‘In a lot of the world, the clock has hit midnight’: China is calling in loans to dozens of countries from Pakistan to Kenya

‘In a lot of the world, the clock has hit midnight’: China is calling in loans to dozens of countries from Pakistan to Kenya
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Keeping schools open, the lights on and even food on the table is being threatened by debt payments from the $1 trillion Belt and Road program.

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 required 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.”

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.”

Poor countries have been hit with foreign currency shortages, high inflation, spikes in unemployment and widespread hunger before, but rarely like in the past year.

Along with the usual mix of government mismanagement and corruption are two unexpected and devastating events: the war in Ukraine, which has sent prices of grain and oil soaring, and the U.S. Federal Reserve’s decision to raise interest rates 10 times in a row, the latest this month. That has made variable rate loans to countries suddenly much more expensive.

All of it is roiling domestic politics and upending strategic alliances.

In March, heavily indebted Honduras cited “financial pressures” in its decision to establish formal diplomatic ties to China and sever those with Taiwan.

Last month, Pakistan was so desperate to prevent more blackouts that it struck a deal to buy discounted oil from Russia, breaking ranks with the U.S.-led effort to shut off Vladimir Putin’s funds.

In Sri Lanka, rioters poured into the streets last July, setting homes of government ministers aflame and storming the presidential palace, sending the leader tied to onerous deals with China fleeing the country.

China’s response

The Chinese Ministry of Foreign Affairs, in a statement to the AP, disputed the notion that China is an unforgiving lender and echoed previous statements putting the blame on the Federal Reserve. It said that if it is to accede to IMF and World Bank demands to forgive a portion of its loans, so should those multilateral lenders, which it views as U.S. proxies.

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