For more than half a century, Western financial institutions such as the IMF and the World Bank have played a decisive role in financing developing countries. Growing hostility towards these institutions and the structural reforms they are forcing have gradually allowed other states and organisations to assert themselves. In particular, after years of very strong growth, China has become a major creditor in many regions, notably in Africa. However, the economic and demographic slowdown has dampened its lofty ambitions. Now, strengthened by the power they have acquired through ever greater public support, private creditors are playing an increasingly important role in the financing of developing countries. Is this a sign of change?
A debt crisis is looming. The effects of the health crisis, inflation, rising interest rates in the West and the global rise in the dollar are constantly undermining countries that are already experiencing difficulties of all kinds. Over the last three years, 18 defaults have been recorded in ten developing countries, more than in the previous two decades. The countries most at risk are those with low incomes, almost a third of whose loans are issued at variable rates. Around 60% of these countries are considered to be over-indebted or in the process of becoming so. According to the UN, 3.3 billion people are suffering because their governments are forced to give priority to paying the interest on their debt over essential investments. And by 2024, the overall cost of servicing the debt is set to rise by more than 10% for developing countries, and by 40% for the poorest countries. Faced with this situation, which has sometimes disastrous economic, political and social consequences, the current reforms of the international financial architecture provide no response.
Western institutions forced to reinvent themselves
The IMF and World Bank programmes imposed over the last four decades under the Washington Consensus are increasingly being rejected. Last summer, Tunisian President Kais Saied refused a $1.9 billion loan from the IMF. In a fragmented world, Western financial institutions are being forced to reinvent themselves.
On 9 October, for the first time in Africa in 50 years, the annual meetings of the IMF and the World Bank opened in Marrakech. On the agenda: reform of the Bretton Woods institutions and climate financing. The aim is to give the new loans a bright green tinge that would almost make them look like grants. For several years now, the IMF has been offering near-zero interest loans with 20-year maturities, with the aim of ‘financing climate action’ in the poorest countries. While the contribution of the poorest countries to global carbon emissions is virtually nil, and the countries of the North have not met their commitment to provide the poorest countries with $100 billion a year to finance their climate policies…
At the same time, these meetings raised the fundamental question of the governance of these institutions – largely run by Western countries and yet created to stabilise the international financial system in the aftermath of the Second World War. No real changes were negotiated, with the emerging countries (including the BRICS) retaining a very small, non-influential role, while sub-Saharan Africa only gained a third, insignificant seat on the IMF Board. In these two institutions, the voting rights of each country depend on their quota (contribution to the capital of the institutions) calculated, arbitrarily, according to their economic and geopolitical weight in the world. The United States holds 17.4% of the votes, China 6.4% (even though its economy represents around 20% of the world’s GDP) and Germany 5.6%… This makes it easy for the West to muster a majority, and for the United States to apply a systematic right of veto to important decisions, all of which require at least 85% of the votes.
Last but not least, the stated aim of these meetings was to change the financing policy of these institutions to grant more loans. As the member countries provide the bulk of the financing according to their share in each institution, a proposal to increase the quotas distributed by 50% was approved. Nevertheless, as borrowing conditions tighten in the advanced countries (which distribute a significant proportion of loans) in the face of historically high levels of public debt and deteriorating public finances, the volume of their financing is likely to fall. As in previous years, this situation should theoretically benefit China, whose status as a creditor has continued to grow. But Xi Jinping’s government is facing major difficulties.
China, a powerful creditor in trouble
For more than a decade, China has been concentrating particularly on its external development (to the detriment of its population). To do this, it has recycled the savings it accumulated during its years of strong growth to lend to those with financing needs. Through a singular policy of unconditional borrowing, it sets itself apart from Western financial institutions. In theory, repayment methods are more flexible, as debtors’ debts are often rescheduled if they are close to default (in the same way as the Paris Club at the end of the 20th century) and rescue loans are introduced if a country’s financial situation deteriorates (at rates of around 5%, which is twice as high as those charged by the IMF in particular). As part of its technological and military development, China has rapidly expanded into Central Asia and Africa in particular, where natural resources abound.
In particular, it can count on its state-owned banks (the Development Bank and the Export-Import Bank), which have provided almost 70% of Chinese loans to emerging and developing economies over the last twenty years, as well as its national banks. The majority of these loans (around 80%) are, however, directed towards emerging countries in order to protect its banking sector from potential payment defaults.
Moreover, China has been trading massively with these countries, becoming the main trading partner of the African continent since 2009, as well as Latin American countries (Argentina, Brazil, Chile, Peru) and many others.
But an era is coming to an end. With its business model on its knees, its status as a creditor has been weakened. It is lending far less than before. In Africa, for example, Chinese loans reached just $1 billion in 2022, their lowest level since 2004. It has also found itself obliged to depart from its usual practices by agreeing to join, among others, the Western DSSI initiative created by the G20, aimed at suspending interest payments on debt in certain countries. Overall, this situation penalises debtor countries more than China, whose decline in lending around the world is merely a reflection of a declining economy. On the other hand, it has long benefited private creditors.
The growing importance of private creditors
The financialisation of the economy has undoubtedly shifted the balance of power from the public to the private sector, all the more so as government support programmes (particularly from central banks) for financial players have multiplied. The bailout guarantee that the latter have obtained, whatever the cost, allows them to lend under conditions that are sometimes risky but particularly profitable. Unlike governments, the rates they offer are generally twice as high and the repayment terms more aggressive. These players are also spared public initiatives to cancel, suspend or restructure debts, sometimes leading to indirect public subsidies when the debt relief provided by a government benefits private players.
In recent years, the role of private creditors in financing developing countries has intensified. In particular, shadow banking players (hedge funds, private equity, etc.), retail and investment banks, and commodities managers (Glencore, for example, holds 20% of Chad’s debt). According to figures from the Institute of International Finance, private financing now accounts for 27% of the public debt of poor countries, compared with just 11% in 2011. In Africa, they hold more than 30% of the continent’s external debt. In some middle-income countries, such as Ghana and Côte d’Ivoire, this rate is close to 60%.
The risks are numerous, leading to ever-increasing financing requirements. Falling budget and export revenues, rising interest rates, exchange rate fluctuations, capital flight, shortages of foreign currency and, last but not least, slowing growth are all challenges that exacerbate the debt burden of developing countries. Many of these countries also have problems of poverty or extreme poverty, a sometimes complicated political situation and a social system in difficulty.
Although the budgetary constraints of advanced countries may curb their ability to lend, private creditors too remain vigilant. The fear of not being repaid and of receiving less support from governments could discourage them from lending. The rise in interest rates has also significantly slowed down the trade-offs (and by extension the financing) between borrowing at low rates in advanced countries to benefit from better returns in developing countries. In 2022, for example, new loans granted by private creditors to developing countries fell by 23%, their lowest level for ten years. At the same time, they received $185 billion more in capital repayments than they lent to developing countries. The World Bank and multilateral creditors have had to intervene.
This raises the question of the lack of financing and debt sustainability in developing countries. More partial, targeted and conditional debt cancellations are needed. This will give countries in desperate need some room for manoeuvre, rather than making them pay for risks for which they are not responsible. The international financial architecture must then be rethought, through the creation of new financial institutions that reflect the new realities of today’s world. A multipolar world in which many of the emerging countries are now emerging powers in their own right. This is a sine qua non if we are not only to strike a balance between today’s challenges, but also to preserve our fragile democracies.