Policy Briefs
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Prompted by the Georgian Government's recent decision to select a Chinese company for the implementation of the Anaklia Deep Sea Port project, ISET-PI’s recent policy note (July 11, 2024) provides useful insights into China's ascent as the largest bilateral creditor for low- and middle-income countries (LMICs), its lending practices and case studies, with that background analyses the risks associated with the Anaklia project and provides recommendations. Here is a summary of the main findings.
China is presently the largest bilateral creditor to low- and middle-income countries (LMICs). China’s lending mainly targets infrastructure, transport, energy, and mining sectors in developing countries driven by the strong push for a global infrastructure development strategy - the Belt and Road Initiative, adopted in 2013. Consequently, China has ascended to become the largest bilateral creditor to LMICs. As of the end of 2022, LMICs collectively owed China US$180 billion in public and publicly guaranteed external debt. Significantly, Sub-Saharan Africa (SSA), led by Angola, has seen marked increases in its borrowing from China since 2012 and SSA represented 44 % of the total debt obligations of LMICs to China. Meanwhile, in South Asia, the debt to China witnessed a nearly sevenfold increase over an 11-year span, jumping from US$6.4 billion in 2012 to US$42.9 billion in 2022, with Pakistan accounting for two-thirds of this debt (Figure 1).
LMICs have access to different sources of funding from China which is primarily facilitated by state entities like government agencies, policy banks, and state-owned enterprises. Unlike traditional lenders (the World Bank, ADB, JICA), some special features of Chinese loan agreements include confidentiality of contracts, extensive default and cancellation clauses, and collateralized transactions which result in spectrum of contingent liabilities:
Despite being one of the world's largest bilateral creditors, China is not a member of the Paris Club, an informal group of official creditors focused on finding coordinated solutions to debtor countries' payment difficulties; instead, China opts for direct, often less transparent, bilateral negotiations for debt restructuring and relief, incorporating strategies such as extended loan maturities, interest rate adjustments, debt-for-resource and debt-for-equity swaps, while more recently also endorsing the G20's Common Framework for coordinated debt treatments.
Collateralized debt borrowing is associated with a higher risk of debt distress, and it has increased the complexity of some recent debt restructurings. Angola, Argentina, Chad, Ecuador, Ghana, Guinea, Malawi, Republic of Congo, Suriname, Zambia had a high risk of overall debt distress and received debt treatments which include debt restructurings since 2020 (Table 1). There are other debt contracts that are also deemed problematic and have been undergoing debt treatments since then (To view the study in full, see attached policy document above).