The urgency of climate change has left the global financial system in desperate need of reform, with debt sustainability and increasing development finance of paramount importance. These were the main conclusions of the Commonwealth finance ministers’ meeting, held on the sidelines of the World Bank and International Monetary Fund (IMF) annual conference in Marrakech this week.
The good news for the Commonwealth’s emerging economies is that there is now a host of innovative means to tap into the necessary financing. The meeting heard from the Commonwealth Secretariat about debt-for-nature swaps, climate-related levies to access domestic revenue, ‘blended finance’ (in which philanthropic grants and development finance are used to mobilise private capital for emerging markets), ‘green bonds’ (in which proceeds are used to finance projects such as renewable energy or) and the oceanic equivalent, blue bonds (when the money raised might go towards fishery management, for example).
At 93% of global GDP, the burden of public debt is completely unsustainable, Patricia Scotland, the Commonwealth secretary-general, told ministers. Much of that debt is down to climate change – more than 40% in the case of small-island developing states. And Commonwealth countries have been leading the world in the unfortunate area of sovereign debt crises. The Covid-19 pandemic dealt a heavy blow to emerging economies, with the lockdowns, trade disruptions and plunge in remittances leading to a surge in debt renegotiations and write-offs. As wealthy countries pumped trillions into their own economies to keep a lid on unemployment and bankruptcies, it pushed up borrowing costs across the world. And as interest rates leapt, so did debt-servicing payments – up 35% to $62bn this year just in Africa.
Swamped by debt
As part of its Belt and Road Initiative, Beijing has been splashing the cash liberally for years, throwing it at several Commonwealth members from Pacific states, such as Papua New Guinea and the Solomon Islands, to Caribbean islands, such as Barbados and Grenada. By 2018, China had lent about $518bn to 72 low-income countries, making it one of the world’s largest creditors. But trade deficits with China and tough conditions means almost $77bn of the loans turned bad between 2020 and 2022 – 4.5 times as much as between 2017 and 2019. Among the countries most swamped by this new wave of global indebtedness are three Commonwealth members: Sri Lanka, Zambia and the Maldives.
Sri Lanka’s vast debt, which has reached 26trn rupees ($80bn), is largely down to the spending spree that the ruling Rajapaksa clan embarked on after the civil war. Their grandiose ambitions and incompetence were summed up by Hambantota port. Built by state-controlled Chinese firms, funded by costly Chinese loans at rates no better than those from banks and based on dubious projections, Sri Lanka eventually handed over the port, on a key maritime trade route, to Beijing for 99 years. Another vanity project built with Chinese loans was Mattala Rajapaksa airport. Built to handle a million passengers a year, the ‘world’s emptiest airport’ barely saw hundreds. ‘There was this sense,’ one Sri Lankan government economist admitted, ‘that China would write us blank cheques.’
That Chinese investment now looks very vulnerable. ‘Whatever the returns China gained for the time and money spent cultivating the Rajapaksas and their associates though, the payoff may be much worse than expected,’ one US analyst said. Last year, after months of demonstrations against the Rajapaksas, and with the economy shrinking by 9%, President Gotabaya Rajapaksa fled abroad as protesters besieged his residence. Meanwhile, the country defaulted for the first time and the UN had to provide food aid.
However, a recent visit by the IMF found several positive signs of the economy stabilising: inflation down from 70% in September 2022 to under 2% last month, foreign reserves up $1.5bn, and shortages of essential goods easing. Debt crises with implications for the global economy would once have commanded a concerted approach by lenders. But with the IMF ready to release $330m in bailout funds, Sri Lanka’s biggest creditor, China, refused to agree to the ‘haircut’ – a trim in the debt owed – that other national lenders had accepted.
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Those creditors, led by India, began working on a deal without China, insisting that Sri Lanka either halted payments to Beijing or put it on a similar deal to the one they were on. ‘The decision to proceed without China reveals the extent of the breakdown in sovereign-debt negotiations,’ the Economist noted, warning of the emergence of ‘a worrying new faultline’ as Indian-Chinese rivalry spills over into debt negotiations. China has since announced its own bilateral deal with Sri Lanka, with the IMF and other creditors left in the dark about the details.
Another Commonwealth country that has become a case study of serpentine debt talks is Zambia, which defaulted in 2020. It has been trying to restructure $8.4bn owed through a G20 programme, while also owing $6bn to Chinese lenders. Its total foreign debt is nearly $20bn. A $6.3bn deal agreed at June’s Paris New Global Finance Summit provided some relief in debt servicing and unlocked $188m in funding from the IMF but, as with Sri Lanka, the ultimate winner appeared to be China. For starters, the debt remained unchanged at 110.8% of Zambia’s GDP as Beijing again insisted that loan maturities and interest rates were changed rather than accept a haircut on the principal.
In the Maldives, the Chinese government or state-owned enterprises put money into more than 20 projects, with the largest three worth $1.5bn, or nearly 40% of the Maldives’ GDP. These include work on Malé airport, housing projects, a power plant, an expensive bridge, water-treatment plants, and hotels. In India, which regards the Maldives as its backyard, there have long been fears that many Chinese investments are a ‘stalking horse for military access’, though these concerns were dismissed as largely overblown by Washington’s Asia Maritime Transparency Initiative.
Nevertheless, the former Maldivian president Mohamed Nasheed alleged that Beijing had leases on 17 of the country’s 1,200 islands and told Reuters that the Chinese ambassador had presented the government with an ‘invoice’ for $3.2bn. ‘They have weaponised foreign direct investment,’ he says.
But while China, India and the West use such investment and loans to leverage their influence, the world’s poorest countries are left paying more on servicing debts than on building the resilient infrastructure they need to cope with climate change. African governments alone owe $1.8trn, borrowed at rates eight times higher than the global north, at an annual cost of more than $50bn. As William Ruto, Kenya’s president, and others argued in a New York Times article as the IMF met in Marrakech: ‘We can’t fix the climate issue unless we fix the debt issue.’
Oren Gruenbaum is a member of the Round Table editorial board.