China should take the lead in providing debt relief
China’s share of debt service payments for developing countries as a whole is high.
Following the launch of the new report, "Chinese and World Bank Lending Terms: A Systematic Comparison Across 157 Countries and 15 Years," by the Washington DC-based think tank, Centre for Global Development (CGD), on April 2, 2020, Financial Nigeria published a news story on the report.
Jide Akintunde, Managing Editor of Financial Nigeria publications, subsequently spoke with Scott Morris, a senior fellow at CGD and one of the authors of the comparative study of loans provided by China and World Bank.
Jide Akintunde (JA): Congratulations on your new study on the comparative terms for loans provided to developing countries by China and the World Bank. What were the key insights from the study?
Scott Morris (SM): Nothing more to add here beyond what we have said in the press release. https://www.cgdev.org/article/coronavirus-raises-debt-sustainability-concerns-new-report-shines-light-chinas-lending
JA: Although the terms of China’s debt are less favourable, African countries have pivoted more to China in recent years. What factors are responsible for this?
SM: We didn’t address this in the study, but I would argue that it’s less a pivot than simply accepting the additional credit that is on offer from China. African countries continue to borrow as much as possible from multilateral lenders like the World Bank. Nevertheless, these funds are limited. China has offered an additional source of credit for infrastructure investments, and African governments have been eager to take up these offers.
JA: Your study supplies new data in the debate on bilateral vs. multilateral debt. Do you think China provides a basis for generalisation in the debate?
SM: No comment provided.
JA: In the period covered by your data, for example, China provided just 34% of the combined Chinese and World Bank debts for Nigeria. Nevertheless, you have recommended that China should take the lead in providing relief to developing countries facing (the threat of) debt distress. Why?
SM: The current limited data and projections we have from the International Monetary Fund (IMF) and World Bank suggest that China’s share of debt service payments for developing countries as a whole is high. It’s almost certainly the case that developing countries owe more to China each year than to any other bilateral creditor.
As a result, China will need to play a leading role among these creditors in sorting out debt restructurings and relief amidst this crisis.
JA: The debt, debt distress, and debt relief loop has brought little development to Africa and the rest of the developing world. Is it time to consider a new and more effective model for development assistance for poor countries?
SM: The past decade was generally a favourable one for African countries when it comes to overall development, including investments in infrastructure. That said, debt concerns began to re-emerge three to four years ago, reflecting easier access to credit (from China and commercial creditors in particular).
The current crisis caused by the coronavirus pandemic presents a massive economic shock that will greatly exacerbate these debt problems, but we should recognize that the shock itself had nothing to do with African countries’ borrowing decisions or fiscal management.
JA: How urgent is the need to provide debt relief for countries that really need it, given the potential economic impacts of Covid-19?
SM: A standstill in current payments would be very helpful in creating immediate fiscal space for these countries as they confront the pandemic and its economic effects.
Beyond that, sorting out debt restructuring and reductions among different categories of creditors will take some time and will need to be specific to each country’s needs. The overriding imperative at this moment in the crisis is to ensure as much financing as possible is flowing to these countries to bolster their fiscal responses.
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