Growing Out of the Developing-Country Debt Crisis
Facing a cascade of government defaults, China, the biggest creditor to the developing world, has insisted that multilateral institutions take a haircut. But the best way for lenders like the World Bank’s International Development Association to ease the burden of poor countries is by offering cheap financing.
PARIS – The sovereign-debt crisis was high on the agenda at this year’s Spring Meetings of the World Bank and the International Monetary Fund, with all eyes on China, the biggest creditor to the developing world, and the International Development Association (IDA), the Bank’s fund for the poorest countries. With many low-income economies already in or at high risk of default, China has been reluctant to write down the value of its loans and insistent that multilateral institutions, including the IDA, share the burden alongside other creditors – a contentious stance that breaks with convention.
There are strong arguments against IDA participation in debt restructuring. Its loans are highly concessional, with an average grant element of 50%, compared to 0% for market-based loans and 18% for Chinese debt. In recent years, its commitments have surged in the face of multiple shocks, reaching $42 billion in 2022. Moreover, it provides its financing in the form of grants, rather than loans, to countries with high debts – self-termed “ex-ante implicit debt relief.” It would be grossly unfair to the taxpayers backing it if the IDA bailed out other creditors not once, but twice.
During the Global Sovereign Debt Roundtable, a centerpiece of the Spring Meetings that focused on facilitating the debt-restructuring process, China apparently agreed to the Bank’s proposal to offer more lending through the IDA, rather than taking a haircut on outstanding debt. This agreement must still be clarified, but it could be a win-win: China’s cooperation with the IMF, together with more concessional financing by multilateral development banks, would go a long way toward putting poorer countries on a greener and more sustainable growth path.
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