Interest Rate Hikes and IMF Bailouts: the US Tries to Roll Back Chinese Influence in the Global South

In their February paper, “US Dollar Primacy in an Age of Economic Warfare,” presented at the West Point Symposium on “Order, Counter-Order, Disorder” Michael Kao and Michael St. Pierre argue for using a stronger US dollar as geopolitical leverage:

Not only are the effects of interest rates hikes magnified in other countries due to a myriad of structural and idiosyncratic economic fragilities previously discussed, the confluence of wide USD adoption with cyclical USD strength … make the USD a potent geopolitical lever masquerading as a domestic fight against inflation. National Power lends the USD dominance in adoption, while an opportunistic fight against inflation lends the USD cyclical strength for geopolitical leverage.

The US and US-led institutions are already trying to sideline China in countries struggling to make debt payments. And these efforts are likely to continue as interest rates rise and more countries in the Global South are unable to repay loans. A recent UNDP paper stated that 52 developing countries are suffering from severe debt problems.

China is the world’s largest bilateral creditor, and this is especially true for countries that are part of Beijing’s Belt and Road Initiative and/or for countries that possess strategically important natural resources. Washington estimates that Chinese lending ranges from $350 billion to a trillion dollars.

In recent years, western officials and media have ratcheted up criticism of China’s lending practices, claiming Beijing is putting its boot on the neck of countries, holding back their development, and is seizing assets offered as collateral.

Deborah Bräutigam, the Director of the China Africa Research Initiative at the Paul H. Nitze School of Advanced International Studies, has written that this is “ a lie, and a powerful one.” She wrote, “our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country.”

Even researchers at Chatham House admit there’s nothing nefarious about China’s lending, explaining that it has instead created a debt trap for China. That is becoming more evident as nations are unable to repay, largely due to the economic fallout from the pandemic, the Nato proxy war against Russia in Ukraine, inflation, and rising interest rates.

These confluence of events hitting developing countries are entangling China  in multilateral talks that include US-backed institutions like the IMF. Beijing’s preference has always been to try and tackle debt repayment issues at a bilateral level, typically by extending maturities rather than accepting write-downs on loans.

But US Treasury Secretary Janet Yellen and company continue to parrot the talking point that China’s lending is harming countries, and in countries unable to repay their international debts, the West and China are increasingly at odds.

Back in 2020, the G-20 countries created the Common Framework for Debt Treatments to provide relief to indebted countries, which included “fair burden sharing” among all creditors. Beijing’s reluctance to agree to such burden sharing is illustrated by the case of Zambia.

Zambia became the first African country to default on some of its dollar-denominated bonds during the Covid-19 pandemic when it failed to make a $42.5 million bond payment in November 2020.

More than a third of the country’s $17 billion in debt is owed to Chinese lenders. Zambia worked out a deal with the IMF for a $1.3 billion bailout package but can’t access the relief until its underlying debt is restructured – including Chinese debts. But the IMF prescription for Zambia is a blow to Beijing. Here are some details of the arrangement from The Diplomat:

Zambia will shift its spending priorities from investment in public infrastructure – typically financed by Chinese stakeholders – to recurrent expenditures. Specifically, Zambia has announced it will totally cancel 12 planned projects, half of which were due to be financed by China EXIM Bank, alongside one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital. The government has also canceled 20 undistributed loan balances – some of which were for the new projects but others for existing projects. While such cancellations are not unusual on Zambia’s part, Chinese partners account for the main bulk of these loans…

While some of these cancellations may have been initiated by Chinese lenders themselves, especially those in arrears, Zambia may not have needed to cancel so many projects. Since 2000, China has canceled more of Zambia’s bilateral debt than any sovereign creditor, standing at $259 million to date.

Nevertheless, the IMF team justified the shift because they – and presumably Zambia’s government – believe that spending on public infrastructure in Zambia has not returned sufficient economic growth or fiscal revenues. However, no evidence is presented for this in the IMF’s report.

Zambia will also cut fuel and agriculture subsidies. So instead of infrastructure investment and social spending, the country gets austerity. The IMF deal also relegates China to the backseat, as it allows for 62 concessional loan projects to continue, only two of which will involve China. The vast majority of the projects will be administered by multilateral institutions and involve recurrent expenditure rather than infrastructure-focused projects.

Despite all the evidence to the contrary, Yellen on a trip to Zambia in February warned that Chinese lending “can leave countries with a legacy of debt, diverted resources, and environmental destruction” and called out Beijing for being a “barrier” to ending the major copper producer’s debt crisis and noted that it had “taken far too long already to resolve.”

The US effort to sideline China in Zambia comes at the same time that Washington is trying to tighten control over resources in the region. Note that back in December the US signed deals with the Democratic Republic of Congo and Zambia (the world’s sixth-largest copper producer and second-largest cobalt producer in Africa) that will see the US support the two countries in developing an electric vehicle value chain.

Beijing is insisting that multilateral lenders also accept haircuts on loans rather than just China being expected to do so. This is a position that most debtor nations agree with. On the other side, the IMF and its partners are worried that its bailout money would merely go to Chinese creditors – many of which are state banks that are increasingly troubled by bad debts.

Gong Chen, founder of Beijing-based think tank Anbound, says that if countries are unwilling or unable to repay their debts to China, it would be devastating:

Widespread debt evasion and avoidance would have a significant impact on China’s financial stability,” he said, “and we are concerned that some countries may try to avoid paying back their debt by utilizing geopolitics and the ideological competition between East and West.

Yellen and company tried to apply more pressure on Beijing at the recent G20 meeting of finance officials in India, but that fell flat on its face much like the West’s efforts to hijack the meeting and turn it into a roundtable on Russian sanctions.

Meanwhile, Zambia has halted work on several Chinese-funded infrastructure projects, including the Lusaka-Ndola road, and canceled undisbursed loans in line with the IMF prescription for its debt problem.

Chinese companies are now attempting to work around these roadblocks by shifting more toward public-private partnerships. For example, a Chinese consortium is now planning to build a $650 million toll road from the Zambian capital to the mineral-rich Copperbelt province and the border with the Democratic Republic of the Congo.

The situation in Zambia does not bode well for other nations needing debt relief, as the delays while the West and China clash mean more pressure on government finances, companies and populations.

And if the West’s primary goal in offering debt relief is to sideline Beijing, as it appeared in Zambia, then that will mean a drastic scaling back of infrastructure projects replaced by austerity. From Sovdebt Oddities:

More broadly, as noted by Mark Sobel, the current international financial architecture is ill-equiped to deal with a major recalcitrant creditor benefiting from outsized (geo)political leverage. While it remains illusional to insulate sovereign restructurings from geopolitical considerations, there is a risk that they would turn into a game of chicken between China on the one hand and the IMF and Paris Club on the other hand. The problem being that if none of the players yields, it will just mean more economic and social hardship for the debtor country stuck in the middle.

Sure enough, the same situation is playing out in two nations that are key points on China’s Belt and Road project: Pakistan and Sri Lanka.

Here is Islamabad’s debt situation, courtesy of Pakistani economist Murtaza Syed at The International News:

For each of the next five years, Pakistan owes the world $25 billion in principal repayments. It will also need at least $10 billion to finance the current account deficit, bringing total external financing needs to $35 billion a year between now and 2027. We have foreign exchange reserves of just $3 billion. For each of the next five years, the government needs to pay 5 percent of GDP to service the debt it owes to residents and foreigners. Our total tax take is only 10 percent of GDP.

Around fourth-fifths of this external debt is owed to the official sector, split roughly evenly between multilaterals (like the IMF, World Bank and ADB) and bilaterals (countries like China, Saudi Arabia and the United States). The remaining one-fifth is commercial, again roughly evenly split between Eurobond/Sukuk issuances and borrowing from Chinese and Middle Eastern banks. By region, we owe roughly one-third of our external debt to China and 10 percent to the old-boys network of the Paris Club, which includes Europe and the US.

Additionally, last year, the Pakistan rupee plunged nearly 30 percent compared to the US dollar. All indications are that the IMF is using bailout negotiations to pressure Pakistan to move away from China and revive its partnership with the US. Some background from WSWS:

Former prime minister Imran Khan’s government was promptly removed in April 2022 after he reversed IMF-demanded subsidy cuts in the face of country-wide protests. Khan had previously implemented two rounds of some of the toughest austerity in the country’s history. In the final year of his government, Khan shifted the country’s foreign policy towards a closer alliance with Russia and deepened ties with China, prompting concern and anger in Washington.

Sharif’s Muslim League (PML-N) and the People’s Party (PPP) assumed power in a coalition with the approval of the military, long the most powerful political actor in the country and the linchpin of the alliance between the Pakistani bourgeoisie and US imperialism. The express aim of the new government was to implement IMF austerity, which it has done.

The IMF-prescribed austerity imposed by Pakistani elites also targets Beijing.  China is Pakistan’s largest single creditor as the country is perhaps the most important country in China’s Belt and Road plans because it would provide China with a potential corridor to the seaport at Gwadar on the Indian Ocean. The supply line would reduce the distance between China and the Middle East by thousands of miles via insecure sea lanes to a shorter and more secure distance by land. Beijing’s spending in Pakistan reflects this, as the $53 billion China has spent on the Belt and Road Initiative (BRI) in the country is tops of all BRI countries.

Yet many of the BRI plans are unrealized, and Pakistan’s current economic situation makes it unlikely they’ll be finished anytime soon. China has dramatically scaled back investment, which fits with its more cautious approach to BRI projects. Meanwhile, decades-high inflation, economic mismanagement, and last year’s biblical floods have led to Islamabad burning through its foreign exchange reserves in order to make debt payments. The US blames China.

“We have been very clear about our concerns not just here in Pakistan, but elsewhere all around the world about Chinese debt, or debt owed to China,” US State Department Counselor Derek Chollet told journalists at the US Embassy in Islamabad after he met with Pakistani officials in February.

Additionally, Cholett said Washington is warning Islamabad about the “perils” of a closer relationship with Beijing.

According to the Times of India, many Pakistani officials have come around to the US way of thinking and are also blaming the China-Pakistan Economic Corridor Project (CPEC), a $65 billion network of roads, railways, pipelines, and ports connecting China to the Arabian Sea,  for worsening the country’s debt crisis. From Indian Express:

Pakistan expanded its electricity generation capacity under the China-Pakistan Economic Corridor Programme (CPEC) but the expansion came at a high cost both in terms of high returns guaranteed to the Chinese independent power producers (IPPs) and the expensive foreign currency debt. Pakistan has been unable to make the capacity payments to IPPs under the long-term power purchase agreements with the electricity sector debt rising to a staggering $ 8.5 billion.

Last December, the government agreed to repay this debt in installments. However, this may have displeased the IMF, which had expected the government, in August 2022, to renegotiate the purchase power agreements. Pakistan tried to renegotiate but the Chinese refused.

The IMF extended the current program on the condition that it would not go to the Chinese IPPs. More from Nikkei Asia:

Observers say Pakistan’s handling of the electricity issue is likely to irk China, noting that Sharif’s government committed to the IMF to reopen power contracts without taking the Chinese companies into confidence. Pakistan has also reneged on a promise to set up an escrow account to ensure smooth payments to Chinese IPPs.

The IMF is demanding that Pakistan rationalize payments to the Chinese IPPs in line with earlier concessions extracted from local private power producers…

The IMF now wants Pakistan to negotiate an increase in the duration of bank loans from 10 years to 20 years, or to reduce the markup on arrears owed to Chinese IPPs from 4.5% to 2%.

Notably, the IMF appears to have been less willing to make concessions than the previous 22 times Pakistan has sought its support since 1959. Oddly enough Beijing is pushing for a deal between Islamabad and the IMF, and China recently extended a $2 billion loan to Pakistan. From the Middle East Institute: 

It is interesting to note, for example, that Chinese officials reportedly urged Islamabad to repair ties with the IMF — if true, an indication that Beijing regards resumption of the Fund’s lending program as key to mitigating Pakistan’s risk of default.

It is also revealing that Pakistan seems keener to take on new financing from China than China may be to furnish it. Even as the economy wobbles under a heavy debt burden and other acute challenges, Pakistani officials have sought support from China to upgrade the Main Line 1 (ML-1) railroad, a project which, if not undertaken, they claim could result in the breakdown of the entire railway system.Yet, the IMF wants Pakistan to rein in CPEC activity. And China’s own domestic economic challenges and priorities might make it hesitant to respond to Islamabad’s appeals. On the other hand, the ML-1 project might meet Beijing’s more exacting standards and increasing emphasis on “high quality” BRI infrastructure projects.

The recent rapprochement between Iran and Saudi Arabia could leave Pakistan out in the cold and even more reliant upon the US. From Andrew Korybko: 

With the Kingdom likely to focus more on mutually beneficial Iranian investments than on dumping billions into seemingly never-ending Pakistani bailouts that haven’t ever brought it anything in return, Islamabad will predictably become more dependent on the US-controlled IMF. China will always provide the bare minimum required to keep Pakistan afloat in the worst-case scenario, but even it seems to be getting cold feet nowadays for a variety of reasons, thus meaning that US influence might further grow.

About that, last year’s post-modern coup restored American suzerainty over Pakistan to a large degree, which now makes that country a regional anomaly in the geopolitical sense considering the broader region’s drift away from that declining unipolar hegemon. The very fact that previously US-aligned Saudi Arabia patched up its seemingly irreconcilable problems with Iran as a result of Chinese mediation reinforces this factual observation. Pakistan now stands alone as the broader region’s only US vassal.

Pakistan is not only the most highly indebted to China of its BRI partners, but along with Sri Lanka, is also among the largest recipients of Chinese rescue lending. The ruling elite Pakistan is increasingly concerned that the social crisis could spiral out of control and result in something similar to what happened in Sri Lanka last year when a popular uprising toppled the government.

Due to haggling between the West and China, Sri Lanka has been waiting since September to finalize a bailout after a $2.9 billion September staff level IMF deal. And yet many of the recommendations in the agreement have already been implemented—to disastrous effect.

The country is dealing with its worst economic crisis since independence in 1948, including a shortage of reserves and essential items. In February, the IMF said Sri Lanka’s bailout package was set to be approved as soon as the country obtained adequate assurances from bilateral creditors, i.e., China.

Beijing now appears ready to meet more of the IMF’s demands, although details have yet to be released. In a letter in January, the Export-Import Bank of China offered a two-year debt moratorium, but the IMF said that wasn’t enough. According to Reuters, total Sri Lankan debt to Chinese lenders totals roughly 20 percent of the country’s total debt.

Sri Lanka is another focal point of the BRI due to its geographical position in the middle of the Indian Ocean. China’s goal was to transform the country into a transportation hub as much of its energy imports from the Middle East and mineral imports from Africa pass through Sri Lanka. Beijing has already achieved much of these goals. For example, in 2017 a 70 percent stake of the Hambantota port was leased to China Merchants Port Holdings Company Limited for 99 years for $1.12 billion.

The West blames China’s BRI initiative in Sri Lanka for saddling the country with unsustainable debt, but is that really the case? Political economists Devaka Gunawardena , Niyanthini Kadirgamar, and Ahilan Kadirgamar write at Phenomenal World:

The problems associated with the IMF’s policy package have been caught in geopolitical rhetoric. The US alleges that Sri Lanka is the victim of a Chinese debt trap. In fact, Sri Lanka is in an IMF trap. The structural consequences of over four decades of neoliberal policies have exploded into view with the receding welfare state, a ballooning import bill, and investment in infrastructure without returns, all of which relied on inflows of speculative capital. Framing Sri Lanka’s crisis within a narrative of geopolitical competition obscures the core dilemmas of the global economy. Will the evident breakdown force a reckoning with the present order, or will it be used as an excuse to inflict more suffering?

Thus far, it looks like the latter.

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  1. John R Moffett

    The US is a hammer, and everything looks like a nail to us. Just imagine how much further developed the world would be now if the US had acted cooperatively with the reset of the world instead of antagonistically. The US is the primary source of belligerence in world affairs, and we just keep bashing those nails wherever we think we see them.

  2. The Rev Kev

    In the same way that we are evolving into a multipolar world, we may see nations of the Global South fall into one camp or another. So here for example we see the leaders of Zambia and Pakistan push their countries into the western camp. But if the result is a further impoverishment due to austerity and more destabilization, that may push other Global South countries into the Russia-China orbit as at least they are promising – and doing – development. Why sign up for a hair shirt if the other side is promising cotton? Can’t help but feel that trying to put Pakistan through an unnecessary wringer may not be a good idea. After all, if that country collapses, what happens to their nukes? Does Washington think, as has been suggested, that they have the ability to send the US military in to seize and evacuate those nukes? And giving up your nukes may not be such a good idea after seeing what was done to Libya.

    1. tropul

      > Why sign up for a hair shirt if the other side is promising cotton?

      For a beach house in LA and a central park apartment.

  3. TomDority

    The pot calling the kettle black for seeing its own reflection in the kettle.
    does austerity mean the subjugation, harm and degradation imposed upon other beings and environment thru the shackles of debt . sort of like the loan shark looking to break knee caps to get it’s usurious, odious money back – tis truly the american way.

    1. square coats

      According to Nietzsche, the breaking of knees used to be a repayment in and of itself.

  4. Lex

    I’m out of my depth on these sorts of economic situations, but …

    What if the Chinese solution was to use its large reserves of US dollars to pay off IMF/WB loans on behalf of debtor nations? It would be expensive but geopolitically advantageous in that it would free these nations from the US debt trap directly and the standing bilateral debt with China could then be serviced normally. It would bring an immense amount of good will. And it would be a major step towards dedollarizing for China.

    Again, ridiculously expensive for China but losing countries to IMF/WB debt is ridiculously expensive too. Not to mention that China should probably consider that its dollars are gone eventually one way or another as relations with the US degrade. I expect more knowledgeable folks here to point out why this is a bad / unworkable idea.

    1. spud

      actually its a good idea. flood the world with dollars, instead of holding them. and the free trade morons in the u.s., will not dump free trade, and as lenin said, they will buy the rope etc., and keep free trading, pumping trillions into china, so that china can use those dollars to further under cut the free tradin west.

      what a way to use parasites. they get to service the debt they created.

      won’t happen though. most leadership will blow the money, instead of becoming as self reliant as possible.

      although, pitchforks used correctly might make a few do whats right.

  5. LY

    Looks like to me that China is mostly involved as vendor financing. These loans are in US dollars? So much for de-dollarization.

    The real solution is a debt jubilee, but every debt is precious.

  6. spud

    the goal now for every country is to break the worlds free trade order built by bill clinton, tony blair and others.

    become as self reliant as they can to mitigate the enormous debts caused by free trade, so enormous, they can’t be paid back, which is the goal of the free traders.

    so every country must first remove any leadership that is not going to bite the bullet like what Iran and Venezuela and others have had to do.

    how they remove them is up to the people, but the goal is to remove them in a way, that if another free trade type gets into power, they remember what happened to the last one.

    of course this might not happen in every country, or at all, but it looks like a few are managing to overcome the free traders, and regain sovereignty, and some sort of civil society.

    just look at the U.K., they have had a series of free market quacks, who have been forced into addressing internal problems, rightly or wrongly addressed, most likely wrong. but they have had to address them none the less.

    and the good thing is that their street, is losing its viscous feverish grip, slowly but surely they are becoming ever weaker.

    than look at france, almost the whole country is out in the streets, and the free trader macron, with the support from oligarchs all over the world, just yawns and business as usual.

    to change the world back to sovereignty and civil societies, will take decades, maybe a century or more, if free trade does not melt down into another world war, which is the inevitable results of free trade.

  7. Mikel

    “…The IMF deal also relegates China to the backseat, as it allows for 62 concessional loan projects to continue, only two of which will involve China. The vast majority of the projects will be administered by multilateral institutions and involve recurrent expenditure rather than infrastructure-focused projects…”

    “Recurrent expenditures” (those rentier like costs)
    So focusing on adminstrative and general expenses: rents, insurance, financial and legal services, computer/IT support…

    Then a infrastructure project left on the table is a toll road.

  8. ArvidMartensen

    So is inflation being stoked by the US as a geopolitical hammer to destroy China. And Russia. And any country that trades or borrows from them. Looks like it to me.

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