As G20 finance ministers gather in India, U.S. Treasury Secretary Janet Yellen said that she was “eager” to work with China on debt restructurings for poorer countries and would push hard for “full and timely participation” in pending debt restructurings.
Working on debt relief is a welcoming step, but to ensure faster global debt relief, the United States should push nobody but itself harder.
Here are the main reasons:
One, China is not the largest lender to developing countries; the U.S.-led West is.
Recent data from the National Treasury of Kenya showed that 46.3 percent of Kenya’s debt is owed to the International Monetary Fund (IMF) and the World Bank (WB), while Chinese entities hold 17.2 percent of the public external debt. In Sri Lanka, private creditors lead with 53.6 percent, followed by multilateral creditors with 20.6 percent, while Chinese entities hold 10.9 percent of the external debt. And contrary to western media reports, Chinese entities account for only one-third of Zambia’s external debt, with two-thirds owed to Western donors and multilateral institutions. In summary, the U.S.-led West is the principal lender to developing countries.
Two, it is the U.S.-led West, not China, who should be blamed for the debt distress of developing countries.
Various factors, including the U.S. Federal Reserve’s interest rate hikes, global commodity price cycles, economic structures of some developing nations, the COVID-19 pandemic, and the Ukraine crisis, have caused liquidity shortages and sovereign debt crises. For instance, the U.S. monetary policy shift from extreme looseness to rapid interest rate hikes in 2022 catalyzed debt problems in some developing countries.
The U.S. dollar’s dominance led to rounds of quantitative easing and lowered interest rates, flooding Africa and emerging markets with low-interest dollars. However, aggressive interest rate increases later caused a liquidity shortage, funding chain disruptions, currency depreciation, and a surge in sovereign debt.
The global financial governance system, centered on the U.S. dollar and institutions like the IMF and the WB, puts developing countries at a disadvantage, limiting their representation in the institutions and subjecting them to high financing costs due to bias from major rating agencies favoring the United States and Western countries.
As a result, developing nations experience rapid credit rating downgrades and increased debt servicing expenses during liquidity challenges. Hence, being the largest shareholder in the WB and the IMF, the United States needs to take more actions to address the debt issues or offer viable solutions.
Three, China’s contribution to debt relief exemplifies how a responsible major country meets its international obligations.
Citing data from the WB, Professor Ding Yibing, dean of the School of Economics, at Jilin University, highlighted that since 2016, China, as a bilateral creditor, has been responsible for roughly 16 percent of global debt relief, surpassing the United States and the WB.
China’s debt reduction has already doubled the average reduction scale of the G7 countries, he added.
“Among G20 members, China has provided the largest debt relief overall,” said Ding. “However, China’s proportion of debt to Africa as a whole is not high. Multilateral financial institutions and commercial creditors hold the highest share of debt. Even without China’s debt, these countries still face high debt pressure.”
When the G20 introduced the COVID-19 Debt Service Suspension Initiative (DSSI) in 2020, China swiftly expressed its support. A Briefing Paper by Deborah Brautigam, director of the China Africa Research Initiative at Johns Hopkins University, praised China’s role as a responsible G20 stakeholder during the pandemic. Among the 46 countries participating in the DSSI, Chinese creditors accounted for 30 percent of all claims and contributed 63 percent of debt service suspensions.
Understandably, debt suspension and relief should be a collective effort: multilateral, bilateral, and commercial. China’s proposal of shared responsibility in debt relief is fair and reasonable since all parties involved are creditors. It is unjust for only one side to bear the burden of debt reduction while others are exempted from their responsibilities.
Undeniably, to achieve faster and more effective global debt relief, the United States should take a proactive stance and push itself harder.
By shouldering its fair share of responsibilities, the United States can play a pivotal role in easing the debt burden and fostering a more sustainable and resilient global economic recovery, from which, in Secretary Yellen’s words, “all of us benefit.”