Last week, China's foreign minister announced that it had agreed to waive 23 loans to 17 African countries under its Belt-and-Road Initiative.
This news sounds good for the debtor countries. Who doesn't want their debt wiped out? Two things make the story even more interesting. First, China is the world's largest bilateral lender and the second-largest creditor after the World Bank. Most of the emerging economies’ loans are to China. Reports show that about 50 developing countries owe China debt worth about 17% of their GDP. Of those fifty, 12 (like the Maldives, Democratic Republic of Congo and Niger) owe at least a fifth of their nominal GDP to China in loans.
A key theme of Chinese loans to emerging economies is that Chinese lenders typically include terms that give them leverage over debtor countries and these countries’ other creditors.
One way they do this is through confidentiality clauses. But this is not peculiar to Chinese lenders alone. The absence of a globally accepted mode of sovereign debt data transparency means lenders and debtors disclose debt information based on discretion.
Securitisation is another theme common in Chinese sovereign debt. Again, this is common in sovereign lending. Despite this, the terms are typically dependent on the strength of institutions in the debtor countries.
The second thing that makes China's debt forgiveness news more relevant is that many emerging countries are at risk of defaulting on their loans, thanks to Covid and Russia. In some cases, countries have resorted to barter to pay off their debt, like how Sri Lanka plans to send Iran $5 million worth of tea every month until it can repay its $251 million debt. Other countries like Zambia first requested a pause in their interest payments but, when they couldn’t get this request, cried to the world's largest creditors for debt restructuring.
Now, more than ever, these emerging economies need debt forgiveness and restructuring to prevent a debt default.
While we applaud the good news, it's important