[DongleDongle] "IMF Hesitates, China Throws Tantrums"... Developing Countries Can't Escape Debt Burden

China Holds Half of External Debt of Over 10 Countries
Providing Loans as Part of Belt and Road Initiative
Demands IMF to Bear Losses
IMF Backs Down Under China's Influence

Recently, the debt issues of developing countries such as Sri Lanka and Pakistan have emerged as major concerns in the international community. China’s loans account for the majority of developing countries’ debt, and as these countries find themselves unable to repay, concerns about China’s economic colonization have grown.

In this situation, the International Monetary Fund (IMF) has stepped in to restructure the debts of developing countries, but market experts continue to criticize the IMF relentlessly.

Despite the IMF’s efforts, is there little significant progress in resolving the debt problems of developing countries? Today, we will explore how developing countries have come to bear such enormous debts and why the IMF is facing criticism.

[Image source=Yonhap News]

◆ China Uses Loans as Bait for Economic Dependence... Accounts for Half of External Debt

The international community is currently pressuring China to alleviate the debt burden of developing countries. The Paris Club, consisting of 22 countries including the United States, France, Germany, South Korea, and Japan, demanded earlier this year that China participate in debt relief for Sri Lanka.

The reason the international community is urging China to act is that about ten of the poorest countries are currently trapped in the debt snare set by China. According to an analysis by the Associated Press of the debt situations of 12 countries including Zambia, Uganda, Ghana, the Democratic Republic of Congo, Mongolia, and Pakistan, more than 50% of these countries’ external debt is owed to China. These countries are spending more than one-third of their government revenues on debt repayment.

Shehbaz Sharif, Prime Minister of Pakistan (left), and Xi Jinping, President of China (right) [Image source=Yonhap News]

Given this situation, Zambia and Sri Lanka, which have fallen into default, are unable to pay interest on loans for port and mine construction. Kenya has also experienced delays in paying the salaries of thousands of public servants due to debt repayments. Sri Lanka, which was pushed to the brink, has somewhat stabilized since the IMF’s bailout support began, with monthly inflation rates dropping from as high as 74% to the 20% range, but it still remains trapped in poverty.

China’s massive loan distribution is analyzed as a result of its active promotion of the overseas infrastructure development project called the “Belt and Road Initiative” (land and maritime Silk Road). China has sought to expand its influence in developing countries by providing huge funds to countries that lack repayment capacity. Since 2000, China has extended loans totaling $240 billion (312.48 trillion KRW) to developing countries, far exceeding the $144 billion disbursed by the IMF during the same period.

As this situation persisted, the international community eventually moved to rein in China. It could not simply stand by as China used loans as bait to economically subordinate developing countries. Accordingly, the finance ministers of the Group of Twenty (G20) established a “Common Framework” for debt restructuring in the poorest countries.

◆ IMF Hesitant to Pressure Debt Restructuring Due to China’s Influence... Reluctant to Disclose China’s Debt

The problem is that China is not actively participating in debt relief. Last month, China announced it would join the Common Framework, outwardly showing a commitment to debt restructuring.

However, the reality was different. It has been revealed that China is actually obstructing debt repayments. Major foreign media outlets such as the Associated Press reported that China demands secrecy regarding the size and terms of loans it has extended to developing countries, preventing other countries from providing support. Additionally, China has demanded that the IMF bear the losses incurred during the debt restructuring process.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF)

The IMF should be actively involved in debt restructuring, but it has shown little significant movement. The IMF has maintained a passive stance and refrains from openly criticizing China. Experts point out that the IMF is cautious, trying to avoid upsetting the balance between China and other creditors.

The IMF fears that restructuring the debts of developing countries could spark disputes between China, the largest creditor, and other debt holders. For example, Zambia, currently awaiting IMF bailout funds, has stated that it can use up to 80% of the funds allocated for external debt repayment to pay China.

However, even after defaulting, Zambia has issued regional currency-denominated bonds in its domestic market. Foreign investors holding these bonds worry that Zambia might repay only China, which leads them to argue that China or the IMF should also bear losses on these bonds.

For these reasons, the IMF avoids strongly pressuring China, fearing a major conflict between China and other creditors. Mark Sobel, chairman of the Official Monetary and Financial Institutions Forum (OMFIF), a UK think tank, criticized, “The IMF needs to adopt a much more explicit and aggressive stance on China’s debt restructuring. The IMF hopes to avoid conflicts between creditors and debtor countries and has only proposed restructuring terms while stepping back.”

Thus, impoverished countries are struggling with debt restructuring due to China’s obstruction and the IMF’s ambiguous stance. We hope that the debt repayments of developing countries will be resolved as soon as possible.

This content was produced with the assistance of AI translation services.