Bretton Woods Committee | Fri, Jan 15, 2021
by Danny Leipziger
The current state of the global economy and the outlook for the next few years do not bode well for Emerging Market and Developing Economies (EMDEs). Many countries were overly indebted before the pandemic and additional borrowing, one of the few options available to them, will push many into the terrain of unsustainable debt. China’s joining the Debt Service Suspension Initiative of the G-20 is commendable; however, this action only deals with official debt held by poorer EMDEs. The biggest problem involves middle-income borrowers, and the external debt that they owe to commercial creditors, including China’s largest banks, some of which is connected to the Belt and Road Initiative.
Existing arrangement to deal with debt problems and debt rescheduling are inefficient and lacking in leadership. Now is the time for China to step up and show that it practices as well as preaches multilateralism. It’s a golden opportunity, not only because it serves China’s own financial interests, but also because western countries are currently too fractured and pre-occupied to come up with new solutions. In the past, during times of HIPC (Heavy Indebted Country Initiative) debt relief, it was the UK that took the lead. Now, the U.K. is locked in a difficult Brexit process. The Brady Plan of the 1980s was spearheaded by the U.S. Treasury, but even after a new administration takes over, debt relief for EMDEs will not be high on the U. S. political agenda.
For this reason, a global meeting organized by China and the key international financial institutions would be a wise course of action. The last time the global economy faced a debt crisis centered on middle-income countries owing commercial debt, it required a new approach, the Brady Plan, to both reprofile debt and actively engage the IMF and World Bank in the design of reform programs that improved the chances of successful future repayments. Waiting for country defaults, such as occurred in Ecuador and Zambia, is not the best way to deal with debt distress. Moreover, the combination of soft power aimed at restoring multilateralism combined with financial self-interest should be persuasive. Despite China’s major gains, there are still lingering doubts about how it will exercise its new economic power, and importantly, many EMDEs are concerned that they have unwisely mortgaged their futures. Now is the time to prove them wrong.
Global exports, including travel and tourism will not refund quickly in 2021 and EMDE payments positions will therefore not improve their external debt sustainability outlooks. Multilateral flows, and even an SDR allocation, will not serve the middle-income countries whose debt service will severely limit their abilities to deal with domestic needs. The solution lies with a re-profiling of private debts and this requires coordinated effort with all major creditors under the same tent. With the assistance of the IMF, World Bank and IIF, a new program of action can be devised. It will necessitate some strong domestic efforts to ensure that resources are well managed, but it importantly requires major Chinese banks to participate fully and openly in such a debt relief effort.
All EMDEs are struggling to respond to pre-existing and post-pandemic challenges, many of which China managed to successfully overcome. The impending EMDE debt crisis provides China with a perfect strategic opportunity to step into the breach and help improve the functioning of the global economy. From economic and political perspectives, it ticks off a lot of boxes positively, and as the country with the best “long-game” in the world, can China afford not to take this step?
Dr. Leipziger is Professor of International Business at George Washington University
and Managing Director of the Growth Dialogue. He was previously Vice President
for Poverty Reduction and Economic Management at the World Bank, and Vice Chair
of the Spence Commission on Growth and Development.