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The world’s poorest countries owe close to $1 trillion in debt to private investors and other countries, with debt-service payments projected to reach $62 billion in 2022, according to the World Bank. This staggering debt has become a point of tension between China and the United States, as roughly half of the debt owed to other countries is owed to China.
In a recent interview with Marketplace’s Sabri Ben-Achour, David Dollar, a senior fellow in the John L. Thornton China Center at the Brookings Institution, explained that many of these countries were too optimistic about their economic prospects and took on too much debt. China has financed a lot of infrastructure in the developing world, but the COVID-19 pandemic and global economic slowdown have made it difficult for these countries to service their debt.
Some have criticized the way China structures its loans to developing countries, as they are not always allowed to disclose the amount or seek relief from debt outside of China. Dollar believes that this secrecy is counterproductive and that countries deserve to know what debt they are taking on.
The issue has also become a U.S.-China issue, as the U.S. is the largest shareholder in the International Monetary Fund (IMF) and has an interest in seeing countries like Zambia succeed. However, the IMF will not lend money to a heavily indebted country that then just turns around and pays off its creditors 100%. The IMF is looking for the creditors to take a “haircut” and for China to negotiate specific terms with Zambia and other creditors.
China has been slow to negotiate these terms, and Treasury Secretary Janet Yellen has complained that the process has taken far too long. Dollar believes that this is due to internal politics in China and the desire of different interest groups and banks to avoid explicit write-offs that indicate they have lost money. The solution may be for Chinese banks to extend loans on a longer term at a lower interest rate, which is a form of debt forgiveness, but allows the banks to still carry the debt on their books at 100%.
