Are Western banks blocking debt relief for poor countries?

  • Saad Hasan
  • 12 Aug 2022

Private Western creditors come under pressure to take a haircut as China and the Paris Club agree to sort out Zambia’s external debt crisis.

Sri Lanka was rocked by protests as prices soared and the country defaulted on its external debt. ( AP )

Millions of people in highly indebted low-income countries continue to suffer in the absence of basic services as their cash-strapped governments wait for private creditors from well-off nations to reschedule troubled loans. 

Chad, Ecuador, Ethiopia, Ghana, Sierra Leone and Sri Lanka are among dozens of countries hit by the pandemic and the Ukraine conflict, which have jacked up food prices and depleted government coffers.

Low-income countries had a debt of $860 billion by the end of 2020, says the World Bank. 

A substantial amount of the debt is owed to Western financial institutions, including banks and asset management firms, which are looking to make handsome gains on their loans. 

An international effort to offer relief to vulnerable governments got a shot in the arm recently when China and France agreed to address the external debt of Zambia, the African copper producer, which defaulted on a loan installment in November 2020. 

“Zambia’s case is significant because with previous debt negotiations there was a tension between eastern and western creditors,” Christopher Vandome, a research fellow at the Chatham House Africa Programme, tells TRT World.

Protests erupted in indebted Argentina last month after lawmakers agreed to seek IMF bailout which requires substantial cut in government spending.(AP)

France is part of the Paris Club, a group of rich creditor countries, including the United States and UK. The club was suspicious of proceeding with debt relief, fearing that it would end up benefiting Chinese firms, which have funded infrastructure projects at a rapid pace in low and middle-income countries in the past decade. 

On the other hand, Beijing was concerned that if it took a haircut – foregoing part of principal and interest payments – the money would go to western financial institutions. 

This suspicion between the two sides had bogged down debt relief negotiations, which started under the Debt Service Suspension Initiative (DSSI), a G20-led effort, that took off in 2020. 

But DSSI wasn’t able to deliver the results hoped for and it was replaced last year by the so-called Common Framework, under which wealthy countries, including China, have tried figuring out ways to help poor countries ride through the tough economic conditions. 

Even though France and China haven’t disclosed details of the agreement or how much of the debt will be waived, the development has opened other avenues for Zambia to borrow concessionary loans. 

The International Monetary Fund (IMF), which had been in talks with Zambia for a $1.4 billion loan, will be more inclined to release the funds now that the Paris Club and China have come to the table, says Vandome. 

While official and multilateral creditors, which include governments and institutions like the World Bank, have been open to the idea of giving debt relief, private creditors have not shown a similar level of enthusiasm. 

Western private creditors such as BlackRock are facing pressure to waive off some of the debt of poor countries.()

Official bilateral creditors rescheduled $12.9 billion in principal repayments, giving breathing space to low-income countries between May 2020 and December 2021, according to a recent Foreign Affairs article

“Unfortunately, only one private creditor chose to participate in the initiative, and only low-income countries were eligible to participate,” it said. That means Sri Lanka and Pakistan, which have seen a rapid decline in their foreign exchange reserves in recent months, can’t benefit from the procedure. 

Contrary to popular narrative, low-income countries are not indebted to China as much as they are at the mercy of the likes of BlackRock, the US-based asset management giant. 

In a research published in July, Debt Justice, an NGO lobbying for bigger loan relief for poor countries, said the African government’s foreign debt to China comes to around 12 percent compared to 35 percent owed to private Western banks. 

"Furthermore, interest rates on private loans are almost double those on Chinese loans, while the most indebted countries are less likely to have their debt dominated by China,” it said. 

African countries owe approximately $132 billion to private creditors,  according to one study. A decade ago, loans coming from private lenders were negligible.

Debt relief lobby groups have long suggested that low-income countries stop paying creditors, including the private sector. 

But private creditors, backed by rating agencies, often use fear-mongering tactics to stop governments from withholding the interest payments. 

“Zambia seems to be the case where these negotiations are working out. Whether or not this is applicable elsewhere is another question. But certainly there are high expectations from all concerned parties to demonstrate that this process works,” says Vandome. 

“Pressure will now start to mount on private creditors. I think that things are in a very good position for them to be part of the wider conversation.”