Bank complex on the Huangpu River in Shanghai – many foreign loans are threatened with default.
Photo: imago/Imaginechina-Tuchong
The world is heavily in debt. But what is discussed primarily as a fundamental economic policy issue in rich countries like Germany causes existential problems in poorer countries. Among the countries most at risk is Pakistan, a country that cooperates with China and, with 227 million people, is one of the most populous in the world.
In July 2022, Pakistan was downgraded from “stable” to “negative” by the rating agencies Fitch and Moody’s. In addition to political instability and environmental disasters, it is above all the high foreign debt of around 120 billion US dollars that is weighing on the South Asian country. Foreign debts usually have to be settled in US dollars or euros. Since the Pakistani rupee has been losing value against these currencies for years, and even drastically since January, buying raw materials or diesel, for example, is almost unaffordable. Another consequence is the extremely high inflation of 35 percent, which hits poorer sections of the population particularly hard. The country has just over a month left on its reserves to finance imports, and $4.5 billion in loans are due to be repaid by the end of the second quarter.
Pakistan’s payment difficulties are by no means an anomaly. “64 percent of the countries in the Global South are critically or very critically indebted, compared to 37 percent before the outbreak of the corona pandemic,” said Kristina Rehbein from the debt relief alliance Erlassjahr.de, explaining the results of the recently published “Debt Report 2023”. Another Asian crisis like that of 1997/98 is imminent if the creditors do not restructure and cancel their debts. In the past, the “Paris Club”, which brings together the most important creditor states from the global North, and the International Monetary Fund (IMF) played a decisive role in the necessary negotiations.
At the week-long spring meeting of the IMF and World Bank, which began in Washington on Monday, the risk of a debt crisis in poor countries and persistently high inflation will dominate much of the discussion. Other topics are the development of the world economy, the reform plans at the World Bank, the turbulence in the banking sector and the consequences of climate change.
In the IMF, the USA is still the largest shareholder with 17.5 percent of the voting rights. With a recently increased share of 6.4 percent, China only plays a minor role, while the People’s Republic is becoming increasingly important in the international economy and also as a creditor. It has already provided over $240 billion in bailout loans to 22 countries, according to a study involving well-known Harvard professor Carmen Reinhart and Christoph Trebesch of the Kiel Institute for the World Economy.
One reason: More and more emerging and developing countries to which China granted loans as part of the New Silk Road project launched in 2010 can no longer service them as planned. According to the study, by the end of 2022, 60 percent of all Chinese foreign loans were at risk of default. Before the Silk Road offensive, it was only five percent. These are mostly refinancing loans, i.e. the extension of terms or the granting of new loans to finance maturing debts. »Debt waivers are extremely rare.« Chinese banks have drastically reduced lending for new projects as a result of the rescue operations, which according to the study »raises questions about the future of the New Silk Road«.
According to the authors, Beijing treats debtor countries very differently. Middle-income countries pose major balance sheet risks for Chinese banks, accounting for more than $500 billion, or 80 percent of China’s total foreign lending. The leadership in Beijing is therefore very interested in preventing the payment default. It usually offers new loans to pay off old debts. Since many of these countries have poor credit ratings and low foreign exchange reserves, the default risk for the new loans is correspondingly high.
In contrast, loans to low-income countries are much less important for the stability of the Chinese banking sector. They rarely receive new funds because of this. In the event of payment difficulties, they generally only have the option of national bankruptcy or debt restructuring, for example by extending the due dates.
“Beijing is ultimately trying to bail out its own banks,” says the study. Which fits the picture that Klaus Schilder, development finance expert at Misereor, paints: China does not use debt “as a political weapon.” The fact that loan negotiations with Beijing are dragging on is due to the complicated decision-making processes in which private and state-owned companies and banks are just as involved as the government. For Pakistan, which is classified in the lower category of middle-income countries, China is the most important creditor with more than 20 billion US dollars.