China's Belt and Road lending is being examined more closely after the IMF tightens debt limits

China: According to experts, infrastructure projects of the Belt and Road Initiative backed by China are beginning to feel the effects of new transparency requirements of international financial institutions, aimed at curbing the sovereign debt crisis. In organizations such as the International Monetary Fund (IMF) and the World Bank, "stability" and "transparency" have become a topic of discussion as concerns about the rise in global interest rates and the development of world credit risks rage.

Former senior employees and analysts claim that international organisations, historically dominated by the United States and other wealthy conglomerates of 7 countries, are insisting on greater disclosure from lenders, including loan contracts with China. Concerns about a potential debt crisis in low-income countries, which have become more urgent in the wake of the economic shock of the COVID-19 pandemic, are driving stricter lending standards, including the IMF's new debt ceiling policy, which had come into force. According to Ottaviano Canuto, Senior Fellow at the Policy Center for the New South based in Morocco, the IMF and the World Bank have determined that many of them are on an unstable path, according to assessments of debt stability of specific developing countries.

 

Given these circumstances, both organizations recommend some debt restructuring as a necessary next step, continued Canuto, a former vice president and executive director of the World Bank as well as an IMF executive director. According to a March report by the Green Finance and Development Center at Fudan University in Shanghai, China is the second largest individual creditor to developing countries after the World Bank. More than a quarter of the $52.8 billion in debt service payments made this year by the world's 68 poorest countries will go to China. Despite playing a key role in development finance, China has come under criticism, particularly from the United States, for not being transparent enough about its debts, fueling claims of "debt trap diplomacy". There are "some signs," according to EdData, the Development Finance Research Center of William & Mary, an American University in Virginia, that the IMF is pressuring borrowers to reveal more details about the terms of their Belt and Road loan agreements. , especially those which can make coordinated debt restructuring more challenging with other creditors.

 

According to Bradley Parks, executive director of EdData, they have focused on cash collateral clauses in [Belt and Road Initiative] loan contracts, for example, which give China the first priority claim on foreign exchange among borrower countries. Many countries participating in the Belt and Road Initiative, including Pakistan, are already feeling the effects of stricter transparency requirements. In an effort to avoid the debt crisis, the South Asian country and the IMF reached a preliminary agreement in mid-July for a US$6 billion bailout. Pakistan's economic crisis has been made worse in recent weeks by the depreciating rupee and rising prices of essential commodities such as oil and gas.

 

In order for Pakistan to receive the funding package, the IMF "pushed" Pakistan to disclose all its internal and external debts, according to Muhammad Faisal, a research fellow at the Institute of Strategic Studies in Islamabad. He said that western countries had requested for transparency of the entire debt of Pakistan, including the loan given to China. According to statements made by Pakistani ministers, the information was shared with the IMF after consultation with the Chinese side. In the interest of borrowers, creditors and financial stability, the IMF and all its members have given top priority to credit transparency. In addition to a new loan-holder profile, "our recently revised credit limit policy has strengthened transparency requirements," he claimed.

 

Our updated policy on sovereign outstanding has focused on debt transparency, partly because sovereign debtors are now required to give their creditors a complete picture of their debt load, upcoming debt obligations and collateralized debt. Parks claims the US government is "encouraging" the IMF to increase oversight of loan agreements. "The Sovereign Debt Contract Capability Act (HR 4111), passed by the House of Representatives on October 25, 2021, instructs the US Executive Director at the IMF to use America's voice and vote to advocate for the promotion of international standards gives," he said.

They claimed that the action is aimed at strengthening the ability of countries eligible for assistance from the International Development Association of lower middle income countries and the World Bank to assess the legal and financial terms of sovereign debt contracts. The value and feasibility of costly infrastructure projects in developing countries financed by China have been the subject of heated discussion in recent years. To stabilize its macroeconomic situation, Zambia last week canceled US$1.6 billion of approved but unpaid Chinese loans, mostly from the China Exim Bank and the Industrial Commercial Bank of China. Since then, China has agreed to a debt restructuring that makes it possible for the southern African country to access a US$1.4 billion IMF bailout.

 

When Zambia failed to pay US$17 billion in external debt, including US$3 billion in bonds in 2020, it became the first African nation to default during the pandemic. About US$6 billion is owed to Chinese lenders used to fund Lusaka's megaprojects, such as the construction of airports, highways and power dams.

Through the Belt and Road Initiative, China has come under fire for plunging some developing countries into debt so that it can gain political clout and seize strategic assets in the event of default. However, some Western scholars and Chinese authorities have refuted this theory.

 

Former central bank governor Zhou Xiaochuan said in April at the Boao Forum for Asia that businesses in debt-ridden countries sought most of the lending for Belt and Road projects, which could ultimately lead to economic gains.

He acknowledged that poor communication and some Chinese borrowings have not always been "carefully designed", however.

The representative of the African Union in China, Rahmatalla Mohamed Osman Elner, refuted the notion of a "Chinese debt trap in Africa" ​​while speaking at a forum on debt stability in Beijing last week.

 

After our independence in the 1960s and 1970s, the debt crisis began in African countries; China was freed from the debt trap, he said at a conference co-organized by the China Forum and the Department of International Relations at Tsinghua University's International Security and Strategy Center.

When discussing debt as a crisis, China is not included as most of the debt is currently in Africa. According to Hu Shisheng, a senior research fellow and director of the Institute for South Asian Studies at China's Contemporary Institute, the debt-trap narrative is used by the US and other Western countries to suppress China's growing influence in developing countries. International Relations.

Take for example the debt crisis in Pakistan and Sri Lanka. He said Chinese debt represented only 10% of each country's total debt. China and the West have opposing ideologies, with the former insisting that building roads would bring prosperity and the latter emphasizing the need to save enough money before doing so.

 

China has become more cautious about funding its Belt and Road initiative in light of tighter credit monitoring by international financial institutions, with its major policy banks becoming more skeptical about borrowers' ability to repay loans. The state-owned China Road and Bridge Corporation recently completed and inaugurated the Nairobi Expressway, which was built and financed by the corporation, a prime example of the gradual transformation of belt and road projects in Africa such as power plants and highways.

Through a public-private partnership, the elevated dual carriageway was made possible. The Chinese company will recover its investment by collecting tolls for 27 years before handing over ownership to the Kenyan government. Before now, public debt financing was the dominant one.

 

To highlight the shortcomings of the US and its allies borrowing from China on how to best finance infrastructure and other investments, as part of "a long-running battle between Beijing and Washington" "Debt issues" are likely to continue. James Crabtree, executive director of the Singapore-based International Institute for Strategic Studies. In agreement with him, Murtaza Jafferji, head of the Advocate Institute in Sri Lanka, insisted that the major powers were competing for influence in underdeveloped countries in a geopolitical game.

That geopolitical game was in full view, following Sri Lanka's $51 billion in US dollar debt in April. Amid the ensuing chaos, the US pointed to China's importance as a significant creditor to the island nation. Last month, Beijing was urged by US Treasury Secretary Janet Yellen to restructure its bilateral debts with the country.

For its part, China has attributed the causes of global economic instability - which has created "shock waves for developing countries" such as Sri Lanka - to the monetary and fiscal policies of industrialized nations. It is unclear how closely China will aspire to the IMF's debt stability standards in the future. However, the threat of a debt crisis among developing countries is not going away anytime soon. According to Crabtree, the world is likely to experience "the same kind of debt stress that contributed to Sri Lanka's ongoing political crisis in other emerging countries" as a result of a slowing global economy.

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