we recognize that. So the solution might be, for example, for some of those Chinese banks to extend loans on a longer term at a lower interest rate, which is a kind of debt forgiveness, but you can still carry it on your books at 100%. So there’s a lot of internal politicking in China about what’s the approach and what’s needed, and China needs to coordinate with other creditors. There’s a lot of private creditors for a country like Zambia. China wants to see other creditors make commitments. In this situation, you don’t want to be the only creditor who gives relief and restores the country to economic health, because you don’t want to see the other creditors get paid 100% when you’ve gotten paid, say 80% on the dollar, 80 cents on the dollar. So I think both the internal politics and then the international negotiation is unfamiliar to China. It’s typically led by what we call the Paris Club of Creditors. These are basically the rich democracies. You know, China is not a member, doesn’t really want to try to join. So I think China resents being pulled into this international coordination. It’s not really a powerful player in that system.
Ben-Achour: Well, what do you think needs to happen to increase cooperation? How do we get out of this?
Dollar: Well I think Chinese leaders have to show leadership, frankly. You know, as an authoritarian country, you would think Xi Jinping could just knock some heads together and get the Chinese financial institutions … they’re the biggest creditor to Zambia … so they can take the lead and make an offer. They can do their analysis and decide, okay, 20% haircut will restore Zambia to health, and they can make a deal. And then basically, it can be contingent on the other creditors following along. So China could play a leading role in this. It’s just something they’re not used to. They tend to, you know, be relatively quiet and on this kind of diplomatic front. So things have just dragged on for years. And meanwhile, it has real effects in a poor country like Zambia, and that’s just the poster child for this issue. There lots of developing countries with similar problems.
Ben-Achour: Yeah, we talked about, you know, the creditor countries, but ultimately, what’s on the line here for these heavily indebted low-income countries that owe so much money?
Dollar: Well, when you get into this kind of debt situation, so then it’s hard for Zambia to take on any new debt, as you can imagine, you know, who’s going to lend money to Zambia in this situation when they’ve already defaulted on their existing debts. And so that means just lots of ordinary things like trade credit, you know, you need to import some food, it’s normally facilitated by trade credit. You can’t get that basically. You have to worry about if you have a state-owned airline, if your planes fly around the world, they might be seized as an asset. So it creates real sand in the wheels for the economy, and essentially contributes to human tragedy. Basically, these are poor countries that under the best of circumstances are struggling. And now they’ve got this additional difficulty. So it’s hard for them to provide basic social services, hard for them to function for people to improve their lives. And I think it’s a positive thing that the United States takes this whole issue very seriously and is usually a leading force in bringing about some kind of debt rescheduling or debt relief for countries that are in over their heads.