Gif that his country is on the brink, Pakistan’s Economy Minister Mohammad Ishaq Dar is strangely calm. In the week ended January 20, his administration burned a quarter of its dollar reserves, leaving $3.5 billion to cover loan repayments and imports that are likely to more than double in the first quarter of the year. Two days later, ministers shut down the power grid to save fuel. Political decision-makers then abandoned a currency peg. The rupee plummeted but Mr Ishaq Dar stayed cool. Pakistan’s prosperity, he said, is in God’s hands.
Your browser supports this
Save time by listening to our audio articles while multitasking
Divinity usually takes the form of the IMF, provider of 21 bailouts to Pakistan since 1960 or Western governments. But the global infrastructure for dealing with irresponsible and unhappy economies is in crisis. China’s lending, which has been growing for two decades, has reached a critical mass. Western financiers are at a standoff with a lender too big to ignore but too irascible to participate in a restructuring. Countries that have borrowed from China and been hit by Covid-19 and rising interest rates are mired in turmoil – few as mired as Pakistan.
Prior to China’s lending, Western countries created a framework to restructure distressed debt. Beginning in 1956, lenders merged on the basis that all repayments would reschedule on the same terms. Eventually, debt relief became a priority. That worked as long as crisis countries were mainly indebted to the West. However, China is now the largest sovereign creditor in at least half of the 38 countries the World Bank estimates are defaulting or close to default.
And China refuses to play by the old rules. In an attempt to get it in the fold that G20 has worked out a new set for 2020. But the Common Framework has turned out to be an empty agreement. In theory, the signatories agree to accept similar restructuring terms. In reality, they have too little in common to get the process started.
Restructuring has all but disappeared since the pandemic. Four countries – Chad, Ethiopia, Ghana and Zambia – have asked for help under the framework. Only Chad has secured a deal and is rescheduling payments rather than canceling them. In addition, Chad’s debt was small ($3 billion) and China’s share small ($264 million or 2% of Chad). bip). In 2017, the World Bank calculated that the average low-income country owes China 11% bipa number that will only have increased.
China’s refusal to accept write-offs is the main problem. The reluctance has drawn the ire of figures such as David Malpass, President of the World Bank, and Janet Yellen, US Treasury Secretary. Beijing’s various ministries are simply unforgiving. To write off a loan, officials in political banks must first obtain approval from the State Council, which is equivalent to China’s cabinet. If the borrowing country is not an ally, this is a risky maneuver. Being the face of a transcript – effectively admitting that the bureaucracy made a mistake – is a professional flaw that is difficult to erase. Rescheduling repayments leaves the mess for another day and someone else.
Another disagreement between China and the West reflects different perspectives. For the purpose of the Common Framework, only sovereign loans are sovereign transactions. Private creditors and international institutions get off lighter because they are seldom asked to cancel a dollar. But China does not separate its political promises to develop the world’s poorest countries from the country’s commercial activities. One of the government’s two main political banks, the China Development Bank, lends to poor countries at market rates. China insists this exempts its loans from being bound by rules designed for states. Western lenders insist on the opposite.
A final problem is that China would rather work alone. Working with other lenders involves sharing information. This may occasionally be necessary when borrowers are struggling to default on many loans at once. But in order not to appear too soft and encourage further defaults, China prefers to conduct its negotiations privately. According to World Bank researchers, the Chinese state has restructured the finances of more countries (71) since 2008 than all members of the Paris Club of predominantly Western countries combined (68), but it has done so on its own terms. Often there is a need for repayments in raw materials or their future proceeds. At other times, borrowers give up shares in the infrastructure they borrowed to build it. Western creditors see the former as little better than blackmail and have no option for the latter, since most of their loans flow directly into borrowers’ budgets.
self interest
As long as the lenders are in a stalemate, the IMF is paralyzed. The organization relies on countries agreeing to deleverage before it can risk a bailout. This means officials are limited to tiny handouts for desperate borrowers. The deal it hopes to strike in Pakistan is valued at $1.1 billion – a drop in the country’s $275 billion debt ocean.
For years, Pakistan’s friends, many of whom don’t get along, have wrought debt relief and emergency aid for their precious geopolitical ally. As a result, Pakistan’s politicians are expecting last-minute miracles. But this time China has not offered any help. After Saudi Arabia proposed a package, things went quiet. The IMF can’t do all the work. Each party is tempted to leave the rescue to someone else. With many more countries poised on the brink of default, the standoff could spell doom for the rest of the world’s struggling economies. ■
Sign up for more expert analysis of the biggest stories in business, finance and markets talks about moneyour weekly newsletter for subscribers only.
