BEIJIN, China – As developing countries across the world teeter on the brink of financial calamity, experts point the finger at one chief culprit: crushing foreign loans from China.
A recent analysis by the Associated Press reveals how the repayment of these loans is pushing a dozen impoverished nations, including Pakistan, Kenya, Zambia, Laos and Mongolia, towards the edge of economic collapse.
“The clock has hit midnight in many parts of the world,” warned Harvard economist Ken Rogoff. “China has moved in and left this geopolitical instability that could have long-lasting effects.”
These countries face a dual challenge. Paying off their mounting debts depletes vital tax revenue for public services like education and healthcare. Concurrently, their foreign currency reserves—critical to servicing the interest on these loans—are rapidly dwindling.
At the heart of the issue lies China’s opacity about its lending activities and its reticence to forgive debts, creating an impenetrable barrier that deters other lenders from stepping in to help.
Recently unearthed details reveal a hidden layer of complexity, with borrowers being compelled to stash money in concealed escrow accounts. This mechanism ensures that China, above all other creditors, gets its pound of flesh first.
Alarmingly, some nations on AP’s analysis spend as much as a third of their government revenue on debt servicing.
Zambia and Sri Lanka have already defaulted, unable to pay interest on loans funding infrastructure projects such as ports, mines, and power plants.
The situation is dire. In Pakistan, power cuts caused by heavy foreign debt have led to the layoff of millions of textile workers.
In Kenya, public servant salaries have been withheld to conserve funds for debt repayment.
Following Sri Lanka’s default last year, industrial job losses have surged to half a million, inflation has rocketed beyond 50%, and over half of the population in many areas now live in poverty.
Unraveling the economic calamity, Zambia serves as a chilling example. The country has been drawn into a vicious cycle of spending cuts and escalating poverty since its default in 2020.
Exorbitant interest payments on Chinese loans, borrowed to fund infrastructure development, have crippled the government’s ability to provide social services, resulting in a humanitarian crisis.
Ashfaq Hassan, a former debt official at Pakistan’s Ministry of Finance, underscored the urgency of the situation. “Every stakeholder will have to take a haircut,” he said. Unless China softens its stance on debt forgiveness, experts fear a ripple effect of defaults and political instability.
China, however, is not showing signs of easing its position. The Chinese Ministry of Foreign Affairs has countered the portrayal of China as an unforgiving lender and blamed the U.S. Federal Reserve for the escalating debt crisis.
Nevertheless, the clock continues to tick. Without swift intervention and policy changes, the crippling debt burdens of these struggling countries will continue to mount, foreshadowing a potential catastrophe on a global scale.
As Rogoff warns, “There could be long-lasting effects” unless action is taken soon.
