The International Monetary Fund’s chief said China is shifting its thinking about participating in debt restructuring after being confronted by countries unable to pay what they owe, signaling hope the world’s second-largest economy will help provide relief for distressed nations.
China — now the biggest lender to developing economies — has joined traditional western creditors from the Paris Club in recognizing the need to create a better mechanism for debt overhauls, Kristalina Georgieva said in an interview with Stephanie Flanders, the head of economics and government at Bloomberg News, at the Milken Institute Global Conference in Beverly Hills, California.
One of the biggest challenges for the country is simply gaining an understanding of the scope of its own lending, given the historical lack for coordination between disparate government agencies and entities, Georgieva said. While China long resisted providing relief, citing its own status as a developing country, that thinking is beginning to change, she said.
“Why? For a very simple reason,” the IMF chief said. “Because they are now being burned. Nothing makes you more eager to understand debt restructuring than when a country says ‘Sorry, I can’t pay you back.’”
“My view is that we have to drag them — maybe that’s an impolite word — we need to walk together. Because if we don’t, there will be catastrophe for many, many countries.”
More than 70 low-income nations face a collective US$326 billion debt burden, with more than half of them already in or near debt distress, including Zambia, Ethiopia and Ghana. In many cases, China is the largest creditor, including Zambia, where about 75% of the debt that needs to be restructured is owed to the nation, Georgieva said.
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Efforts to restructure those debts, and rescue those economies from crisis, have been hampered over disagreements between traditional creditors like the Paris Club — mainly Western rich nations — and new entrants like China.
That failure of cooperation among creditors was a key theme at last month’s Spring Meetings of the IMF and World Bank. That included the so-called Global Sovereign Debt Roundtable, which was broadly tasked with hammering out a way forward for resolving debt treatment among all creditors.
China participated “quite constructively” in the discussions and has offered to host some technical meetings of the roundtable, Georgieva said.
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The IMF chief said that a March visit to China and meetings with Premier Li Qiang and vice ministers showed her that China wants to work with the Group of Seven nations and the IMF. She added that the fund’s review of members’ quotas, or weighting of countries at the lender, is important for adequately addressing the growing importance of emerging markets like China.
“Unless we address it, the strength of the IMF as a meeting place is going to be affected,” she said. The 15th review concluded in 2020 with no increase in quotas. The 16th is currently ongoing and expected to be completed in mid-December.
China at last month’s meetings softened its insistence that multilateral lenders like the World Bank take haircuts, or losses, on their debt along with all other creditors. That came amid an apparent concession by the World Bank to boost ultra-low interest loans and grants to countries in debt distress.
