IMF and Chinese Debt

The International Monetary Fund (IMF) is a United Nation’s financial agency which is financed by 190 member countries and has its headquarters in Washington D.C. The IMF acts as a lender of last resort for governments and plays a key role in helping countries to maintain exchange-rate stability. The institution’s mission is stated as ‘working to foster global cooperation, secure financial stability, facilitate international trade, promote high employment, sustainable economic growth and reduce poverty around the world.’ The IMF was founded in July 1944 at the Bretton Woods conference. It  initially had 29 members states who had the objective of reconstructing the international monetary system after the end of the Second World War. Since then, the institution has grown to play a central role in managing international financial crises as well as balance of payment problems. It has a quota system that allows countries to contribute money to a pool from which states can borrow if they are experiencing problems with their balance of payments. The IMF also advises governments as it has sufficient data obtained from the surveillance of the economies of its member states.

Although the IMF plays a key role in the global economy and helps countries in the management of their economies, it has received a lot of criticism because it imposes conditions before it gives loans to it member countries. Some of these conditions are viewed as harsh as they require governments to reduce their spending meaning that it negatively affects the ability of such governments to provide social services such as healthcare, education and infrastructure to their populations. Some scholars also criticize the IMF’s conditions because they view them as a violation of the sovereignty of countries which are forced to outsource their sovereign decision making to the institution. Nevertheless, countries continue to depend of the IMF because of a lack of options. In the past few decades, China has emerged as one of the alternative lender and has provided loans to countries with less conditions than the IMF. As such, many countries especially in the global south have borrowed and continue to borrow from China to build infrastructure and finance their economies.

The IMF’s Conditions

It is well known that the IMF sets conditions before it can provide financial resources to its member states. The institutions normally requires the governments seeking loans to correct their macroeconomic imbalances by reforming their economic policies. In addition, it requires collateral from states that seek financial resources. This means that if these conditions are not met, the IMF can withhold its resources and refuse to offer assistance. Before a country can receive IMF loans, it has to undertake structural adjustment which involves several policy reforms. These include raising national income or cutting expenditure also referred to as austerity. It can also involve the devaluation of currencies, the lifting of restrictions on exports and imports and the liberalization of trade. Other conditions include privatization, fighting corruption, balancing budgets by avoiding overspending, the removal of state subsidies and price controls, improving the rights of foreign investors through national laws and focusing on increasing economic output and the extraction of natural resources.

The Importance of IMF Conditions.

The policy of conditionality is meant to ensure that the borrowing state will have the ability to repay the IMF and that such a state will not try to solve their balance of payment issues in a manner that can negatively affect the global economy. Moreover, such conditions assure the IMF that the money lent to the borrowing states will be used for the intended purpose as defined by the Article of Agreement and offer safeguards that the such states will have the ability to rectify their structural as well as macroeconomic imbalances. The IMF imposes corrective measures to ensure that the borrowing members will repay it and ensure that the money will be available to assist other member states. History shows that states that borrow from the IMF have a good track record of repaying their loans with full interest over the period of the loan.

Criticisms of Conditionality

According to the Overseas Development Institute (ODI), the IMF is structured in a manner that allows developed nations to play a dominant role over less developed nations. In addition, some of the policies advocated by the IMF can be considered to be anti-developmental because they have deflationary effects that lead to losses of output leading to an increase in unemployment in economies where the unemployment is already high and the average incomes are low. Expert also argue that the main victims of the IMF’s deflationary policies are the poor and low income classes. Moreover, the IMF mainly works based on an incorrect assumption that problems with balance of payment imbalances are caused by domestic factors. The IMF is accused of not distinguishing between imbalances that have external causes from those that have internal causes. This criticism was particularly loud during the 1973 oil crisis when nations suffered from payment deficits as a result of the negative changes in their terms of trade due to the high prices of oil. During this crisis, the IMF imposed stabilization polices which were similar to those prescribed for over-spending governments instead of focusing on the external causes of the crisis..

The ODI also argued that the IMF’s policies aimed at the promotion of market-oriented approaches were eventually growing to face criticism and push back. Additionally, the IMF’s policies make the institution a scapegoat that allows incompetent and corrupt governments to blame international bankers for their mismanagement of their economies.

In 2001, Argentina experienced a severe economic crisis which some scholars believe to have been the result of IMF-imposed budget restrictions. These restrictions negatively affected the government’s capacity to maintain its national infrastructure even in crucial sectors including security, education as well as health. The IMF also forced the country to privatize some strategically important national resources. This crisis made people have doubts about the institution’s policies because the IMF had always regarded Argentina as a model state because of its compliance with polices imposed by the Bretton Woods institutions. However, some argued that the crisis had been caused by Argentina’s fiscal federalism which allowed a rapid increase in sub-national spending. This crisis led to a widespread hatred of the IMF in South America because it was blamed for the economic problems in the region.

According to Raghurarn Rajan, the former governor of the Reserve Bank of India and a former IMF chief economist, the institution remains a side player for the developed world. This can be considered to be true because the IMF rarely loans developed countries. He also said that the IMF wrongly praises the United State’s monetary policies which often create chaos in emerging markets. The inability to criticize powerful countries such as the USA which frequently have ultra-loose monetarily policies is a major weakness for the IMF that proves that the developed and wealthy nations are allowed to dominate the less developed countries without having to pay a price in austerity polices or imposed structural adjustments.

Moreover, the IMF faces criticisms for not giving aid and debt write-offs for heavily indebted poor countries such as Zambia. In 2005, Zambia was the recipient of debt write-offs that allowed the country to improve its health and education sectors. However,the country was not able to sustain a healthy debt-to GDP ratio because its debt increased to over half of its GDP in less than 10 years. The debt situation in Zambia has made the IMF less likely to issue debt write-offs because of the opinion that debt relief simply encourages incompetent governments to borrow recklessly without having to implement policies that improve governance and increase economic growth.

The IMF is also accused of being out of touch with with local economic realities, cultures as well as the environments in the states that are required to carry out policy reform. The policies recommended by the institution do not always consider that there may be a difference between government spending on paper and how such spending is felt by citizens. Governments argues that excessive IMF conditions mean that the regimes do not own the programs thus breaking the links that exist between a recipient nation’s government, their people and the objectives of the IMF. According to renown economist Jeffrey Sachs, the IMF normally requires nations that are too poor to own belts to pursue budgetary belt tightening policies that only increase poverty.

 There is a widespread view that unfortunately, IMF conditionality plays a role in undermining local political institutions. As such, the recipient nations are forced to sacrifice their autonomy in making policies in exchange for loans. This causes public resentment of politicians and leaders who accept and enforce the conditions imposed by the IMF. It can also lead to political instability caused by turnovers in leaderships as local populations seek to replace leaders who enforce IMF conditions. The IMF also imposes conditions that exacerbate income inequality through policies such as forced  privatization that concentrate national wealth among a few elites and foreign investors or companies. In many ways, the IMF’s policies and conditions can be compared to modern high-tech warfare which has gotten rid of physical contact by dropping bombs from the air which ensure that one does not feel what they do. Similarly, modern economic management allows a few people to coldly impose policies from their luxury hotels/apartments without having any regard for the lives destroyed by such policies.

Since the formation of the Bretton Woods institutions, organizations such as the IMF and the World Bank have been heavily criticized for their support of dictatorships and brutal regimes as long as they are friendly to the West and the United States. The IMF has supported military dictatorships such as the the current Egyptian regime. The IMF famously supported the Mobutu regime in Zaire even when it was well known that most the funds were embezzled by corrupt officials and that the country did not have the ability to repay its debt. In 2021, the IMF issued a $1 billion loan to the dictatorial Ugandan regime in spite of protests by Ugandan citizens. It also supports the brutal Rwandan regime which has been accused of war crimes and human right violations in eastern Democratic Republic of Congo (DRC). These policies lead to a decline in democratic rule as authoritarian regimes backed by the IMF feel that they have a powerful institution which can always bail them out even when they mismanage their economies.

Chinese Lending Policies

As stated earlier, over the last few decades, China has emerged as one of the most important and consequential lenders in the global economy. In fact, in 2017, China became the largest official creditor in the world.  Unfortunately, there are acute data limitations on China’s international lending because its government does not provide adequate information on how it lends money overseas. Unlike other countries and major economies, most of China’s international lending is done by state-owned banks as well as other state-owned entities. However, the China’s lending terms mostly resemble commercial lending transactions because most loans have relatively higher interest rates and short maturities. For instance, Chinese loans to low-income countries often have interest rates of 2-3% in contrast to loans by multilateral lenders which tend to be interest-free. In addition, the principal repayments and interest tend to be secured in the form of commodity export proceeds (for example agricultural goods or raw materials) or through revenues obtained from financed projects. This is a unique form of lending which is not practised by other international institutions.

It is well known that China has a rapidly growing economy that needs vast amounts of natural resources including oil, gas and other minerals such as cobalt, coltan and copper among others. These resources are widely available in low income countries around the world mostly in Africa and South America. China uses its vast financial resources to loan money to such countries in exchange for access to the natural resources. For example, China has signed infrastructure for minerals/oil deals with countries such as the Democratic Republic of the Congo and Angola. These deals have allowed countries which have massive infrastructure deficits such as the DRC to build and improve infrastructure such as roads and hospitals in exchange for their mineral wealth. China has used such deals to get concessions and mines that produce cobalt and copper among other minerals. For example, today, China owns the Sicomine company which is the largest producer of cobalt in the DRC.

Criticisms of China’s Lending Policies

The rapid growth of Chinese lending internationally has led to an increase in the high debt burdens among the developing countries. It is estimated that more than 20 countries now owe over 10% of the gross domestic product to Chinese state-owned lenders. As a result, China has been accused of debt-trap diplomacy. Critics argue that China uses its loans to get concessions in natural resources and to increase their political and diplomatic influence. It is noteworthy that China does not impose IMF-like conditions that require governments to change their monetary and macroeconomic policies. This has made the country an attractive lender to governments which do not wish to change their public spending policies to get access to financial resources. The fact that China does not impose monetary conditions has led to criticism that the Chinese do not care about reckless spending by governments and that the country often does not care about how its loans are spent.

After the announcement of China’s famous Belt and Road Initiative, China began to issue massive loans to countries in the developing world to help them develop their infrastructure projects such as ports, railways, roads and power plants. For example, China built the Djibuti to Addis Ababa electric railway which allows the landlocked nation of Ethiopia to access the sea port and reduced the amount of time needed to transport goods from/to the port significantly. In addition, the Chinese also financed the Mombasa-Nairobi Standard Gauge Railway which has also improved the transport system in Kenya. Although these are important projects, China has faced criticism because they have led to a massive increase in the national debts in countries such as Angola and Kenya. For instance, the standard gauge railway project in Kenya does not produce enough revenues to repay the Chinese loans. This means that they country has to rely on its national budget to pay China. The lack of profitability of some of the projects financed by China has proven to be a big problem for the developing nations. In Kenya, China has also been criticized for failing to finance the railway to reach Uganda which would have made the project more profitable.

It is well known that Chinese loans differ from those provided by western financial institutions such as the IMF and the World Bank. According to research done by AidData shows that China’s state-owned creditors are mainly driven by profit motives and often have conditions which can strain the weak economies in the developing countries. These include the inclusion of strict confidentiality clauses and the prohibition of collective restructuring. These terms can limit the recipient nations’ ability to make sovereign and independent financial decisions.

Moreover, the loans offered by China are surrounded by a lack of transparency. Government transparency is particularly important for financial interactions with external lenders because it ensures that the citizens and markets can have access to accurate information and data. A recent research study found that nearly half of Chines loans in sub-Saharan Africa are not disclosed in the records on sovereign debt. The lack of transparency is also noted in Chinese-funded infrastructure project, This is because such projects do not go through the normal public tender process. This raises the risk of corruption and mismanagement of funds especially in countries that have weak governance structures. The lack of disclousure can cause a rise in social tensions as well as the rise of anti-Chinese sentiments particularly when the citizens in developing countries feel that China is acting in an exploitative manner. For example, the rise of anti-Chinese feelings in countries such as Zimbabwe, Zambia, Kenya and Ghana has been used by politicians to win electoral support and has created political instability in other countries.

Finally, China has faced criticism that it does not care about democracy, good governance and human rights when providing loans to developing countries. This is not surprising because China has an authoritarian system and it does not care about the political ideologies of the countries it lends money. As such, China does not have a problem with financing brutal regimes such as the Sisi government in Egypt and the Kagame regime in Rwanda. In addition, China is known for not raising concerns about corruption and mismanagement of funds when lending to corrupt governments.

Debt Trap Diplomacy

There is absolutely no doubt that although China has faced a lot of criticism, its loans are very important for the developing world. First, Chinese loans provide an options for countries around the world which had to be reliant on the IMF, World Bank or private banks to finance their infrastructure projects. The fact that China chooses to fiance projects that are rejected by other financiers has led to accusations that the country pursues debt trap diplomacy. However, such accusations are unfair because China has not been the main driver behind the ever-rising debt risks in the developing world. Most of these accusations are made by the Western media/intelligentsia due to their fear of the rise of China.

Although China is Africa’s largest bilateral creditor, most of the debt in Africa is held by private holders in the West, particularly European and American investors. In fact, the fastest growing segment of debt in Africa is owned by American and European investors not China. As such, it is accurate to argue that the debt trap narrative is driven by China-US ideological and strategic rivalry rather than a reflection of the perspective or realities of the African countries. Moreover, China has proven that it is a good faith actor in Africa by restructuring and postponing debts of approximately $1 billion especially during the COVID-19 pandemic. As such, it is clear that China will continue to be an important source of investments and loans for countries in the developing world for many years to come.