China’s increasingly dominant role as a lender to poor countries has dissuaded many from seeking debt relief for fear of losing access to future Chinese funds, according to the club’s group chief. of Paris of rich creditor countries.
The nations “did not want to create difficulties with China,” Emmanuel Moulin, president of the Paris Club and head of the French treasury, told the Financial Times.
The indebtedness of low-income countries has risen sharply since the onset of the pandemic, as health care and other costs have pushed up public spending as the severe global recession hit government production and revenues.
This sparked an international effort to ease the burden of their debt. The Debt Service Suspension Initiative (DSSI), launched by the G20 group of major economies in April last year, has allowed the world’s poorest countries, mostly in sub-Saharan Africa, to defer payments interest owed to official bilateral creditors.
It was originally scheduled to expire at the end of last year, but has been extended twice and will now end on December 31.
Despite this, few countries have chosen to operate the program; only 42 of the 73 eligible countries have requested assistance. The $ 12.7 billion carried over was well below initial estimates which suggested that the DSSI would provide around $ 20 billion in relief in 2020 alone.
This relatively low participation is in part due to the growing role China is playing in lending to other countries, Moulin said. China has become by far the largest bilateral lender to DSSI-eligible countries in recent years, and now accounts for nearly two-thirds of their bilateral debt.
“Some countries have decided not to apply for the final [DSSI] extension because they did not want to create difficulties with China, ”said Moulin. “Some countries preferred to talk to China and other creditors about new money rather than asking for help under the DSSI.”
However, China has made by far the greatest contribution to DSSI. Calculations by Jubilee Debt Campaign, an NGO, estimate that it deferred payments by $ 5.7 billion, while $ 4.5 billion has been deferred by Paris Club member states.
The Paris Club was formed by creditor countries in 1956 to settle debts owed by nation states around the world, at a time when its members dominated the global bilateral loan market. Today, 22 high- and middle-income countries are members.
China has not joined the group and disagrees with the club on the classification of some of its loans, although they have agreed to reflect the Paris Club’s approach to the DSSI.
Moulin said that overall, “we can’t complain about China’s participation in DSSI. They were very fair in the way they implemented it ”.
The G20 agenda also called on debtor countries to demand treatment from their commercial creditors, such as bondholders and banks, similar to that given by bilateral lenders. No participating country has done so for fear of losing access to future borrowing or causing a downgrade in its credit rating, which could lead to default.
Participating countries must fully compensate deferred amounts over the next four to six years.
Several factors have eased the financial conditions of developing countries since the early months of the pandemic, easing the pressure on them to face the burden of their debt. These include the enormous liquidity injected into global markets by the world’s major central banks, rising commodity prices and an injection of liquidity by the IMF this summer.
As a result, said Moulin, in recent months “the situation was not the same as at the beginning”.
The G20 has developed a common framework for dealing with debt beyond the DSSI which will come into effect next year. It is much narrower in scope and will only be open to countries with unsustainable debts at risk of defaulting. So far, only Ethiopia, Chad and Zambia have requested to participate.
Moulin said progress on the common framework had been slower than expected. “There have been criticisms of the slowness of the process. It is true and we are aware of it. We would have liked it to be faster, ”he said.