Under the pressure of hundreds of billions of dollars in foreign loans—many of them from China, the largest and most forgiving government lender in the world—dozen impoverished countries are at risk of economic instability if not outright collapse.
A survey by the Associated Press of the 12 nations most indebted to China, including Pakistan, Kenya, Zambia, Laos, and Mongolia, revealed that the tax income required to maintain public education, supply energy, and pay for food and gasoline is increasingly being used to pay off this debt. Furthermore, it depletes the foreign exchange reserves that these nations need to pay the interest on their loans, leaving some of them with only a few months’ worth of reserves.
- Advertisement -
The main reason why other large lenders haven’t stepped in to provide money is China’s unwillingness to forgive the debt and its excessive secrecy about how much money it has given and under what conditions. The latest finding that borrowers were obliged to deposit money in secret escrow accounts, which elevates China to the front of the list of creditors to be paid, is added on top of that.
China accounted for up to 50% of the foreign loans taken out by the countries in the AP investigation, and the majority of them were using more than a third of their tax revenues to service their debt. Zambia and Sri Lanka, two of them, are already in default, struggling to pay even the interest on loans used to build ports, mines, and power plants.
Millions of Pakistani textile workers have been laid off as a result of the nation’s excessive foreign debt, which prevents it from affording to keep the lights on and the machines operating.
In order to preserve money to pay back foreign debts, the Kenyan government has withheld salaries from thousands of state servants. Last month, the main economic adviser to the president tweeted, “Salaries or default? Make your choice.
More than half of the population in several regions of Sri Lanka has plunged into poverty since the country’s defaulted a year ago, which has resulted in the loss of 500,000 industrial jobs, inflation exceeding 50%, and all of these problems.
According to experts, there may be a wave of more defaults and political upheavals unless China starts to relax its attitude on its loans to underdeveloped nations.
As Harvard economist Ken Rogoff put it, “The clock has hit midnight in a lot of the world.” He added, “China has moved in and left this geopolitical instability that could have long-lasting effects.”
Zambia, a landlocked nation with a population of 20 million in southern Africa, provides a case study of how it has been carried out. Over the last 20 years, Zambia has received billions of dollars from Chinese state-owned banks in loans to construct dams, trains, and highways.
The loans strengthened Zambia’s economy, but they also increased foreign interest payments to such a high level that there was nothing left for the government. As a result, it was forced to reduce expenditure on social services, healthcare, and subsidies for seed and fertilizer for farmers.
In previous years, in similar conditions, major government lenders like the US, Japan, and France would negotiate agreements to erase some debt, with each lender making known what they were due and under what conditions so no one felt duped.
China, however, didn’t adhere to them. It first refused to even participate in multilateral discussions, engaging in separate negotiations with Zambia and insisting on confidentiality, which prevented the government from disclosing to non-Chinese lenders the conditions of the loans or if China had come up with a strategy to jump ahead in the payback line.
Due to China’s resistance to accepting significant losses on the hundreds of billions of dollars it owes, as recommended by the International Monetary Fund and the World Bank, many nations are stuck paying interest, which stunts their ability to build their economies and pay off their debt.
