David Malpass, in a recent interview, has reportedly talked about China’s non-disclosure clause as one of the hurdles in the sovereign debt restructuring process. The outgoing World Bank president, indicated with regard to this, and overall debt restructuring as ‘…critical on this is to have a faster timetable for reconciling the debts of the various players… that’s been taking a long time within the debt restructuring process.
So, reconcile the debts. Agree that what you’re trying to do is have comparable treatment across the various creditors, and find ways to resolve some of the barriers... On China, important is that they are still including non-disclosure clauses in some of their contracts that makes it very difficult to do the restructuring. They take collateral, which is not really necessary….’
On the other hand, China has reportedly desired, and rightly so, that multilateral institutions, including World Bank, also provide debt relief—something which the World Bank, for instance, is not ready to accept.
According to a recent Bloomberg published article, ‘As the mix of global creditors diversifies, China has lobbied to change the system for restructuring sovereign debt, which typically exempts lending by multilaterals.
The World Bank and others have rejected Beiji ng’s demands, jeopardizing efforts by G-20 nations this week to reach a consensus on fixes to the Common Framework. That initiative brings the Paris Club and traditional creditors around the same negotiating table with China.
The rift has delayed efforts to ease debt burdens in struggling countries like Zambia, which sought relief about two years ago but has yet to reach an agreement.
At a briefing, Mao Ning, a Chinese foreign ministry spokesperson, said a deal in Zambia “lies in the participation of multilateral financial institutions and commercial creditors in the debt-relief efforts.”’
Then there is a lack of provision of special drawing rights (SDRs) by the International Monetary Fund (IMF). In August 2021, and one-and-a-half years into the pandemic, one maximum allocation with the IMF at $650 billion was made, but then the usual quota- sharing formula was used, and most of that allocation went to already rich countries.
Another such allocation with a better allocative formula has been over-due for many months now with even the call to the US Congress to increase the envelope to around $2 to $3 trillion in view of the spending needs generated in the face of climate change crisis and pandemic, and in enabling developing countries better deal with debt repayment, and supply chain crisis-related requirements, especially in the wake of the food and energy shortages due to war in Ukraine.
To date no SDR- related issuance has taken place, what to talk of enhancing the envelope in this regard. In addition, the call to the IMF to revisit its policy of surcharges on late repayment of loans has also not received any positive response so far.
It is important indeed that rich countries, multilateral institutions, private creditors, and developing countries should understand that there is need to have fiscal space with countries under debt distress, like Pakistan, to make the needed development and welfare expenditures to move towards a much-needed resilient, and green economies in the wake of existential threats, and overall poly-crisis that the world find itself in.
A serious policy correction away from Neoliberalism, and a greater spirit of multilateralism to allow countries to move towards non-austerity, and counter-cyclical policies is indeed essential.
The current environment of polycrisis – climate change, pandemic, high inflation, high debt distress – also presents an opportunity to tackle the root causes of these crises, and rather than passing the buck to each other – rich, advanced countries, developing countries, multilateral institutions, private sector. The world is facing the existential threat of climate change – which has also increased the probability of more pandemics – and more than ever there is a need to work together.
Two main root causes are Neoliberalism, and a lack of multilateralism. Under the neoliberal assault, among other things, weak regulation has meant greater financial crises, and fragile supply chains. It has also meant greater austerity when there is need for more development spending. Moreover, procyclical policies are being practiced when counter-cyclical policies are needed.
Lack of multilateral spirit has led to a significant vaccine inequity, and lack of financial support for developing countries, primarily in the shape of greater SDR allocation, more climate finance, and meaningful debt relief.
The opportunity is to fix the broken system, under which no one is better off, rich and poor countries alike. There is a need to revisit the Bretton Woods system to make it work for all, and which means also meaningfully fighting, and adapting in the face of climate change crisis.
Among other things, it requires countries to have greater fiscal space, which requires greater domestic resource mobilization, and low level of both current account deficit, and debt distress.
An important element here is to have economic growth, and its better distribution. Another thing is to have policy rates that better internalize the role of significant supply-side determination.
Copyright Business Recorder, 2023