By Bernard Condon - AP
A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world’s biggest and most unforgiving government lender, China.
An Associated Press analysis
of a dozen countries most indebted to China — including Pakistan, Kenya,
Zambia, Laos and Mongolia — found paying back that debt is consuming an
ever-greater amount of the tax revenue needed to keep schools open, provide
electricity and pay for food and fuel. And it’s draining foreign currency
reserves these countries use to pay interest on those loans, leaving some with
just months before that money is gone.
Behind the scenes is China’s
reluctance to forgive debt and its extreme secrecy about how much money it has
loaned and on what terms, which has kept other major lenders from stepping in
to help. On top of that is the recent discovery that borrowers have been forced
to put cash in hidden escrow accounts that push China to the front of the line
of creditors to be paid.
Countries in AP’s analysis had
as much as 50% of their foreign loans from China and most were devoting more
than a third of government revenue to paying off foreign debt. Two of them,
Zambia and Sri Lanka, have already gone into default, unable to make even
interest payments on loans financing the construction of ports, mines and power
plants.
In Pakistan, millions of
textile workers have been laid off because the country has too much foreign
debt and can’t afford to keep the electricity on and machines running.
In Kenya, the government has
held back paychecks to thousands of civil service workers to save cash to pay
foreign loans. The president’s chief economic adviser tweeted last month,
“Salaries or default? Take your pick.”
Since Sri
Lanka defaulted a year ago, a half-million industrial jobs have
vanished, inflation has pierced 50% and more than half the population in many
parts of the country has fallen into poverty.
Experts predict that unless
China begins to soften its stance on its loans to poor countries, there could
be a wave of more defaults and political upheavals.
“In a lot of the world, the
clock has hit midnight,” said Harvard economist Ken Rogoff. “ China has
moved in and left this geopolitical instability that could have long-lasting
effects.”
HOW IT’S PLAYING OUT
A case study of how it has played out is in Zambia, a landlocked country of 20 million people in southern Africa that over the past two decades has borrowed billions of dollars from Chinese state-owned banks to build dams, railways and roads.
The loans boosted Zambia’s
economy but also raised foreign interest payments so high there was little left
for the government, forcing it to cut spending on healthcare, social services
and subsidies to farmers for seed and fertilizer.
In the past under such
circumstances, big government lenders such as the U.S., Japan and France would
work out deals to forgive some debt, with each lender disclosing clearly what
they were owed and on what terms so no one would feel cheated.
But China didn’t play by those
rules. It refused at first to even join in multinational talks, negotiating
separately with Zambia and insisting on confidentiality that barred the country
from telling non-Chinese lenders the terms of the loans and whether China had
devised a way of muscling to the front of the repayment line.
Amid this confusion in 2020, a
group of non-Chinese lenders refused desperate pleas from Zambia to suspend
interest payments, even for a few months. That refusal added to the drain on
Zambia’s foreign cash reserves, the stash of mostly U.S. dollars that it used
to pay interest on loans and to buy major commodities like oil. By November
2020, with little reserves left, Zambia stopped paying the interest and
defaulted, locking it out of future borrowing and setting off a vicious cycle
of spending cuts and deepening poverty.
Inflation in Zambia has since
soared 50%, unemployment has hit a 17-year high and the nation’s currency, the
kwacha, has lost 30% of its value in just seven months. A United Nations
estimate of Zambians not getting enough food has nearly tripled so far this
year, to 3.5 million.
“I just sit in the house
thinking what I will eat because I have no money to buy food,” said Marvis
Kunda, a blind 70-year-old widow in Zambia’s Luapula province whose welfare
payments were recently slashed. “Sometimes I eat once a day and if no one
remembers to help me with food from the neighborhood, then I just starve.”
A few months after Zambia
defaulted, researchers found that it owed $6.6 billion to Chinese state-owned
banks, double what many thought at the time and about a third of the country’s
total debt.
“We’re flying blind,” said
Brad Parks, executive director of AidData, a research lab at the College of
William & Mary that has uncovered thousands of secret Chinese loans and
assisted the AP in its analysis. “When you look under the cushions of the
couch, suddenly you realize, ‘Oh, there’s a lot of stuff we missed. And actually,
things are much worse.’”
DEBT AND UPHEAVAL
China’s unwillingness to take
big losses on the hundreds of billions of dollars it is owed, as the
International Monetary Fund and World Bank have urged, has left many countries
on a treadmill of paying back interest, which stifles the economic growth that
would help them pay off the debt.
Foreign cash reserves have
dropped in 10 of the dozen countries in AP’s analysis, down an average 25% in
just a year. They have plunged more than 50% in Pakistan and the Republic of
Congo. Without a bailout, several countries have only months left of foreign
cash to pay for food, fuel and other essential imports. Mongolia has eight
months left. Pakistan and Ethiopia about two.
“As soon as the financing taps are turned off, the adjustment takes place right away,” said Patrick Curran, senior economist at researcher Tellimer. “The economy contracts, inflation spikes up, food and fuel become unaffordable.”
Mohammad Tahir, who was laid
off six months ago from his job at a textile factory in the Pakistani city of
Multan, says he has contemplated suicide because he can no longer bear to see
his family of four go to bed night after night without dinner.
“I’ve been facing the worst
kind of poverty,” said Tahir, who was recently told Pakistan’s foreign cash
reserves have depleted so much that it was now unable to import raw materials
for his factory. “I have no idea when we would get our jobs back.”
Poor countries have been hit
with foreign currency shortages, high inflation, spikes in unemployment and
widespread hunger before, but rarely like in the past year.
Along with the usual mix of
government mismanagement and corruption are two unexpected and devastating
events: the war in Ukraine, which has sent prices of grain and oil soaring, and
the U.S. Federal
Reserve’s decision to raise interest rates 10 times in a row, the
latest this month. That has made variable rate loans to countries suddenly much
more expensive.
All of it is roiling domestic
politics and upending strategic alliances.
In March, heavily indebted
Honduras cited “financial pressures” in its decision to establish formal
diplomatic ties to China and sever those with Taiwan.
Last month, Pakistan was so
desperate to prevent more blackouts that
it struck a deal to buy discounted oil from Russia, breaking ranks with the
U.S.-led effort to shut off Vladimir Putin’s funds.
In Sri Lanka, rioters poured
into the streets last July, setting homes of government ministers aflame
and storming
the presidential palace, sending the leader tied to onerous deals with
China fleeing the country.
CHINA’S RESPONSE
The Chinese Ministry of
Foreign Affairs, in a statement to the AP, disputed the notion that China is an
unforgiving lender and echoed previous statements putting the blame on the
Federal Reserve. It said that if it is to accede to IMF and World Bank demands
to forgive a portion of its loans, so do those multilateral lenders, which it
views as U.S. proxies.
“We call on these institutions
to actively participate in relevant actions in accordance with the principle of
‘joint action, fair burden’ and make greater contributions to help developing
countries tide over the difficulties,” the ministry statement said.
China argues it has offered
relief in the form of extended loan maturities and emergency loans, and as the
biggest contributor to a program to temporarily suspend interest payments
during the coronavirus pandemic. It also says it has forgiven 23 no-interest
loans to African countries, though AidData’s Parks said such loans are mostly
from two decades ago and amount to less than 5% of the total it has lent.
In high-level talks in
Washington last month, China was considering dropping its demand that the IMF
and World Bank forgive loans if the two lenders would make commitments to offer
grants and other help to troubled countries, according to various news reports.
But in the weeks since there has been no announcement and both lenders have
expressed frustration with Beijing.
“My view is that we have to
drag them — maybe that’s an impolite word — we need to walk together,” IMF
Managing Director Kristalina Georgieva said earlier this month. “Because if we
don’t, there will be catastrophe for many, many countries.”
The IMF and World Bank say
taking losses on their loans would rip up the traditional playbook of dealing
with sovereign crises that accords them special treatment because, unlike
Chinese banks, they already finance at low rates to help distressed countries
get back on their feet. The Chinese foreign ministry noted, however, that the
two multilateral lenders have made an exception to the rules in the past,
forgiving loans to many countries in the mid-1990s to save them from collapse.
As time runs out, some
officials are urging concessions.
Ashfaq Hassan, a former debt
official at Pakistan’s Ministry of Finance, said his country’s debt burden is
too heavy and time too short for the IMF and World Bank to hold out. He also
called for concessions from private investment funds that lent to his country
by purchasing bonds.
“Every stakeholder will have
to take a haircut,” Hassan said.
China has also pushed back on
the idea, popularized in the Trump administration, that it has engaged in “debt
trap diplomacy,” leaving countries saddled with loans they cannot afford so
that it can seize ports, mines and other strategic assets.
On this point, experts who
have studied the issue in detail have sided with Beijing. Chinese lending has
come from dozens of banks on the mainland and is far too haphazard and sloppy
to be coordinated from the top. If anything, they say, Chinese banks are not
taking losses because the timing is awful as they face big hits from reckless
real estate lending in their own country and a dramatically slowing economy.
But the experts are quick to
point out that a less sinister Chinese role is not a less scary one.
“There is no single person in
charge,” said Teal Emery, a former sovereign loan analyst who now runs
consulting group Teal Insights.
Adds AidData’s Parks about
Beijing, “They’re kind of making it up as they go along. There is no master
plan.”
LOAN SLEUTH
Much of the credit for
dragging China’s hidden debt into the light goes to Parks, who over the past
decade has had to contend with all manner of roadblocks, obfuscations and
falsehoods from the authoritarian government.
The hunt began in 2011 when a
top World Bank economist asked Parks to take over the job of looking into
Chinese loans. Within months, using online data-mining techniques, Parks and a
few researchers began uncovering hundreds of loans the World Bank had not known
about.
China at the time was ramping
up lending that would soon become part of its $1 trillion “Belt and Road
Initiative” to secure supplies of key minerals, win allies abroad and make more
money off its U.S. dollar holdings. Many developing countries were eager for
U.S. dollars to build power plants, roads and ports and expand mining operations.
But after a few years of
straightforward Chinese government loans, those countries found themselves
heavily indebted, and the optics were awful. They feared that piling more loans
atop old ones would make them seem reckless to credit rating agencies and make
it more expensive to borrow in the future.
So China started setting up
offshore shell companies for some infrastructure projects and lent to them
instead, which allowed heavily indebted countries to avoid putting that new
debt on their books. Even if the loans were backed by the government, no one
would be the wiser.
In Zambia, for example, a $1.5
billion loan from two Chinese banks to a shell company to build a giant
hydroelectric dam didn’t appear on the country’s books for years.
In Indonesia, a Chinese loan
of $4 billion to help it build a railway also never appeared on public
government accounts. That all changed years later when, overbudget by $1.5
billion, the Indonesian government was forced to bail out the railroad twice.
“When these projects go bad,
what was advertised as a private debt becomes a public debt,” Parks said.
“There are projects all over the globe like this.”
In 2021, a decade after Parks
and his team began their hunt, they had gathered enough information for a
blockbuster finding: China’s hidden loans amounted to at least $385 billion in
88 countries, and many of those countries were in far worse shape than anyone
knew.
Among the disclosures was that
Laos was on the hook for a $3.5 billion Chinese loan to build a railway system,
which would take nearly a quarter of country’s annual output to pay off.
Another AidData report around
the same time suggested that many Chinese loans go to projects in areas of
countries favored by powerful politicians and frequently right before key
elections. Some of the things built made little economic sense and were riddled
with problems.
In Sri Lanka, a Chinese-funded
airport built in the president’s hometown away from most of the country’s
population is so barely used that elephants have been spotted wandering on its
tarmac.
Cracks are appearing in
hydroelectric plants in Uganda and Ecuador, where in March the government got
judicial approval for corruption charges tied to the project against a former
president now in exile.
In Pakistan, a power plant had
to be shut down for fear it could collapse. In Kenya, the last key miles of a
railway were never built due to poor planning and a lack of funds.
JUMPING TO THE FRONT OF THE
LINE
As Parks dug into the details
of the loans, he found something alarming: Clauses mandating that borrowing
countries deposit U.S. dollars or other foreign currency in secret escrow
accounts that Beijing could raid if those countries stopped paying interest on
their loans.
In effect, China had jumped to
the front of the line to get paid without other lenders knowing.
In Uganda, Parks revealed a
loan to expand the main airport included an escrow account that could hold more
than $15 million. A legislative probe blasted the finance minister for agreeing
to such terms, with the lead investigator saying he should be prosecuted and
jailed.
Parks is not sure how many
such accounts have been set up, but governments insisting on any kind of
collateral, much less collateral in the form of hard cash, is rare in sovereign
lending. And their very existence has rattled non-Chinese banks, bond investors
and other lenders and made them unwilling to accept less than they’re owed.
“The other creditors are
saying, ‘We’re not going to offer anything if China is, in effect, at the head
of the repayment line,’” Parks said. “It leads to paralysis. Everyone is sizing
each other up and saying, ‘Am I going to be a chump here?’”
LOANS AS ‘CURRENCY EXCHANGES’
Meanwhile, Beijing has taken
on a new kind of hidden lending that has added to the confusion and distrust.
Parks and others found that China’s central bank has effectively been lending
tens of billions of dollars through what appear as ordinary foreign currency
exchanges.
Foreign currency exchanges,
called swaps, allow countries to essentially borrow more widely used currencies
like the U.S. dollar to plug temporary shortages in foreign reserves. They are
intended for liquidity purposes, not to build things, and last for only a few
months.
But China’s swaps mimic loans
by lasting years and charging higher-than-normal interest rates. And
importantly, they don’t show up on the books as loans that would add to a
country’s debt total.
Mongolia has taken out $5.4
billion in such swaps, an amount equivalent to 14% of its total debt. Pakistan
took out nearly $11 billion in three years and Laos has borrowed $600 million.
The swaps can help stave off
default by replenishing currency reserves, but they pile more loans on top of
old ones and can make a collapse much worse, akin to what happened in the runup
to 2009 financial crisis when U.S. banks kept offering ever-bigger mortgages to
homeowners who couldn’t afford the first one.
Some poor countries struggling
to repay China now find themselves stuck in a kind of loan limbo: China won’t
budge in taking losses, and the IMF won’t offer low-interest loans if the money
is just going to pay interest on Chinese debt.
For Chad and Ethiopia, it’s
been more than a year since IMF rescue packages were approved in so-called
staff-level agreements, but nearly all the money has been withheld as
negotiations among its creditors drag on.
“You’ve got a growing number
of countries that are in dire financial straits,” said Parks, attributing it
largely to China’s stunning rise in just a generation from being a net
recipient of foreign aid to the world’s largest creditor.
“Somehow they’ve managed to do
all of this out of public view,” he said. “So unless people understand how
China lends, how its lending practices work, we’re never going to solve these
crises.”
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