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International Financial Institutions (IFIs) and particularly the relationship between the IFIs and the United States.
Scott Morris is a senior fellow at the Center for Global Development, director of the center’s US Development Policy program and co-director of the Sustainable Development Finance program. His research addresses development finance issues, debt policy, governance issues at international financial institutions like the World Bank and IMF, and Chinese development finance.
Morris served as deputy assistant secretary for development finance and debt at the US Treasury Department in the Obama Administration. In that capacity, he led US engagement with the multilateral development banks, as well as US participation in the Paris Club of official creditors. During his time at Treasury, Morris led negotiations for four general capital increases at the multilateral development banks and replenishments of the International Development Association (IDA), Asian Development Fund, and African Development Fund.
Morris was a senior staff member on the Financial Services Committee in the US House of Representatives, where he was responsible for the Committee’s international policy issues, including the Foreign Investment and National Security Act of 2007 (the landmark reform of the CFIUS process), as well multiple reauthorizations of the US Export-Import Bank charter and approval of a $108 billion financing agreement for the International Monetary Fund in 2009. Previously, Morris was a vice president at the Committee for Economic Development in Washington, DC.
Morris serves on the international advisory panel of the Asian Infrastructure Investment Bank, the eminent group of independent advisors for the International Fund for Agricultural Development, and the executive committee of the Modernizing Foreign Assistance Network. He is also co-chair of the International Financial Institutions working group, a diverse coalition of US-based organizations seeking to promote effective US participation in multilateral institutions.
An unprecedented cache of documents shows that Chinese loan contracts have unusual secrecy provisions, collateral requirements, and debt renegotiation restrictions.
A new study and dataset released today reveals previously unknown details about China—the world’s largest official creditor—and its lending practices to developing countries.
How China Lends finds that Chinese state-owned banks are muscular, commercially savvy lenders that use contracts to position themselves as “preferred creditors,” seeking repayment ahead of other commercial and official lenders. They often do so by asking borrowers for an informal source of collateral—bank accounts with minimum cash balance requirements that lenders can seize in the event of default—and prohibiting borrowers from restructuring their Chinese debts in coordination with other creditors.
“All the pitched arguments over China's foreign lending have played out in a fact vacuum,” said Georgetown Law Professor Anna Gelpern, a Nonresident Senior Fellow at the Peterson Institute for International Economics (PIIE), “with hardly any of China's debt contracts—and precious few of other countries' bilateral contracts—ever published or studied.”
The How China Lends study, carried out by researchers from AidData at William & Mary, the Center for Global Development, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics, examined 100 Chinese loan contracts to 24 countries, many of which participate in the Belt and Road Initiative. The analysis is the first systematic evaluation of the legal terms of China’s foreign lending, and the newly published contract dataset, assembled by AidData, is the largest source of debt contracts between Chinese government lenders and developing country borrowers. These documents were difficult to access, but over a 36-month period AidData collated the contracts by conducting an in-depth review of the debt information management systems, official registers, and parliamentary websites of 200 borrower countries.
The researchers benchmarked the Chinese contracts against 142 publicly available contracts with other major lenders and they found several unusual features in Chinese contracts:
China’s contracts contain unusually broad confidentiality clauses, which prevent borrowers from revealing the terms or sometimes even the existence of the loans. The researchers also found that China’s contracts have become more secretive over time, with a confidentiality clause in every contract in the dataset since 2014. These confidentiality restrictions hide loans from the people who are bound to repay them via taxes.
The contracts also contain provisions that position Chinese state-owned banks as senior creditors whose loans should be repaid on a priority basis. Nearly a third of the contracts required borrowing countries to maintain significant cash balances in bank or escrow accounts. These informal collateral arrangements put Chinese lenders at the front of the repayment line, since banks can simply dip into their borrower’s accounts to collect unpaid debts.
China’s contracts also give it broad latitude to cancel loans or accelerate repayment if it disagrees with a borrower’s policies. For example, China Development Bank (CDB) treats termination of diplomatic relations with China as an “event of default”. Expansive cross-default and cross-cancellation provisions also provide Chinese lenders with more leverage over borrowers and other creditors than was previously understood.
According to Sebastian Horn, an economist at the Kiel Institute for the World Economy, another key finding of the study is that “Most Chinese loan contracts contain ‘No Paris Club’ clauses, which prohibit countries from restructuring Chinese loans on equal terms and in coordination with other creditors.” This approach to foreign lending effectively gives Beijing sole discretion to decide if, when, and how it will grant debt relief. Christoph Trebesch, also of the Kiel Institute, adds that “China’s practices complicate debt relief efforts in countries that are in financial distress due to the COVID-19 pandemic or other factors.”
According to Scott Morris, a Senior Fellow at the Center for Global Development, “China has struck a cooperative tone on debt issues in the G20, but some of the provisions in these contracts clearly are at odds with the objectives of the Common Framework on debt that G20 ministers agreed to six months ago.”
The authors of How China Lends warn that restrictions on debt transparency make it difficult for citizens in borrower countries and creditor countries to hold their governments accountable, and call for public debt to be made public.
Brad Parks, AidData’s Executive Director and a co-author of the report, says that “by shielding their contractual arrangements from public scrutiny, Chinese state-owned banks have made it difficult for other lenders to know if they are positioning themselves at the front of the repayment line.” Hidden debts to China have also put developing countries—with insufficient foreign currency to repay all of their outstanding obligations to foreign creditors—in an equally challenging position. According to Parks, “non-Chinese creditors are increasingly reluctant to renegotiate repayment terms until they know more about China’s claims.”
The full report is available at: https://www.cgdev.org/publication/how-china-lends-rare-look-100-debt-contracts-foreign-governments. An online repository of digitized copies of the original contracts can be accessed and searched by lender, borrower, sector, and contract clause at https://www.aiddata.org/how-china-lends.
Center for Global DevelopmentJeremy GainesCommunications Managerjgaines@cgdev.org+1.202.416.4058
AidData at William & MaryAlex WooleyPartnerships and Communications Directorawooley@aiddata.org+1.757.585.9875
Kiel Institute for the World EconomyMathias RauckPress OfficerMathias.Rauck@ifw-kiel.de+49 (431) 8814-411
Peterson Institute for International EconomicsMichele HellerMedia Relations and Communications Managermheller@piie.com
Georgetown LawTanya WeinbergDirector of Media Relationstanya.email@example.com+1.202.577.7827
US leadership in multilateral institutions such as the World Bank and regional development banks is flagging. These institutions, rated as some of the most effective development actors globally, provide clear advantages to the United States in terms of geostrategic interests, cost-effectiveness, and results on the ground. Restoring US leadership in institutions like the World Bank will mean giving a greater priority to MDB funding, which today accounts for less than 10 percent of the total US foreign assistance budget and less than 0.1 percent of the total federal budget. Prioritizing multilateral assistance in an era of flat or declining foreign assistance budgets will necessarily mean some reallocation from other pots of foreign assistance money, as well as an effort to address the structural impediments to considering reallocations.
From the testimony: “And while the United States was roundly criticized for its handling of this episode, I think much of that criticism was misguided in putting the focus on the short term bungling of diplomatic outreach, or Congress’s failure to pass IMF reform. Both are relevant, and I very much believe that action on the IMF quota package is critical in its own right, but the challenges to US leadership in the MDBs – institutions like the World Bank and Asian Development Bank where the US is the largest shareholder – run deeper and are longer term in nature.”
Researchers urge China to improve their debt practices and adopt standards
Center for Global Development
Washington – China’s Belt and Road Initiative – which plans to invest as much as $8 trillion in infrastructure projects across Europe, Africa, and Asia – raises serious concerns about sovereign debt sustainability in eight countries it funds, according to a new study from the Center for Global Development.
The study evaluated the current and future debt levels of the 68 countries hosting BRI-funded projects. It found that of the 23 countries that are at risk of debt distress today, in eight of those countries, future BRI-related financing will significantly add to the risk of debt distress. You can see the full list of countries, their external debt levels, and China’s portion of that debt in the new study here.
“Belt and Road provides something that countries desperately want – financing for infrastructure,” said John Hurley, a visiting fellow at the Center for Global Development and a coauthor of the study. “But when it comes to this type of lending, there can be too much of a good thing.”
According to the study, China’s track record managing debt distress has been problematic, and unlike the world’s other leading government creditors, China has not signed on to a binding set of rules of the road when it comes to avoiding unsustainable lending and addressing debt problems when they arise.
“Our research makes clear that China needs to adopt standards and improve its debt practices – and soon,” said Scott Morris, a senior fellow at the Center for Global Development and a coauthor of the paper.
The study recommends that China:
Multilateralize the Belt and Road Initiative: Currently, the multilateral development institutions like the World Bank are lending their reputations to the broader initiative while only seeking to obtain operational standards that will apply to a very narrow slice of BRI projects: those financed by the MDBs themselves. Before going further, the MDBs should work toward a more detailed agreement with the Chinese government when it comes to the lending standards that will apply to any BRI project, no matter the lender.
Consider additional mechanisms to agree to lending standards: Some methods might include a post-Paris Club approach to collective creditor action, implementing a China-led G-20 sustainable financing agenda, and using China’s aid dollars to mitigate risks of default.
In all eight highest risk countries, the proportion of external debt that is owed to China and its banks will rise, sometimes dramatically, under the Belt and Road Initiative:
Pakistan: Pakistan, by far the largest country at high risk, currently projects an estimated $62 billion in additional debt, with China reportedly financing roughly 80 percent of that. Big-ticket BRI projects and the relatively high interest rates being charged by China add to Pakistan’s risk of debt distress.
Djibouti: The most recent IMF assessment stresses the extremely risky nature of Djibouti’s borrowing program, noting that in just two years, public external debt has increased from 50 to 85 percent of GDP, the highest of any low-income country. Much of the debt consists of government-guaranteed public enterprise debt and is owed to China Exim Bank.
Maldives: China is heavily involved in the Maldives’ three most prominent investment projects: an upgrade of the international airport costing around US$830 million, the development of a new population center and bridge near the airport costing around US$400 million, and the relocation of the major port (no cost estimate). The country is considered by the World Bank and the IMF to be at a high risk of debt distress and is currently being buffeted by domestic political turmoil.
Lao, P.D.R. (Laos): Laos, one of the poorest countries in Southeast Asia, has several BRI-linked projects. The largest, a $6.7 billion China-Laos railway, represents almost half the country’s GDP, which led the IMF to warn that the project might threaten the country’s ability to service its debts.
Mongolia: Mongolia’s future economic prosperity depends on major infrastructure investments. Recognizing Mongolia’s difficult situation, China Exim Bank agreed in early 2017 to provide financing under its US$1 billion line of credit at concessional rates for a hydropower project and a highway project. If reports of an additional $30 billion in credit for BRI-related projects over the next five to ten years are true, then the prospect of a Mongolia default is extremely high, regardless of the concessional nature of the financing.
Montenegro: The World Bank estimates that public debt as a share of GDP will climb to a whopping 83 percent in 2018. The source of the problem is one very large infrastructure project, a motorway linking the port of Bar with Serbia that would integrate the Montenegrin transport network with other Balkan countries. The Montenegro authorities concluded an agreement with China Exim Bank in 2014 to finance 85 percent of the estimated US$1 billion cost for the first phase of the project, with the second and third phases likely to lead to default if financing is not provided on highly concessional terms.
Tajikistan: One of the poorest countries in Asia, Tajikistan is already assessed by the IMF and World Bank to be at “high risk” of debt distress. Despite this, it is planning to increase its external debt to pay for infrastructure investments in the power and transportation sectors. Debt to China, Tajikistan’s single largest creditor, accounts for almost 80 percent of the total increase in Tajikistan’s external debt over the 2007-2016 period.
Kyrgyzstan: Kyrgyzstan is a relatively poor country with significant new BRI-related infrastructure projects, much of it financed by external debt. China Exim Bank is the largest single creditor, with reported loans by the end of 2016 totaling US$1.5 billion, or roughly 40 percent of the country's total external debt. While currently considered to be at a “moderate” risk of debt distress, Kyrgyzstan remains vulnerable.
The full study, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective” can be found at: https://www.cgdev.org/publication/examining-debt-implications-belt-and-road-initiative-policy-perspective.
What's going to happen in the world of development in 2018? Will we finally understand how to deal equitably with refugees and migrants? Or how technological progress can work for developing countries? Or what the impact of year two of the Trump Administration will be? Today’s podcast, our final episode of 2017, raises these questions and many more as a multitude of CGD scholars share their insights and hopes for the year ahead.