IMF China and debt-trap
Posted on November 12th, 2022

by S. Amaratunga Courtesy The Island

The above topic is relevant to all countries experiencing economic crises for IMF and China, it appears are alternative and perhaps competing sources for economic aid and they are both accused of causing debt-traps for the recipient countries. IMF is accused by people like Joseph Stiglitz of manipulating the economy of poor countries in such a way that there is a drain of their wealth for the benefit of the rich countries. China is accused of trapping the recipients of its aid to cough out to the Chinese their valuable national assets like harbours and airports. Poor countries have turned to China after realising the apparent folly of following IMF policy and China has willingly stepped in to displace the IMF. In this context IMF is perceived as a tool of the Western powers and China as the alternative power that could stand up against Western imperialism.

Sri Lanka seemingly is in a situation where it is not possible to be choosy. Most of the economic advisers have been asking the government to go for an IMF programme since 2019 when the early symptoms of an economic downturn were visible. However, the then government decided not to go to IMF but tried out other measures like heavy cuts on tax and stabilizing the rupee against the dollar. These plus other blunders like a ban on agro-chemicals brought the country to bankruptcy forcing it to default on debt repayment and to decide to seek IMF assistance. IMF may have already asked the government to adopt policies that may cause lot of hardship to people. Heavy taxation has been brought back. Loss making public enterprises may have to be privatized. Welfarism may have to be curtailed with less public expenditure. Market forces may have to be given more freedom with less government intervention.

All these measures would finally hurt the lower middle class and the poor. This is where the Chinese factor comes in. The relevant questions are whether China is an alternative to IMF, whether its presence as a player in the global debt scenario would give recipient countries the opportunity to negotiate with the IMF for more favourable terms and conditions and whether any of these lenders have designs on the recipients. These are important questions for Sri Lanka at the present moment as negotiations with the IMF are not finalised, rescheduling of debt is still being discussed and nothing is certain yet. And China seems to be closely watching the unfolding events, all the time promising every assistance.

A research study done by James Sundquist (2021) involving 104 developing countries covering the period from 2001 to 2017 has shown that Chinese aid has helped some countries to turn away from the IMF and others to negotiate deals with less damaging conditions. Chinese loans may have achieved much more than the loudest critics of the IMF. Plain criticism of the IMF has not brought any results beneficial to poor countries. But the competition brought on by China has resulted in the change of policy in relation to terms and conditions of the IMF. In 1996 the IMF and the World Bank developed the Heavily Indebted Poor Country (HIPC) Initiative, under which low-income countries with multi-year track records of good policies would qualify for grants in association with their concessional loans.

The HIPC initiative soon came under heavy criticism for offering too little relief too slowly to too few,” with only four countries obtaining full stock of available debt relief before the end of the century. In 1999, the Bretton Woods institutions enhanced” the Initiative by lowering the bar for judging whether debt was unsustainable and providing debt relief and grants sooner to qualifying countries. Within three years, enhanced HIPC could deliver almost US$1 billion in debt relief to 25 countries.

Critics of China on its role as an aid-giver accuse China of many dirty tricks including 1) prioritising short term projects instead of long term programmes aimed at sustainable prosperity, 2) non-transparent lending with little regard for issues such as corruption and money laundering and 3) promoting infra-structure projects that benefit China’s economy, for instance its imports of raw materialas and export of manufactured goods.

However, if China is intent on ensnaring poor helpless countries it would target countries like Zimbabwe, but it did not come forward to bail out that country for it was seen that Zimbabwe had no reliable foreign exchange earning capacity. This shows that China focuses on debt sustainability of a country rather than its vulnerability that provides an opportunity to trap them and force them to part with their national assets. Countries which export large volumes of natural resources are the most likely to benefit from Chinese aid. This could mean that China may not be interested in encouraging these countries to develop their technology that would enable them to add value to their natural resources before they export them. Yet there are countries which see China as an alternative to the IMF. China may not be engaged in ensnaring poor countries but it certainly is interested in their natural resources.

Financial Times reports (18th January 2022) that some 74 low- and middle-income countries will have to repay an estimated $35 bn to official bilateral and private-sector lenders in 2022”, which is a 45% increase compared with 2020, with seen as one of most vulnerable.” Ghana, Salvador and Tunisia could also be in jeopardy. Zambia defaulted in 2020 on an amount of $3 billion and the situation has not improved. The Zambian government is negotiating a new loan from the IMF, which, if granted, will demand more austerity measures. As explained in the Financial Times, this surge is a consequence of developing countries contracting ever more debt to face the impact of coronavirus, but also of the rising cost of refinancing existing loans and the resumption of debt repayments that had been suspended during the pandemic. David Malpass, President of the World Bank, warned that the creditors’ insistence on being paid will increase the risk of disorderly defaults. Countries are facing a resumption of debt payments at precisely the time when they don’t have the resources to be making them,” he said.

Almost all countries take loans from other countries with the US being the biggest borrower. For the rich it is a game they can play and also enjoy very well. But for the poor countries it is a matter of life and death. The slightest mishap, eg; Covid pandemic, and their survival is in danger. This is so mainly because the system involving global debt is so designed that it ensures a flow of wealth from the poor to the rich. The IMF and the World Bank may have changed their policies, but that may be to prevent the total death of the indebted countries but not with the intention of making them prosperous. The idea is to keep the developing countries in a permanant state of poverty and remain suppliers of raw materials and cheap labour. The hidden agenda, the one that is actually applied, is to subordinate the public and private spheres of all human societies to the capitalist imperative of seeking maximum . The implementation of this hidden agenda results in reproducing poverty rather than reducing it and in increasing inequalities rather than reducing them. It results in stagnation, if not deterioration, of the living conditions of a great majority of the world’s population, concurrently with a greater and greater concentration of wealth in the hands of a smaller and smaller elite. A further result is the continued deterioration of ecological balances, which means that the very future of humanity is in danger” (Eric Toussaint, 2022).

China, if it is not a party to this evil system must try to help change the system. Chinese economy is not entirly profit dependent and neo-liberal. It must come forward, as it has shown in the recent past, at this critical hour to help the poor countries come out of the debt-trap they have got into. It must get together with other like-minded countries to set up an alternative to the IMF. This new organisation could prevent poor countries from being entrapped by the imperialist forces. It could strengthen the negotiating capacity of poor countries which have to obtain loans for their survival. It should be possible for these countries to get some aid without having to mortgage their future survival.

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