‘Clock has hit midnight’: China loans pushing world’s poorest countries to brink of collapse
May 18, 2023 -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.”
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.”