‘In a lot of the world, the clock has hit midnight’: China is calling in loans to dozens of countries from Pakistan to Kenya
A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world’s biggest and most unforgiving government lender, China.
According to an analysis by the Associated Press, several countries heavily indebted to China, including Pakistan, Kenya, Zambia, Laos, and Mongolia, are struggling to repay their debts, which are increasingly consuming a significant portion of their tax revenue. The debt repayments are affecting essential services such as education, electricity, and food and fuel subsidies. Moreover, these countries' foreign currency reserves, used to pay interest on the loans, are being drained, leaving them with limited time before running out of money.
China's lack of transparency regarding the terms and amounts of the loans, as well as its reluctance to forgive debt, has deterred other lenders from stepping in to assist. In some cases, borrowers have been required to deposit cash in hidden escrow accounts that prioritize China as the primary creditor to be paid.
Many countries have over 50% of their foreign loans from China and allocate more than a third of their government revenue to servicing foreign debt. Zambia and Sri Lanka have already defaulted on their loans, resulting in economic turmoil, job losses, inflation, and rising poverty rates. The report warns of potential further defaults and political unrest if China does not adopt a more lenient stance on its loans. The situation in Zambia serves as a case study, where borrowing from Chinese state-owned banks for infrastructure projects led to soaring interest payments, forcing the government to cut spending on crucial sectors and eventually default on its debt.
Inflation has surged, unemployment has reached a 17-year high, and millions of Zambians are facing food shortages and poverty. China's refusal to bear significant losses on the debt has hampered economic growth in indebted countries and caused foreign cash reserves to decline, leading to currency shortages, inflation, unemployment, and widespread hunger. The report also highlights the potential consequences of the debt crisis, including political upheaval, shifts in alliances, and the erosion of global stability.
While China disputes the notion that it is an unforgiving lender, it argues that multilateral lenders such as the IMF and World Bank should also forgive debt to assist developing countries. The lack of a coordinated approach and China's insistence on repayment have left countries with limited options. The report emphasizes the urgency of concessions and collaborative efforts from various stakeholders to prevent a catastrophic outcome.
The analysis also credits the work of researchers in uncovering the extent of China's hidden debt, which has revealed that at least $385 billion of debt is undisclosed or underreported in 88 countries. It further highlights the existence of secret escrow accounts where borrowing countries are required to deposit foreign currency as collateral, enabling China to prioritize repayment over other lenders. China's use of foreign currency exchanges, known as swaps, as a form of hidden lending has added to the complexity and distrust in the debt landscape.
Condon, B. (2023, May 18). In a lot of the world, the clock has hit midnight: China is calling in loans to dozens of countries from Pakistan to Kenya. Fortune. Retrieved from https://fortune.com/2023/05/18/china-belt-road-loans-pakistan-sri-lanka-africa-collapse-economic-instability/