China’s increasingly dominant role as a lender to poor countries has deterred many of them from seeking debt relief for fear of losing access to future Chinese funds, according to the head of the Paris Club group of wealthy creditor nations.
Nations “didn’t want to create difficulties with China”, Emmanuel Moulin, chair of the Paris Club and head of the French Treasury, told the Financial Times.
Indebtedness among low-income nations has risen sharply since the start of the pandemic, as healthcare and other costs pushed up public spending while the severe global recession hit output and government receipts.
This triggered an international effort to ease their debt burden. The Debt Service Suspension Initiative (DSSI), launched by the G20 group of large economies in April last year, let the world’s poorest countries, mostly in sub-Saharan Africa, postpone interest payments owed to official bilateral creditors.
It was originally due to expire at the end of last year but was extended twice and will now end on December 31.
Despite this, few nations have chosen to tap the scheme; just 42 out of 73 eligible countries have applied for support. The $12.7bn deferred fell far short of initial estimates which suggested the DSSI would provide about $20bn of relief in 2020 alone.
This relatively low take-up is partly because of the rapidly growing role China plays in lending to other nations, Moulin said. China has become by far the biggest bilateral lender to countries eligible for the DSSI in recent years, and now accounts for almost two-thirds of their bilateral debts.
“Some countries have decided not to apply for the final [DSSI] extension as they didn’t want to create difficulties with China,” Moulin said. “Some countries have preferred to talk to China and other creditors about new money rather than requesting help under the DSSI.”
However, China has made by far the biggest contribution to the DSSI. Calculations by the Jubilee Debt Campaign, an NGO, estimate that it has deferred payments of $5.7bn, while $4.5bn was deferred by Paris Club member states.
The Paris Club was formed by creditor nations in 1956 to address debts owed by nation states around the world, at a time when its membership dominated the global market for bilateral lending. Today 22 high- and middle-income countries are members.
China has not joined the group and has disagreed with the club over the classification of some of its loans, although it agreed to mirror the Paris Club’s approach to the DSSI.
Moulin said that overall, “We can’t complain about the participation of China in the DSSI. They have been very fair in the way they have implemented it”.
The G20 scheme also called on debtor countries to ask their commercial creditors, such as bondholders and banks, for similar treatment to that provided by bilateral lenders. No participating country has done so, for fear of losing access to future borrowing or causing a downgrade to their credit ratings, which could lead to default.
Participating countries must make up the deferred amounts in full over the following four to six years.
Several factors have eased financial conditions for developing countries since the early months of the pandemic, easing the pressure on them to address their debt burdens. These include the huge liquidity pumped into global markets by the world’s leading central banks, higher commodity prices and an injection of liquidity by the IMF this summer.
As a result, Moulin said, in recent months “the situation was not the same as it was at the start”.
The G20 has devised a common framework for debt treatment beyond the DSSI that will come into force next year. It is much narrower in scope and will only be open to countries with unsustainable debts at risk of falling into default. So far only Ethiopia, Chad and Zambia have asked to take part.
Moulin said progress on the common framework had been slower than expected. “There has been some criticism of the slowness of the process. It is true and we are cognisant of the fact. We would have liked it to be faster,” he said.