Since Sri Lanka defaulted a year ago on foreign debt, a half-million industrial jobs have vanished, inflation has pierced 50% and more than half the population in many parts of the country has fallen into poverty.
In Kenya, the government has held back paychecks to thousands of civil service workers to save cash to pay foreign loans. The president’s chief economic adviser tweeted last month: “Salaries or default? Take your pick”.
Unforgiving lender
The common thread among all these crises-ridden countries is that their governments took hundreds of billions of dollars in loans from the world’s biggest and most unforgiving government lender, China.
An analysis by the Associated Press of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — revealed that these nations are now struggling to fund their welfare schemes as well as their education and healthcare systems because most of the tax revenue is going towards paying back foreign debt.
Even paying the interest on the loans is costing the nations dear as most of them have nearly exhausted their foreign reserves.
Countries in AP’s analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.
Ambiguity over loan details
Experts say a major reason for the current crisis is China’s reluctance to forgive debt and its secrecy over how much money it has loaned and on what terms.
Ambiguity over loan details is why other money lenders have been reluctant to bail out nations under Chinese debt.
On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.
Experts predict that unless China begins to soften its stance, there could be a wave of defaults and political upheavals. “In a lot of the world, the clock has hit midnight,” said Harvard economist Ken Rogoff, referring to the Doomsday Clock, a symbolic representation of a human-made global catastrophe.
A country destroyed
Zambia, a landlocked country of 20 million people in southern Africa, borrowed billions of dollars from Chinese state-owned banks over two decades to funds its infrastructure drive.
The loans boosted the nation’s economy by also raised foreign interest payments so high that its government was forced to cut spending on subsidies for farmers, healthcare, education and welfare schemes.
As the country struggled with its debt, several nations such as the US, France and Japan came forward to work out a relief deal.
But with China refusing to divulge the terms of its loans, and even refusing to take part in the multinational talks, the efforts failed as no lender wanted to take the risk.
To add to the crisis, the non-Chinese lenders refused Zambia’s plea to suspend interest payments. The nation was forced to dip into its foreign exchange to make the payments, cash that it was using to buy fuel and other major commodities.
By November 2020, Zambia defaulted on its payments.
Since then, inflation in Zambia has soared 50%, unemployment has hit a 17-year high and the nation’s currency, the kwacha, has lost 30% of its value in just seven months. A United Nations estimate of Zambians not getting enough food has nearly tripled so far this year, to 3.5 million.
It was later revealed that Zambia owed $6.6 billion to Chinese state-owned banks, nearly double what was estimated by experts and about a third of the country’s total debt.
Pakistan, Mongolia nearing default
China’s unwillingness to forgive debt has left many countries on a treadmill of paying back interest, which stifles economic growth that would help them pay off the debt. Foreign cash reserves have dropped in 10 of the dozen countries in AP’s analysis, down an average 25% in just a year.
They have plunged more than 50% in Pakistan and the Republic of Congo.
Without a bailout, several countries have only months left of foreign cash to pay for food, fuel and other essential imports.
Mongolia has eight months left. Pakistan and Ethiopia about two.
Global order in chaos
Poor countries have been hit with foreign currency shortages, high inflation, spikes in unemployment and widespread hunger before, but rarely like in the past year.
All of it is roiling domestic politics and upending strategic alliances.
In March, heavily indebted Honduras cited “financial pressures” in its decision to establish formal diplomatic ties to China and sever those with Taiwan.
Last month, Pakistan was so desperate to prevent more blackouts that it struck a deal to buy discounted oil from Russia, breaking ranks with the US-led effort to shut off Vladimir Putin’s funds.
In Sri Lanka, rioters poured into the streets last July, setting homes of government ministers aflame and storming the presidential palace, sending the leader tied to onerous deals with China fleeing the country.
China’s response
Beijing has vehemently refuted its image as an unforgiving lender.
In response to calls by global lenders (IMF, World Bank) to take a loss on its loans, China has hit back saying that the lenders should too.
“We call on these institutions to actively participate in relevant actions in accordance with the principle of ‘joint action, fair burden’ and make greater contributions to help developing countries tide over the difficulties,” the Chinese ministry of foreign affairs said.
China argues it has offered relief in the form of extended loan maturities and emergency loans, and as the biggest contributor to a programme to temporarily suspend interest payments during the coronavirus pandemic. It also says it has forgiven 23 no-interest loans to African countries, though AidData said such loans are mostly from two decades ago and amount to less than 5% of the total it has lent.
(With inputs from agencies)