The following is a guest post by David Sacks, a research fellow at the Council on Foreign Relations, and Max Yoeli, a New York-based attorney who is a policy advisor and speechwriter to former Secretary of the Treasury Jacob J. Lew.
Jennifer Hillman and David Sacks are codirectors of the CFR-sponsored Independent Task Force on a U.S. Response to China’s Belt and Road Initiative, which is co-chaired by Jacob J. Lew and Gary Roughead.
The Spring Meetings of the World Bank Group and International Monetary Fund (IMF) convene virtually this week against the backdrop of a historic health crisis and an uneven economic recovery. The COVID-19 pandemic precipitated the most serious economic downturn since the Great Depression, causing the global economy to contract by 3.5 percent last year. While some countries are beginning to bounce back, emerging market and developing economies face a longer recovery, as many lack access to vaccines and the fiscal space to deploy significant economic stimulus.
As the World Bank and IMF seek to put the world economy on a more stable footing and promote sustainable growth, there is one issue they cannot ignore: China’s Belt and Road Initiative (BRI). China’s massive global infrastructure program has increased debt levels to a worrying extent in many developing countries, threatening to hinder their economic recovery. The Bretton Woods institutions need to confront this issue head-on, rather than sweeping it under the rug.
BRI meets significant development needs, by funding and building physical and digital infrastructure projects around the world. That is the good news. The bad news, as our recent Council on Foreign Relations Independent Task Force points out, is that BRI also contributes to economic instability. China’s lending practices have increased indebtedness to alarming levels in some BRI partner nations. Because they enjoy state backing, China’s state-owned commercial and policy banks can relax lending criteria and finance projects that nobody else will, even as they generally lend on commercial rather than concessional terms. As a result, China has funded many large projects that cannot pay for themselves, leading host countries to become overextended and economically fragile.
Even before COVID-19, the World Bank estimated that nearly one-third of BRI countries were at high risk of debt distress. Although BRI is just one factor behind such debt pressure, there is no doubt that its megaprojects have deepened the macroeconomic plight of many nations. In Pakistan, the $62 billion China-Pakistan Economic Corridor helped precipitate a balance of payments crisis, necessitating a $6 billion IMF bailout. Sri Lanka, unable to make debt payments to its Chinese creditors, handed over control of a port for 99 years. Kenya offers another cautionary tale, as fears grow that the country will be unable to repay China for its disastrously unprofitable $4.7 billion railway.
The COVID-19 pandemic struck when many BRI partners were at their most vulnerable: projects had not yet begun to pay for themselves, and countries started facing debt payments alongside increased healthcare and social expenditures, even as state revenues plummeted. As a result, many countries have found it difficult to repay their BRI loans, increasing the risk of debt crises. Should these materialize, ailing countries will be forced to make painful tradeoffs. Meanwhile, debt distress boosts China’s geopolitical leverage over partner nations, especially given Beijing’s practice of using foreign assets as loan collateral. While it is unlikely China will seize infrastructure, that very possibility may lead countries to defer to China on political or strategic issues, to the detriment of the United States.
BRI borrower nations clearly need relief, and many have sought it directly (see the chart above). Before COVID-19, Malaysia and Myanmar renegotiated unsustainable deals, and countries from Serbia to Thailand delayed, shrunk, or cancelled BRI projects. Since the pandemic began, however, newly urgent requests for debt assistance have found only limited success. China rarely cancels debt, instead opting to increase loan maturity, reschedule payments, and extend new credit (see the chart below).
China’s lending practices make it difficult for borrower nations to obtain—or even seek—relief. Beijing regularly insists on confidentiality clauses that prevent borrowers from disclosing the terms of debt, and sometimes its very existence. Chinese lending contracts often prohibit collective restructuring processes, including through the Paris Club. And China also inserts expansive cross-default, stabilization, and other contract clauses that allow it to demand immediate repayment should a host country take an action deemed contrary to Chinese interests.
The Spring Meetings offer an opportunity to shine a light on China’s problematic lending practices and its inadequate response to rising debt across BRI nations, which risk undermining the nascent global economic recovery. The World Bank and IMF should press China to publish data on its overseas lending and advocate for improved transparency in BRI projects, which would help ensure more reliable macroeconomic oversight. The World Bank should also begin the process of returning the focus of its lending activities to infrastructure to ensure that countries with legitimate financing needs have a high-standards alternative to BRI. The United States could encourage this shift by advocating for recapitalization of the World Bank and other multilateral development banks.
Following the Spring Meetings, the United States should work with like-minded countries in the IMF to make clear that the Fund will not bail out nations that take on unsustainable debt through BRI. At the same time, the United States should support coordinated efforts to provide some relief to nations that have become overextended. This should include extending through the end of the year the G20’s Debt Service Suspension Initiative, which currently permits seventy-three eligible countries to suspend debt-service payments through June 2021. The United States should also marshal multilateral pressure on China to treat BRI-related claims as official debt, subject to generous restructuring terms. Finally, the United States and its partners should implore China, the world’s largest official creditor, to join the Paris Club so that during the next crisis it cannot pursue opaque bilateral consultations.
The Spring Meetings should address BRI’s pitfalls and advance policies to help put BRI countries on the path toward recovery and sustainable growth. The United States should work with its partners under the auspices of the World Bank and IMF to offer an alternative to BRI and press China to improve its lending practices—to protect against macroeconomic instability, promote higher standards of development cooperation, and boost the nascent economic recovery.