Spain debt

IMF: China has more say on the debt of poor countries

Although debt ratios are lower than in the mid-1990s, debt has increased over the past decade and the composition of creditors has shifted from mainly Western countries to China.

The world’s poorest countries have become heavily dependent on China for credit and this will make future debt restructurings “more complex”, according to a study by staff of the International Monetary Fund (IMF).

Although debt ratios are lower than in the mid-1990s, debt has increased over the past decade and the composition of creditors has shifted from mainly Western countries to China.

Boosted by low interest rates, high investment needs, limited progress in raising additional domestic revenue and strained public financial management systems, the debt ratios of countries covered by the G20 Debt Service Suspension Initiative (DSSI) increased, partly reversing a decline observed in the early 2000s.

Today, the economic shocks of Covid-19 and the war in Ukraine add to the debt problems facing low-income countries, even as central banks begin to raise interest rates.

In recent decades, the poorest countries have borrowed mainly from the 22 betting club nations – Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, South Korea, Netherlands, Norway, Russia, Spain, Sweden, Switzerland, United Kingdom and United States.

Today, China and private bondholders play a much larger lending role, IMF researchers say Guillaume Chabert, Martin Cerisola and Dalia Hakura.

The share of external debt of DSSI countries to Paris Club creditors fell to 11% in 2020 from 28% in 2006.

Over the same period, the share due to China rose from 2% to 18%. The share of Eurobonds sold to private creditors increased from 3% to 11%.

“The changing composition of creditors will make restructurings more complex,” they wrote, without specifying the nature of the complexity.

“Beijing would therefore play a key role in debt restructurings of most DSSI countries that would involve official bilateral creditors,” they wrote.

China is now the largest official bilateral creditor in more than half of DSSI countries, including counting the 22 Paris Club creditors as one pool.

“While the diversity of creditor compositions calls for greater attention to country specificities, appropriate coordination mechanisms will be essential in any case,” the IMF trio wrote.

Most heavily indebted countries are in Africa. Among the 41 DSSI countries at high risk or in debt distress, Chad, Ethiopia, Somalia and Zambia have already requested debt treatment.

Around 20 others show significant breaches of the applicable high risk thresholds, half of which also have low reserves, rising gross funding needs or a combination of both in 2022.

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george russell

George Russell is a Hong Kong-based freelance writer and editor who has lived in Asia since 1996. His work has appeared in the Financial Times, Wall Street Journal, Bloomberg, New York Post, Variety, Forbes, and South China Morning Post. . .