China — the biggest bilateral creditor to emerging markets — needs to be open to agreeing to a new process to rework loans for countries that are burdened by high levels of debt, World Bank President David Malpass said.
(Bloomberg) — China — the biggest bilateral creditor to emerging markets — needs to be open to agreeing to a new process to rework loans for countries that are burdened by high levels of debt, World Bank President David Malpass said.
Officials from the world’s second-biggest economy participated in talks in Washington this week that aimed to end a deadlock among the biggest creditor nations on how to renegotiate poorer nations’ debt.
While there was some progress on issues and Beijing softened its stance, more needs to be done, said Malpass — who was a co-chair of the Global Sovereign Debt Roundtable.
“China needs to be willing to sign off on the structure of the restructuring,” he said in an interview on Bloomberg Television Thursday.
In a later briefing with reporters, Malpass said China was “more receptive to understanding” that multilateral development banks such as the World Bank can’t take losses on outstanding loans because they’re already providing loans at low interest rates.
Debt reduction by the MDBs “doesn’t make sense,” Malpass said. “The World Bank is providing implicit debt relief” through the International Development Association, its arm that provides concessional loans and grants to poorest countries.
The IDA plans to provide even more funding to nations at risk of distress, the roundtable participants said in a statement Wednesday.
Increasing the funding is “an important part of the equation” to getting all creditors on board for speedier debt relief, Malpass said separately.
Speaking after Malpass on Thursday, International Monetary Fund Managing Director Kristalina Georgieva hailed Wednesday’s meeting as “breakthrough” for bringing all participants in the debt-restructuring discussions together. Defining timelines for restructuring will be the top task for the next round of talks.
While the IMF won’t hesitate to use its policy on lending into arrears when there is no other way to provide debt relief, restructuring is the first option, Georgieva said.
The problem with lending into arrears is that it doesn’t bring debt to a sustainable level, and there’s a risk that funds from the IMF could be used to repay the holdout creditor, Georgieva said.
“It is an option that we will use when we believe there is no way to do the best one — to be in plan A. And plan A is to restructure the debt and give the country breathing space to grow.”
The debt-relief efforts, started by the Group of 20 in late 2020, were intended as a way to coordinate traditional creditor nations, like the US and France, with emerging creditors, particularly China, the biggest lender to emerging economies.
Yet that mechanism, known as the Common Framework, has faced repeated delays over differences about how to treat various forms of debt. The Global Sovereign Debt Roundtable — first convened in February — aims to address the impasses and speed up the debt-relief process.
More than 70 low-income nations face a collective $326 billion debt burden. About 15% of low-income countries are already in debt distress and another 45% face high debt vulnerabilities, and the list is growing.
The World Bank, IMF and India, which holds the G-20 presidency this year, co-chaired the roundtable.
Besides China and chairing organizations, participants included official bilateral creditors such as Paris Club chair France, Japan, and the US, as well as debtor countries like Ecuador, Ethiopia, Ghana, Sri Lanka, Suriname and Zambia. The Institute of International Finance, International Capital Markets Association, Blackrock Inc. and Standard Chartered Plc represented the private sector.
More Work
The outgoing World Bank chief said roundtable participants are setting up a working group to work out the technicalities of equal burden-sharing of a nation’s outstanding debt so that all creditors participate in the restructure process.
“This is really important to the people in developing countries, because their governments” are paying high interest rates on the debt, he said. “It’s draining the countries of what they need for nutrition, for health, for education, for climate adaptation.”
Other issues discussed at the debt meeting included the following, Malpass said:
- Some officials said swap lines by China’s central bank should be left out of the restructuring, while others argued for inclusion
- Participants made proposals on what to do about arrears. “As these restructurings drag on, the interest on the interest goes up and up, so can you agree in advance on how to handle that,” Malpass said
- How to calculate net-present-value reduction within a debt restructuring
–With assistance from Lisa Abramowicz, Jonathan Ferro and Tom Keene.
(Updates with comments from IMF chief in ninth paragraph.)
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