Debt management has become a key challenge for many emerging markets as the coronavirus pandemic continues, with major creditors debating the suspension and perhaps even reduction of debt.
In mid-October the G20 nations announced they were extending a debt suspension initiative for some of the world’s poorest nations.
This means that the Debt Service Suspension Initiative (DSSI), initially rolled out in June, will now run until the end of June 2021, with some suggesting that it could be further extended until the end of next year.
The DSSI offers a moratorium on bilateral loan repayments owed to G20 members and their policy banks. The scheme is available to 73 low-income nations, allowing them to use funds to address the social and economic fallout from the pandemic.
As of November 6, 44 countries had applied for some form of debt suspension, according to the World Bank.
The bank calculates that the DSSI could result in a total of $12.2bn in cumulative savings for these emerging markets, with countries such as Pakistan ($3.6bn), Angola ($1.8bn), Kenya ($630.8m) and Ethiopia ($472.9m) among those that stand to save the most under the scheme.
One aspect that is central to post-pandemic debt management is China’s inclusion in the DSSI.
Of the $178bn in official bilateral debt that the world’s poorest countries owed to G20 nations last year, 63% came from China – up from 45% in 2013 when the country launched its Belt and Road Initiative.
As a result of extensive lending in recent times, China is the largest contributor to the DSSI, suspending $1.9bn in repayments this year out of a total of $5.3bn across the G20 bloc, according to international media.
Although the scale of China’s debt suspension measures is significant, critics argue that China should engage more with other nations on multilateral debt issues.
China is not a member of the so-called Paris Club – a group of mostly Western creditor countries – and has traditionally preferred to conduct debt negotiations on a bilateral level.
While this recent cooperation has thus been welcomed, there has been frustration over a perceived lack of transparency with regard to China’s debt deals, and the fact that many of its state-backed creditors are not participating in the scheme.
For example, while loans from the Export-Import Bank of China are eligible for the DSSI, China considers other institutions, such as the China Development Bank, to be commercial lenders, meaning that they can choose whether to participate in the initiative.
Another concern relates to potentially unsustainable debt burdens some emerging markets accept from China. Much of this debt has been concentrated in sub-Saharan African countries.
While China announced in October that it would waive interest-free loans due to mature by the end of the year in 15 African countries, these loans only make up around 5% of the continent’s total debt to China, limiting the measure’s overall impact.
Researchers from John Hopkins University estimate that $143bn in Chinese loans were provided to Africa between 2000 and 2017. Of this, Angola alone received $43bn, while other estimates have suggested that Ethiopia received $13.7bn from China between 2002 and 2018 to help fund a series of infrastructure projects.
As OBG has detailed, many of these loans are offered at commercial rates and secured against collateral or other commodities, meaning that China has much leverage over emerging markets that default on repayments.
For example, in December 2017 Sri Lanka formally ceded 70% control of Hambantota Port to a Chinese state-owned firm on a 99-year lease, after it was unable to service loans used to build the $1.3bn strategic gateway on the Indian Ocean.
Calls for reduction not suspension
While many have welcomed the DSSI, there are concerns that the initiative might not be enough to adequately reduce the debt burden on countries suffering economically as a result of the Covid-19 downturn.
Analysis released by the non-governmental European Network on Debt and Development in October found that the DSSI only covered 1.66% of debt repayments due from developing countries this year.
The group noted that the failure of private and multilateral lenders to participate in the scheme was severely reducing its impact. Without further action, it is feared that a number of countries could start to default on their repayments.
For example, Zambia’s government announced on October 13 that it would suspend debt service payments to external commercial creditors.
In light of these challenges, major global creditors, including the World Bank, have urged G20 officials to look beyond the DSSI’s debt deferral system and consider the option of debt reduction.