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Debt Vulnerability of Developing Countries
Date:11.22.2022 Author:JIN Zhongxia - CF40 Guest Member; Director-General, International Department, the People’s Bank of China

Abstract: Debt vulnerabilities in developing countries are rising. To solve this issue, we should adopt an inclusive, cooperative, and development-oriented approach. In this process, the role and credibility of the IMF is critical, whose assessment and proposal must be highly professional, objective, transparent, and even-handed; debtor countries should provide necessary transparency on their borrowings including collaterals; creditor countries should work together to build mutual trust; international organizations should play a leading role in uniting their member countries.

Recently, debt issue in development countries has been receiving much attention.

Developing countries generally face a large financing gap for development. Due to their limited capacity in domestic resource mobilization, these countries tend to rely on external borrowing, which builds up their debt burden. Some countries have made improper use of the funds they borrowed, failing to invest them into productive projects that can help generate sustainable growth.

Funds provided by multilateral institutions such as the International Monetary Fund (IMF) are mainly used for achieving macroeconomic stability of the borrowing countries. But in fact, the funding needs for infrastructure construction in these countries are far from being fully satisfied. Over the past decade, China's loans to related countries are mainly used for projects such as railways, roads, bridges, schools, and hospitals, with the aim to promote economic growth in the short and long run.

Like the World Bank and other multilateral development banks (MDBs), China Development Bank and Ex-Im Bank of China select overseas projects independently and raise money by issuing bonds in the market.

Another important reason for the rapid growth of debt in developing countries is the extremely loose monetary environment after the Global Financial Crisis, which has lured developing countries into excessive borrowing of cheap money and encouraged profit-seeking of international investors. Most European bonds issued by developed countries have coupon rates that are lower than 2%, while those of the 10-year European bonds issued by African countries ranged from 4% to 10% between 2013 and 2019. A significant reason behind African countries’ debt problem is the continuous lowering of their credit ratings by sovereign credit rating agencies. Zambia, for example, issued 3 European bonds from 2012 to 2015, raising a total of $3 billion. As the rating agencies downgraded the rating for Zambia each year, the coupon rate of European bonds issued by Zambia rose all the way from 5.4% in 2012 to almost 9% in 2015.

There is another trend worth attention—private creditors have become developing countries’ largest creditors in recent years. According to the data from United Nations Conference on Trade and Development (UNCTAD), as of the end of 2020, private creditors hold 62% of developing countries’ external debt, compared with 24% held by MDBs and 14% held by bilateral official creditors. From 2009 to 2020, the share of private creditors extended from 43% to 62%, whereas the share of MDBs shrank from 32% to 24% and the share of bilateral official creditors shrank from 25% to only 14%. This is an important phenomenon. According to the World Bank's international debt statistics, Sub-Saharan African sovereign bond increased 5-fold from 2009 to 2020 while African official bilateral debt only doubled over the same period.

Since the outbreak of COVID, sovereign debt levels in many countries have risen to historical highs. The Russian-Ukraine conflict caused a surge in energy and food prices, driving inflation further upward. At the same time, interest rate hikes by the US Federal Reserve and other central banks of developed countries have led to the sharp depreciation of the currencies of many developing countries.

The median sovereign debt of low-income countries increased by more than 50%. As a result, debt vulnerabilities are rising in many developing countries.

With the tightening of the Fed’s policy, I think the dollar will continue to strengthen, but not indefinitely. The reason is that although the Fed will keep raising rates, the US economic growth will slow down, which will largely offset the strong dollar and stop its appreciation to some extent. However, the strengthening dollar will continue to hurt some countries, especially those with large current account deficits and heavy reliance on capital inflows to achieve balance of payments. These countries might witness severe capital outflows, or even find themselves in a situation similar to what happened during the Asian financial crisis.


After the COVID outbreak in 2020, the G20 put forward the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments. The Common Framework has become an important coordination mechanism among bilateral official creditors. This is a good progress in the multinational or international platform that can facilitate a coordinated debt restructuring. China has fully implemented G20 DSSI and has made the biggest contribution in terms of debt treatment among all G20 members. For example, China is actively participating in debt treatment of Chad, Zambia, and Ethiopia under the Common Framework.

For the international sovereign debt treatment, we need a comprehensive and balanced approach. This means we need to make a balance between creditors and debtors, between multilateral, private, and official creditors and between Paris Club members and non-members. We call for an inclusive, cooperative, and development-oriented approach.

In this process, the role and credibility of the IMF is critical. The assessment and proposal must be highly professional, objective, transparent, and even-handed. The debtor countries should take first and major responsibility for their negligence in debt management to avoid moral hazards. At the same time, debtor countries should improve the transparency of their borrowings including collaterals, since collaterals are related to all the existing or potential creditors.

Chinese creditors will also strengthen internal coordination, enhance communication and cooperation with the IMF and other official creditors. Reform of China Development Bank and Ex-Im Bank may be necessary in the future to clearly separate policy lending from commercial lending, and ensure better transparency of their credit businesses.

To further illustrate, debt restructuring involves the restructuring of public debt, which is not an easy task in any country. We must coordinate all the creditors, especially when these creditors select and manage most of their projects on their own, meaning that the whole process is based on business rules. If the government were to assume the role of a coordinator and tell the creditors what to do, it would only complicate the matter, especially when the government is not involved in the initial decision-making. As we can imagine, internal coordination at the state level usually takes a long time because it requires lengthy evaluation and process optimization. In addition, it is the first time for China to participate in such a large-scale international debt restructuring. Throughout history, massive debt restructuring in low-income countries is not uncommon and can occur periodically, but Chinese creditors do not have experience in dealing with large-scale debt restructuring. Therefore, we must draw lessons from ourselves and others and gradually establish our decision-making and coordination mechanism.

But I’m glad to see that so far we have promptly participated in debt restructuring projects of some countries under DSSI. We hope to work with the international community and other creditors, whether official, multilateral or private, to solve this issue successfully.

With regard to international debt coordination mechanism, we are trying to collaborate and communicate with traditional creditors such as members of Paris Club on a case-by-case basis. Whenever we have the opportunity, we try to negotiate with the Paris Club to reach a coordinated solution. This is a positive progress under the Common Framework that includes both Paris Club members and non-members, both traditional creditors and non-traditional creditors. It marks a new beginning as all these different parties sit together and foster a new platform. I hope that this framework will build mutual trust among creditors who used to operate independently, so that they recognize that they can work together for common interests and ultimately reach a solution. If this approach succeeds and the parties involved can achieve fruitful results, I think it is possible for all parties to gradually step up their cooperation in the future.

Common Framework under the G20 has its focus on coordination among official bilateral creditors. But a comprehensive approach requires that the role of all the other stakeholders should not be overlooked or underestimated. As I mentioned, private creditors have already become major creditors of developing countries. The debt problem of low-income countries cannot be effectively tackled without their involvement. In the case of Chad for example, the largest private creditor, Glencore, has failed to negotiate in good faith with the Chadian government in a timely manner, leading to a delay in approval of the IMF loan program for several months. In the case of Congo several years ago, the IMF loan program went off track due to the failure of the Congo government in reaching a restructuring agreement with its private creditors (mainly oil traders).

In terms of MDB's participation in debt treatment, MDBs, especially the World Bank, have promised to offer highly-concessional new financing, largely out of the concern that debt restructuring will damage their credit rating. Likewise, China Development Bank and Ex-Im Bank of China that operate under a very similar business model face a similar situation. More importantly, for a country with unsustainable public debt, no matter how concessional new credit financing may be, it will add to the country's debt burden unless the new financing is purely grant.

Therefore, the MDBs should also participate in debt restructuring rather than crowding out other creditors with their new lending which is not a “free lunch”. The IMF has taken the lead by providing debt relief under the Catastrophe Containment and Relief Trust (CCRT) and implementing general Special Drawing Rights (SDR) allocation, which is highly commendable.

In general, debt restructuring is a very challenging task. But if we take it positively, it may create an opportunity for debtor countries to implement structural reform, improve governance, and embark on a sustainable growth path. It can be an opportunity for creditor countries to show their commitment, support, and good will to debtor countries and find common interest among creditors themselves so that they can avoid misunderstanding and build up trust through cooperation under the current rapidly changing geopolitical environment. It also provides international financial institutions a chance to play a leading role in uniting their member countries in dealing with global challenges and safeguard multilateralism, avoid segmentation and division of the world economy.

Last but not least, in terms of how to cope with the global macroeconomic challenges, I think there are two things to be done. First, the world should work together to end the pandemic as soon as possible to allow people and goods to flow more freely. In this way, countries like Sri Lanka will receive more tourists and naturally recover their economies, thereby reducing their debt burden. Second, we should stop trade protectionism from balkanizing the world economy. Although some divisions are unavoidable, many are artificial. While it is understandable that some countries are beginning to cooperate with their trade partners to address the supply-chain issue to ensure their supply-chain security, we should never prevent our trade partners from trading with other nations. I think the behavior goes beyond “self-interest” and is purely destructive.

To reduce the damage to the world economy, these are the two things we can do right now.

The article is based on the author’s keynote speech in the 9th CF40-PIIE Youth Forum on “Debt Sustainability of Developing Countries in the Post-Pandemic Era”. It is compiled and translated by CF40 and has not been reviewed by the author. The views expressed herewith are the author's own and do not represent those of CF40 or other organizations.