China Is Becoming a Challenger to the IMF for Emerging Countries, but With Disastrous Effects.
The recent example of Sri Lanka is a reminder of this.
In recent years, China has provided tens of billions of dollars in emergency loans to countries threatened by financial crises. In doing so, Beijing is positioning itself as an alternative to the International Monetary Fund (IMF), the United Nations organization that tries to ensure the stability of the global monetary system.
The three main recipients of Chinese bailout funds are Pakistan, Sri Lanka, and Argentina (which, by the way, also receives IMF assistance). Together, the three countries have received over $30 billion in aid since 2017. That's according to data collected by AidData, a research institute at the U.S. University of William & Mary.
But other countries, not just in Asia but around the world, are also receiving emergency loans from China. These include Kenya, Venezuela, Ecuador, Laos, Suriname, Belarus, and Ukraine. These countries have all borrowed money from China in recent years.
China acts to promote its Belt and Road Initiative
However, not much is known about these loans. China publishes little information about them, unlike the IMF, which always announces the purpose of the loan and the amount involved. However, it is known that there is a significant difference between the two.
At least according to analysts who spoke to the Financial Times. Beijing is said to be lending without expecting countries to reform their economies or restructure their debt, whereas IMF loans often make this a precondition.
Much of China's lending would only be to repay infrastructure loans under the Belt and Road Initiative (BRI), President Xi Jinping's international investment program to build a “new silk road.”
Indeed, dozens of countries have taken out billions of dollars worth of loans in recent years to build large-scale infrastructure projects under the BRI. Many of them now owe China more than 10% of their GDP. These are mainly low- and middle-income countries, such as Laos, Brunei, and Cambodia.
Under these conditions, you can better understand China's interest in making loans to these countries that promote the objectives that China has set for the future with the BIS.
Countries procrastinate by opting for Beijing's help instead of the IMF
“Beijing has tried to keep these countries afloat by providing emergency loan after emergency loan, without requiring borrowers to restore economic policy discipline or seek debt relief through a coordinated restructuring process with all major creditors,” Bradley Parks, executive director of AidData, commented to the Financial Times.
China's unconditional loans only put the problem on the back burner, not the root cause. They add to the dependence of countries on China while worsening the economic situation in these countries as we have seen in Sri Lanka in recent months.
Gabriel Sterne, a former IMF economist, confirms that this does aggravate financial crises in the countries concerned, in the long term: “I see this as a major obstacle to resolving a crisis,” he said. “The suspicion is that countries are seeking loans from China to avoid having to go to the IMF, which requires painful reforms.”
Thus, the leaders of the countries concerned are taking the easy way out by asking China for help, when going to the IMF would be the best way to push them to undertake reforms that would improve the situation in the long term. All this while avoiding being indebted to China.
Some reading
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