By Kevin P. Gallagher

History is repeating itself, but Western leaders are experiencing a selective memory loss that is preventing learning the lessons of that history.

If developing countries are to mobilize the necessary resources to recover from multiple crises and have a chance of meeting our shared development goals and climate commitments, the G20 Common Framework needs to promote fair burden sharing among all creditors and link debt relief to achieve those commitments. This was done before and must happen again.

Developing countries are experiencing the worst period of debt and fiscal stress in this century at precisely the time when they need to be mobilizing $1 trillion annually in order to meet development goals and climate commitments. According to the United Nations Development Program, the same number of developing countries exceed sustainable debt thresholds as was the case on the eve of the Highly Indebted Poor Countries (HIPC) Initiative—the last major debt relief effort—when debt distress jeopardized the ability of countries to mobilize the necessary resources to meet the UN’s Millennium Development Goals. 

According to the World Bank, private bondholders are due 48% of debt service payments, followed by multilateral development banks (MDBs) (18%), the Paris Club (14%), and China (7%). Yet, the G20 Common Framework doesn’t compel all creditor classes to engage in debt relief. The Paris Club leads by example. Private bondholders and China point fingers at each other—claiming if just one provides relief, the debtor country will pay the other instead of mounting a recovery. Meanwhile, the MDBs sit on the sidelines.

Leaders of Western-led international financial institutions have lined up to lambast China’s call for MDBs to step up their role. In February, the World Bank’s outgoing President David Malpass accused China of ‘stringing out the process’ and the International Monetary Fund’s (IMF) Kristalina Georgieva said China’s proposal was ‘not possible’.

A quarter century ago during the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) the World Bank and other MDBs (the Inter-American Development Bank and the African Development Bank) played leadership roles in debt relief—without jeopardizing their preferred creditor status (PCT) or AAA credit ratings. The MDBs used their earnings and donations to write off the debt of qualifying countries. What is more, the World Bank partially guaranteed newly restructured bonds to compel private bankers to restructure sovereign debt with middle-income countries.

The G20 Common Framework calls on the MDBs to develop options for debt relief without jeopardizing their PCT or AAA ratings, but they have not done so. The World Bank did bump up its lending to poor countries in 2020 and 2021, but that tapered in 2022, despite the fact that a G20 Expert Panel ruled that MDBs could be lending hundreds of billions of dollars without jeopardizing their credit ratings.

The MDBs could mobilize their unused balance sheets to provide debt relief without hurting PCT and AAA ratings. This could be supplemented with a small portion of the hundreds of billions of Special Drawing Rights sitting on the balance sheets of Global North countries. As in the past, the MDBs could also guarantee restructured private sector and commercial debt as a carrot to compel the private sector and China’s commercial banks to come along, while allowing for lending into arrears by debtors.

The United States is the largest shareholder at the World Bank and hand-picks the World Bank president. The U.S. can test if China is simply trying to stall the process by offering to exchange MDB participation in debt relief for China’s commensurate action and linking debt relief to development goals and climate commitments. 

If China isn’t bluffing, the whole world will benefit.

Kevin P. Gallagher is the Director of the Boston University Global Development Policy Center and Professor of Global Development Policy at the Frederick S. Pardee School of Global Studies at Boston University. He is the co-author of the 2022 book ‘The Case for a New Bretton Woods.’ Follow him on Twitter: @KevinPGallagher

Ajay Banda, U.S. President Joe Biden’s nominee to head the World Bank, is on a ‘listening tour’ of Africa to drum up support for his nomination. Banda kicked off his visit to the continent in Ivory Coast and Kenya.

As a veteran of the private sector (he was an executive at Citigroup, before heading Mastercard) Banda is an unlikely fit for a job usually occupied by development finance experts. While he is officially a nominee, and is campaigning for support, the fact that he was appointed by Biden basically makes him a shoo-in.

Banda would helm the World Bank at a uniquely perilous moment, as it pivots from poverty alleviation to climate change mitigation and adaptation.

Some African governments aren’t happy about this shift. South African Finance Minister Enoch Godongwana griped: “[They should be] careful about shifting the mandate of the World Bank so that whatever additional mandate is being taken does not avert its focus on poverty reduction.”

But getting the buy-in from African governments is only one of Banda’s problems. Far larger is the WB and International Monetary Fund’s ongoing standoff with China.

Beijing now seems set on trying to push the Bretton Woods Institutions to accept losses as part of debt restructuring for bankrupt countries like Sri Lanka, a move that would overturn years-long conventions and change the development finance landscape.

WHY IS THIS IMPORTANT? Banda seems set to oversee massive changes at the World Bank, as the creaking institution already faces a drumbeat of complaints about slow payouts, and its frequently problematic climate actions. His success or failure will likely be affected by geopolitical tensions between the U.S. and China.

SUGGESTED READING:

• Semafor: World Bank nominee Ajay Banga prompts mixed response from Africa watchers by Yinka Adegoke
• Australian Strategic Policy Institute: Imperatives for the World Bank’s next president by Ngaire Woods

UN Secretary-General António Guterres said the world's poorest countries are reaching a breaking point due to mounting pressures from debt, climate change and conflict.

"Systems are stretched. From health and education, to social protection, infrastructure, and job creation. Unemployment is rising, especially among young people, and women are being pushed to the sidelines," he said. (NEWS24)

Yet another U.S. government official has added to the war of words between Washington and Beijing on debt restructuring.

Ramin Toloui, Assistant Secretary for the Bureau of Economic and Business Affairs at the US Department of State, was asked about China’s role in Sri Lanka’s debt crisis during an interview on the nationalist Indian news channel, WION:

SIDHANT SIBAL: What's your view on the ongoing global debt crisis? And, of course, specifically, if you talk about the Indian subcontinent, there are countries like Sri Lanka that have been majorly impacted and how much would you say that China is responsible for that?

RAMIN TOLOUI: Well, this issue of debt is incredibly important right now. There were already vulnerabilities preceding it, but the COVID pandemic has made all of these debt challenges much, much worse. It's very important that the creditor countries cooperate effectively in order to alleviate these debt problems and find solutions and ways forward.

You asked about Sri Lanka in particular, India has shown real leadership in offering assurances or what is called financing assurances that will be necessary in order for Sri Lankan to launch its IMF program. The Paris Club of which the United States is a part has also offered those financing assurances that are basically a way of saying that we are pledging that we're going to provide debt relief that will help get Sri Lanka on a sustainable course.

Unfortunately, China hasn't provided those assurances yet, and we very much hope that they will because China is a major creditor of Sri Lanka, and it's very important that all major creditors come together to help the nation and other countries that are suffering from debt distress to find a way out and stabilise the economic situation and lay the groundwork for again a return to rising living standards in these countries.

WHY IS THIS IMPORTANT? Toloui is only the latest U.S. official to frame China as a unique barrier to debt restructuring. Predecessors include U.S. Treasury Secretary Janet Yellen and U.S. ambassador to Sri Lanka Julie Chung. Seeing that these comments only tend to harden Beijing’s position, they’re more likely aimed at audiences in New Delhi and Washington.

SUGGESTED READING:

• WION News: US Diplomat Toloui praises Indian G20 presidency, regrets China-Russia stance by Sidhant Sibal
• BBC Newsnight: How Sri Lanka is caught in a dance between two rival geopolitical powers by Ben Chu

WHY IS THIS IMPORTANT? The controversy reveals how Kenya's yawning trade imbalance with China is part of the East African country's larger failure as a manufacturer.

SUGGESTED READING:

• The Standard: How storm over China Square has exposed Kenya's trade policy gaps by Macharia Kamau and Brian Ngugi
• Nation: China Square reopens amid backlash from CS Kuria, local traders by Simon Cirui

The Commander of U.S. Africa Command, General Michael Langley, played down South Africa’s recent joint military exercises with China and Russia.

In a press briefing, he said: “I think [the U.S. has] a very strong value proposition in the exercises, especially maritime exercises, that we do with our African partners.  So yes, we’re not asking these countries to choose, but I know that we have a value proposition that I think outweighs some of those aforementioned competitors’” (STATE.GOV)

The Iranian authorities say they found the world’s second-largest deposit of lithium in the mountainous province of Hamedan.

At an estimated 8.5 million tons, the Hamedan lithium haul would be second only to Chile’s estimated 9.2 million ton deposit. It could position Iran as a significant player in the global competition for battery minerals between China and the United States. (CNBC)

AFRICA: China Natural Resources (CNR) has bought Zimbabwe’s Williams Minerals lithium mine from its Chinese counterparts Feishang Group and Top Pacific for $1.75 billion. Zimbabwe has Africa’s largest known lithium deposits. (BUSINESS INSIDER AFRICA)

SOUTH AMERICA: Argentina, Brazil, Bolivia and Chile plan to work together to localize battery manufacturing. South America is a key supplier of raw lithium, and hopes to move up the lucrative battery value chain, a sector currently dominated by Chinese and Global North companies. (BLOOMBERG)