‘Lead by example’: China urges debt suspension for poor nations

China tells World Bank its leadership role will be weakened if it fails to suspend debt servicing for poor countries.

South Africa poverty
The Group of 20 leading economies agreed on Wednesday to suspend bilateral official debt service payments for the world's poorest countries through the end of the year [File: Rogan Ward/Reuters]

China has urged the World Bank to allow its poorest borrowers to suspend debt payments while they deal with the coronavirus pandemic, saying the world’s biggest multilateral development bank should “lead by example.”

Chinese Finance Minister Liu Kun said in a statement to the World Bank’s Development Committee that all parties should take part in joint actions agreed by Group of 20 countries to address debt vulnerabilities amid the pandemic, including commercial, multilateral and official bilateral creditors.

Liu said debt service suspension by the World Bank Group’s International Development Association arm would be “net present value-neutral” – meaning it would not affect the group’s cash flow – and would not hurt its credit rating.

If the World Bank Group “fails to participate in collective actions for suspending debt service payments, its role as a global leader in multilateral development will be seriously weakened and the effectiveness of the initiative will be undermined,” Liu said.

On Wednesday, the G20 economies agreed to suspend bilateral official debt service payments for the world’s poorest countries through the end of the year, a move quickly matched by a group of hundreds of private creditors. It was expected to free up more than $20bn for the countries to spend on fighting the coronavirus outbreak.

“As a responsible bilateral creditor, China will actively engage in bilateral consultations with borrowing countries to put into effect the arrangements for the suspension of debt-service payments reached by the G20 through consensus,” Liu said.

World Bank President David Malpass, who pushed for the G20 debt initiative, told a meeting of G20 finance officials that debt forbearance by multilateral development banks (MDBs) would require them to maintain creditworthiness.

“Suspending repayments to MDBs, if not fully compensated by new shareholder contributions, would run the risk of hurting the poor in both the short-term, by reducing our ability to front-load assistance, and in the long-term, by reducing our leveraging capacity,” Malpass said in a statement.

Chins supports SDR issue 

People’s Bank of China Governor Yi Gang said in a separate statement to the International Monetary Fund’s steering committee that China supports a general allocation of new Special Drawing Rights (SDRs), which would boost liquidity for member countries.

SDRs are essentially a reserve asset created by the IMF from a basket of currencies including the United States dollar, Japanese yen, Chinese yuan, euro and British pound. Essentially an artificial currency, an SDR allocation is a low-cost way of bolstering IMF member states’ international reserves during times of extreme stress. 

US Treasury Secretary Steven Mnuchin on Thursday dashed any hopes for such a new issuance of IMF monetary reserves at the present time, saying it would do little help the poorest countries and most of the benefits would flow to wealthier countries that do not need them.

Sources familiar with the IMF’s deliberations on the issue told Reuters news agency this week that the US was also opposed to the fund providing new resources to Iran and China with no conditions.

“We also support a timely allocation of Special Drawing Rights, which has been proved as an agile and effective measure in previous crises response,” Yi said.

In 2009, the IMF allocated $250bn in new SDRs to its members, providing a liquidity boost during the depths of the last financial crisis. 

Source: Reuters