IMF Calls on China to Expand Debt Relief to World’s Most Vulnerable Countries

A Chinese laborer works at a construction site on reclaimed land, part of a Chinese-funded project for Port City, in Colombo, Sri Lanka, on Feb. 24, 2020. ISHARA S. KODIKARA/AFP via Getty Images

WASHINGTON—The International Monetary Fund (IMF) urged China to expand debt relief for the world’s poorest countries that have suffered the devastating effects of the pandemic.

Global public debt is projected to hit a record high next year, reaching the size of the global economy, according to the IMF. This is partly because governments around the world had to increase spending to fight the coronavirus and recover from its economic fallout.

“Addressing this issue over the medium-term will be critical. But for many low-income countries, urgent action is required now,” Kristalina Georgieva, IMF managing director, said during a press conference on Oct. 14.

“Given their heavy debt burdens, they are now struggling to maintain vital policy support. They need access to more grants, concessional credit, and debt relief.”

Both the World Bank Group and the IMF have been urging the Group of 20 (G-20) economies, including China, to provide debt relief to the world’s 76 poorest countries and allow them to redirect funds toward fighting the pandemic.

G-20 countries approved a debt service suspension initiative (DSSI) in April, freezing debt repayments for the poorest countries through the end of this year. And the group announced on Oct. 14 that the countries would extend the debt service suspension by an additional six months, until June 2021.

The DSSI offers a temporary pause of “official sector” or government-to-government debt payments. Private creditors, however, haven’t participated in the initiative.

“There is a very strong call for the private sector to participate,” Georgieva said during the press conference.

“Unfortunately, we haven’t seen it happening. Out of the 44 countries that have subscribed, only three have reached out to private creditors.”

Beijing is a signatory to the DSSI agreed to by the G-20 countries. China is crucial to this initiative, as it has become the world’s largest creditor to low-income countries in recent years.

Through its Belt and Road Initiative (BRI), Beijing has poured billions of dollars in loans into poor countries to help build their infrastructure projects.

BRI’s massive construction projects are financed mainly through a wide range of Chinese local government and state-controlled institutions.

“In terms of China’s institutions and their participation, it has been an open question,” Georgieva said.

While some of the Chinese lenders participated in the DSSI, she said, there are others that haven’t yet participated.

“And what we are also hearing from China is a recognition that they are a relatively new creditor, but they’re a very large creditor, and they need to mature domestically in terms of how they handle their own lenders, the coordination among them.”

China’s BRI has contributed to the substantial external debt buildup in many low-income countries, according to a recent report by the Institute of International Finance (IIF).

Over the past two decades, China has become a major global lender, with outstanding debt exceeding $5.5 trillion in 2019—more than 6 percent of global gross domestic product, the IIF report stated.

In addition, an academic study published by the Kiel Institute for the World Economy suggests that the Chinese overseas loans may be larger than reported. Up to 50 percent of Chinese loans are “hidden,” as they’re not reported to the IMF or World Bank, the report states.

Hence, China’s nontransparent lending practices also amplify debt vulnerabilities in poor countries.