South Asia: The crucible for a global debt crisis?

Creon Butler

Well, hello, everyone. My name is Creon Butler and I’m the Director of the Global Economy and Finance Programme at Chatham House, and it’s my great pleasure to welcome you to today’s panel discussion on debt distress and the role of recent developments in South Asia, but also, what’s happening in other key parts of the world, including Africa. And we’ve got two great experts, and I’ll hand over them shortly for some introductory comments. But before doing so, I wanted to make three sort of quick points about the general situation in relation to debt distress.

And the first of these is that, while we got through the pandemic without a systemic crisis, the situation has clearly worsened since the start of the year, reflecting the knock-on effect of Russia’s invasion of Ukraine and measures that had to be taken in response to that. Some emerging and developing economies clearly benefited from higher energy prices, but the many of – the majority of countries at risk of debt distress did not. And so now we’re facing the combination of the legacy of the pandemic, rising US interest rates and a strengthening dollar, which obviously affects the external debt of many of the countries. It’s still very much in – denominated in dollars or other hard currencies and also, the impact of energy price rises and food price hikes. And this is really potentially toxic. In Africa alone, I think, if you look in August, there was some 22 low income countries either in debt distress or at high risk of debt distress.

Second point is that the mechanism for dealing with debt distress, which is the G20 Common Framework, and this was launched in the autumn of 2020 and was really quite an achievement because it brought together all the members of the G20, but particular China, together with Western countries, essentially to use the approaches of the Paris Club. China’s not a member of the Paris Club, but there was an agreement effectively to use Paris Club approaches to dealing with countries – to helping countries that are in debt distress to dealing with the question of debt restructuring.

It did, however, move incredibly slowly through 2021 and I think at some point sometimes people thought, you know, it was broken. However, this summer, there was a quite significant movement in relation to Zambia, with the agreement of – by official creditors to provide assurances to the IMF that the IMF needed in order to agree an extended credit facility, that’s then been agreed by the IMF Board and we’re now in the process of the official creditor’s looking at what relief they’re going to provide, through official debt restructuring. And that’s quite a significant movement and I think reflects – I mean, one of the interesting questions is, what does it reflect? But it seems to reflect, certainly within China, greater comfort with the approach that’s underlying the Common Framework.

However, crucially, the Common Framework is really only intended to apply to – it’s only designed to apply to low income countries, 73 low income countries. It doesn’t formally apply to emerging economies or middle-income economies, some of which we’re going to talk about today, particularly in relation – in Sri Lanka.

Final point really is, that when thinking about debt distress, it’s really important not to think about it in isolation because many low income and emerging economies face considerable need for external finance, in the context of the transition to net-zero. And, as I think will be discussed later, this is really much for most of them in relation to the adaptation needs, as climate change progresses, but that’s alongside the broader transition of the global economy to net-zero. And if you think about it, if a country’s in debt distress, it’s not very much point thinking about how you’re going to mobilise private finance because the overall environment is not one in which private finance is going to be happy coming in. So, you really have to deal with the issues of debt distress in order to tackle that need for external financing. And, as I say, I hope we’ll get into that subsequently.

So, what we’re going to do is, because we badged this event as starting with South Asia, I’m going to move to our first speaker. But before doing that, I just need to highlight a couple of quick points, which are standard for these events. So, firstly, the session is the – the session is on the record. We’re going to make a recording, which will be available subsequently and then, after each of the presentations by the two speakers, we’ll have a discussion among the panellists, but then we’ll open to Q&A from the audience for the final 20 or 25 minutes or so. And what I’d very much like you to do is post your questions in the Q&A box. If there’s time, I may ask you to make your – put your question directly, but if not I will aim to read it out. And please post questions at any time during the discussion, so you don’t have to wait until that final point and then, once we’ve – I will try and handle as many of those questions as possible, so that we can give everybody a chance to put their points.

Excellent, so, now I will return to our first speaker and Gareth Price is a Senior Research Fellow in the Asia-Pacific Programme in Chatham House. So, Gareth, over to you for your introductory comments.

Dr Gareth Price

Thank you, Creon. Yeah, it’s interesting, I’m putting South Asia together because South Asia’s one of the least connected parts of the world and when we think about contagion, we’re normally thinking about the spread of risk because of linkages between the countries involved. What we’re talking about here is the numerous economic similarities between them, which make them appear vulnerable. I thought I’d start with running through the story of what happened in Sri Lanka, because Sri Lanka clearly was the first country to default for a decade or so, and appeared the most vulnerable within South Asia.

The story really goes back to 2009 at the end of the Sri Lankan Civil War and the Government goes on a mission to push GDP by – in part, by borrowing external debt. And so, if you like, it’s debt fuel spending, which is fine, because GDP started to rise. With the end of the Civil War, tourism started coming in so it’s getting more foreign exchange reserves. It’s worth making a point, I guess, that its external debt that’s the troubling one. Domestic debt, if you’re borrowing domestically, in the last resort you can print money. And that’s not what the textbooks suggest you should do and it’s inflationary and so forth, but you can do that. If it’s external debt, you need dollars to pay it off, and this is the story of Sri Lanka, which I’ll quickly relay. So, it starts borrowing money, not necessarily a problem.

The next event, if you like, in April 2019, a series of bomb blasts go off in Sri Lanka, linked to Islamist terrorists, and what that meant is that tourist numbers started to decline. And so, in particular, Western tourist numbers and that’s as problem because that’s a key source of foreign exchange. In the short-term, they were replaced by, ironically, Russian and Ukrainian tourists, and you can see that that may crop up later in the tale.

Then you have, as a current theme, and I’ll come to the, sort of, linkages or similarities across South Asia, but one of the linkages is populism and I know it’s a debated term, but I’m using populism in the term, spending more than you should, given your taxation levels. So, the new President comes in, Rajapaksa, on a platform of slashing taxes, which any Economist would say, this is ill-advised, but it was popular. So, he comes to power late in 2019 and starts cutting taxes.

And I’ll digress a second just to make the point, Sri Lanka’s continuously had current account deficits and it’s continuously had fiscal account deficits. This has been the history of Sri Lanka and it’s been in trouble before. It hasn’t necessarily defaulted, but it’s had to turn to the IMF because of this recurrent theme of not taxing enough and importing more than it exports or more than the foreign exchange it brings in. And so, things are pretty bad and then you have the pandemic, at which point tourist numbers stop. So, it affects all economic activity, as everywhere else in the world, but it’s also it’s specific sources of foreign exchange for Sri Lanka, one being tourism, which has stopped, the other one being remittances. And I think remittances are a key part of this story, certainly in the South Asian context.

Remittances actually started to rise at the start of the pandemic, the reason being they had to go through official channels, and what this implies is that previous estimates of remittances were vastly underestimates. That much more money was coming back on people’s persons and when they couldn’t travel, you know, they had to send it through the official channels. So, that’s an interesting observation that remittances hold – sustain or are very important in all of South Asian economies and sustain a few of them. So, you take those out and you have a massive problem.

So, foreign exchange isn’t coming in, and so, Sri Lanka starts ploughing through its foreign exchange reserves to pay for its imports. Then one of the stories of mismanagement, it starts banning imports of goods and one of the main imports in Sri Lanka is fertiliser and so, the President announces it’s going to introduce organic farming. Now, with a lag to the next harvest, that means the agriculture output entirely failed, so instead of importing fertiliser, it’s got to import food, which is very problematic. So, instead of agriculture being a minor import, it suddenly becomes a much more major import.

So, you’ve got a slow car crash. There was a quote from Hemingway, “How did you go bankrupt?” Two ways, slowly at first and then all of a sudden. Implies entirely and the all of a sudden was Russia invading Ukraine. Those few tourists that were left coming from Russia and Ukraine, they weren’t there any more, more importantly, the prices of wheat, palm oil, other food stuffs, those knock-on effects, and in particular, fuel all soar and the country’s running through its foreign exchange reserves, not long after it’s go through them and it’s defaulting.

The next comment that I wanted to make was just to, sort of, bring out, you know, the aspects of Sri Lanka’s story that resonates elsewhere in South Asia. And when I say South Asia, I’m saying in order of risk: Pakistan, Nepal, Bangladesh; India’s a little bit different, but it does suffer from some of these issues. Remittances are absolutely vital across the region.

I was going to make this good point at the end, but I think I’ll sort of fit it in now. As an Economist working on South Asia when that’s been my title, there’s always been something of an escape valve that countries have been in trouble before, maybe not all at once, but there have been crises in Sri Lanka, in the 20/25 years of looking at them. Pakistan’s had crises, Sri Lanka’s had crises, Nepal’s had a Civil War and resultant crises, you know, the crises are not new.

What – and what happens is that worker outflows become the escape valve. It gets bad in Pakistan; more Pakistanis go and work in the Gulf, and this is the cycle. The problem, during the pandemic, was that those opportunities weren’t there. But more workers go overseas, then they start sending more money back and then the situation at home stabilises.

Of late, remittances are hitting record levels, so it would seem that that cycle is still in place. That, you know, when things get bad, as they are, the people are still finding opportunities overseas, at least if you look at the remittances. Economic mismanagement, there’s lots of examples, and I’ll give you Imran Khan in Pakistan, Russia invades Ukraine, the cost of fuel goes up, Pakistan’s a major fuel importer, so what he does is, introduce a massive subsidy, which is entirely unaffordable. And it’s been widely interpreted as a curveball for his successor because his successor will have to stop this subsidy and will therefore be unpopular. But there are countless examples like that.

And then, the external debt, including from China. I think I’ll leave the discussion on Chinese debt. I think it’s something that we’ll come back to, but outside of India, you know, the other countries I mentioned, they will get in Chinese debt and I suppose the one point I would say, in relation to Sri Lanka, is that this debt was spent on entirely economically unproductive matters. A hotel, with a revolving restaurant that doesn’t work, being the mainly the most obvious.

A comment on Pakistan and a comment on populism that, if you like, the populist leaders – Nepal had one and Pakistan had one, Sri Lanka had one, they’ve now gone back to technocrats or more technocratic people. Pakistan’s political situation is, I think, really problematic because Imran Khan’s left, but he certainly has left quietly. So, you’ve got a whole bunch of political questions and any adhering to any, sort of, IMF package and doing these kind of things, will be the exact opposite of what Imran Khan has popularly done. But we can return to that more.

I think my final comment – I mean, we have targeted this as South Asia. There are many similarities between the countries of South Asia and there are questions about their ability to continue paying external debt, given their income. At the same time, these very persuasive statements and articles from each of the other countries that I mentioned, explaining why their position is markedly different from Sri Lanka. But they’re all worried.

I mean, Bangladesh I put to the bottom of the list, it’s economy is doing pretty well and it should be fine. But, you know, there are many articles in the press here about bans on luxury goods and bans on imports because they’re trying to conserve their foreign exchange reserves. It’s not that they should be in trouble, it’s that they’re concerned that if international capitalists wanted to take advantage of higher interest rates in the US, one of the reasons for the external debt is that international capital has been driven into places like Sri Lanka because of low interest rates in the West, and these are the places where it moves to and then if it gets worried, or if the opportunities are better in safer havens, it’s going to start moving back. So, there are fears of, you know, market sentiment driving an almost needless crisis that I think is one of the main concerns.

If international capital follows my earlier logic and says, these are very similar, Sri Lanka’s in trouble, Pakistan’s happening next, it can become a self-fulfilling and unnecessary prophecy.

Creon Butler

Gareth, thank you very much. I mean, it’s absolutely fascinating. I have just one quick question. I mean, we’ll come back to the general question of China’s approach, but just thinking back, you know, when India was in crisis in the early 90s and had an IMF programme, it turned out to be completely transformational for the Indian economy, and in a way, you know, although it was desperate at the time, it was one of the things that, because of the reforms it forced, partly under – well, largely underpinned by subsequent Indian economic miracle, is there any chance that the same, you know, positive story could happen in relation to Sri Lanka or is their, kind of, whole history of their relationship with the fund and so on, quite different?

Dr Gareth Price

So, look, I mean, it’s not the despair, it’s the hope that kills me. And when I look at South Asia, it’s about the challenge is this one of connectivity. All the studies suggest that if they were better integrated, there are massive economic benefits from this. But instead, they’re not. I mean, there are examples of Sri Lanka and India, they’re relatively close, but as a region, it’s not integrated and it would be much better off it is was.

Whenever a Pakistan leaders says “We should liberalise trade with India,” and you think is this one of the opportunities? Could this be exactly, as you say, the moment at which they flip over and say, “Maybe we should try and work together a little bit as opposed to talking, emphasising our sovereignty.” Pakistan and India don’t get on, but that shouldn’t necessarily prevent them from trading with each other. Other countries that don’t like each other do trade with each other, and I think there’s an ADB report, a couple of years ago, that came up with a number of 74 billion and net benefit of this.

They started talking about it, will it happen? Maybe. It depends how bad it gets, but it could happen. I mean, it’s one of the easy wins. If shared economies or multiple economies are in crisis, everyone knows that there’s potential benefits from doing so. Does crisis drive it? I doubt it, but it might do.

Creon Butler

Great, excellent. Well, I’m now very pleased to move to our next expert, Anzetse Were, who’s a highly experienced Development Economist and has been working on Africa for, I think, over 12 years and has also been an Advisor to a wide range of governments and private sector firms and so on. So, Anzetse, it’s great to welcome you and over to you for your introductory comments.

Anzetse Were

Thank you, Gareth, thank you very much, Creon, and I thank you, Chatham House, for having me. I’m just going to go ahead and start with a presentation ‘cause I find, you know, visuals tend to help. So, just to be clear, I am going to be centring a view from Africa. I hope that the slides are in a format that you can see, sometimes the Zoom is a bit tricky.

So, first of all, you know, I think, obviously, we’re all aware of the debt trap narrative and, sort of, the fallacious assertions of China’s larger than life law there. I think, to be fair, from an African perspective, the public debt in Africa is driven by the appetite of African governments, discharging finance by private creditors, domestic and external. Domestic creditors, in particular, I do not think have the level of focus that they should. And, sort of, the debt restructuring, reframing, because for some, obviously, [inaudible – 21:32] is an aggregate, but for some specific countries they are just considerable and they’re really just not part of the conversation, you know, private creditors generally.

I think one should bear in mind that, you know, the debt crisis, or COVID-19 occurred when signs of political strain, signs of debt strain, that had already started emerging, essentially because of the borrowing spree that started, I’d say, around 2010, partly informed by the global financial crisis and world hunters that came, you know, again, and certainly Africa started opening up. So, there was a confluence of factors that, sort of, led to this very aggressive and quick and rapid increase of debt in Africa. And this, however, was not met with sufficient focus on every generation.

So, I’m one of the Economists that actually don’t encourage people to look at debt, in terms of debt to GDP, because it’s a bit of a misnomer. In many countries, your GDP will be growing, but your revenue base and exports won’t. Kenya’s a very good example where our debt to GDP has been growing, our revenue to GDP, our export to GDP has been declining for over a decade. So, one of the fundamental fiscal structural problems, in terms of the sustainability has been, revenue to GDP in many countries has not been growing.

As a result, the debt carried capacities has also – has been weakening, even as, you know, appetite for debt has increased on both the demand and supply side. So, then I would say during COVID, you’ve got all debts. Suspension Initiative, which unless you were welcome, of course, a lot of African countries took advantage of them, but now result of the outcome might be dealing with a lot of lumpy accumulated debt payments that are squeezing African governments at a time when we have a new generation and previous recovery, if you’re looking at, first of all, juggling formalisation effect that COVID had on a lot of formal firms, either shut down or became informal to cut costs to survive. But more importantly, the economic growth engines of the country. The private sector’s not recovered. So, there are only generation problems not going away. So, that suspension, sort of, pushed the problem forward, but now it’s like, well, now it’s time we’re having to pay and really, revenue is where it is.

So, sort of looking at China specifically, and then, I’ll get into this later and you’ve obviously seen about a two-year – a 20-year period of very, very aggressive lending, very large buckets, particularly, you know, making construction projects, and I think now we’re going to be seeing, you know, smaller lending, more targeted investment too, and external factors. I think often, people try and tend to reduce it to, oh, it’s China this or it’s Africa this, but it’s a blend of factors.

Now, I’m just going to talk about the debt trap now, I think, because it’s just one of those things that won’t go away. It’s like a smell that just won’t go away, even though there’s just no truth to it. But obviously, it’s factually inaccurate and I think there’s now – I’ve written on it, and just about everybody I know has written on it. But the real problem with the debt trap nowadays is that it continues infantilisation of African governments.

Any sort of debt crisis is in the context of fiscal choices and fiscal policies that evolve over time. And so, this notion this is a one-dimensional, one person or one country is responsible, is a proper infantilisation of the people who are responsible for those dockets? More importantly, it creates a basis for pulling back on fiscal responsibility. So, I’m going to talk you through the next point.

The concern from African public and many experts is not China or anybody else, it’s fiscal accountability, fiscal justice and fiscal transparency. And so, when the debt trap narrative that’s sitting in great power of competition gets all the press, you’re essentially side-lining the voices of the people who matter the most, of the people who will be affected by the crisis the most and it prevents, particularly African publics from getting the fiscal accountability that they want from their governments because everybody is banging on about China.

With the biggest things, it just pretends that the BRI has had no positive impacts in Africa, and I’m going to get into this, you know, as primarily debt has been accumulated, China’s a tiny player, as I showed in the previous slide, but it has had positive effects. You know, let us know forget that, not all debt, you know, is bad debt. But I think the real thing is just really showing that the governments are ripping off America are completely out of touch.

I mean, I don’t choose, in terms of the reality of the ground in Africa, and it, sort of, seems that the African view doesn’t matter, which then informs the appetite for your American strategy for the continent. And so, I’m just looking at some of the value and challenges. First of all, there has been a reduction in the economic inequality due to Chinese transport colonies. So, I’ll put this up on my website, so you’ll be able to click in on the links. There are lots of them. They are mainly journal and think tank and academic papers, so, you know, they were previously done. That has been – that has happened, you know, for example, in Kenya, the Thika Road highway, which linked Nairobi to one of the main outskirts has actually been seen to do that. There has been a reduction in travel time and energy costs, depending on the type of infrastructure projects you were dealing with. The technology transfer has been happening in exchange of development and solutions, emphasising this is both public and private sector, okay? So, if you’re looking at how BRI has heralded the entry of Chinese private sector, and I wrote an article on this in South China, specifically looking at the unique selling points and advantages that the Chinese were having…

Creon Butler

Anzetse, I’m sorry to interrupt you, but had you intended to move on, in terms of slides, ‘cause we’ve still got you…?

Anzetse Were

Oh, well, thank you.

Creon Butler

We’re still on your…

Anzetse Were

I had.

Creon Butler

We’re still on your…

Anzetse Were

We’re still on the first one.

Creon Butler

You’re still on the first one, but it’s up to you, I just wanted to check.

Anzetse Were

No, I moved them, but this has, sort of, been – the settings stuff that I’m not really good at. Let me see if I can change it. No, yeah. Thank you for letting me know that, that’s…

Creon Butler

Not at all, it’s one of our participants flagged it to me.

Anzetse Were

Can you see the next slide, are you now on the right slide?

Creon Butler

Yeah, we can see that now. Yeah.

Anzetse Were

Okay, so, that was my point on the, thank you, on the debt trap narrative and you can see the quote there from the IMF. Yes, you know, it’s had positive economic and social outcomes and, you know, the facts on, in terms of the negative effects had been negligible, and I’m just now qualifying that by pointing out why that statement has been made. I think, first of all, the reality that there have been a lot of positive impacts. Ooh, sorry. So, I’ll just going through the economic equality question, the reduction in travel time and energy costs, technology transfer, then I’ll try and put in the links that I had on South China.

The opening of trade channels, you know, as much as people really emphasise the fact that the trade is imbalanced between Africa and China, which is absolutely correct, and that is an ongoing concern for both Africa and China. The reality is that the investment in infrastructure facilitated by BRI is something that other countries, including European and North American partners, are piggybacking on. And then the other big one is dating geo-mapping. I think anyone who is familiar with the continent is aware of how difficult it is to sometimes find people, places and things because of the fact that a lot of the infrastructure of the continent is not well mapped out and so the BRI has really been important in, sort of, updating that.

However, there have been challenges at this part. I mean, everybody knows this part ‘cause this is the one time dimensionality you have been talking about. The fiscal opacity concerns have been there, there are concerns about hidden debt and contingent liabilities. We have been, you know, voicing concerns about the project visibility question and to be fair, I think the Chinese have listened and are learning. I think you’re going to be seeing and we are already beginning to see a lot more rigour around that.

The environmental question is one that is not going away. China is adding to a problem that had been really started, I think, by European and North American firms, and if you’re looking, and whether it’s over-fishing in the West African Coast, the first people who were causing headaches really for the Ghanian and those other countries, were European supertrawlers and so to now, China has just added to that. And then, of course, poor labour practices, which in Africa really upset the public, in terms of them streaking into African workers and poor working conditions.

So, I’m just going to, sort of, start talking about going forward in the global debt strain and the points that have been made by the previous speaker, and a lot of which actually resonated with what’s going on in Africa. I mean, first of all, the process will be multilateral often. Sometimes it will be bilateral, but either way, China will be an equal among creditors.

I think in the beginning, certainly from Africa, there was, sort of, this assumption or this push with China to, sort of, be, you know, second in the pecking order for China to comply to certain things, and I think there’ll be times when that happens, but fundamentally, China is increasingly, I think now, being seen as an equal among creditors.

Any, sort of, debt forgiveness and I think actually, you’re right, Creon, there was some announcements made by China, there may be some by others, but there will be an expectation of a soft power return and diplomatic return from African governments because all the PayPal environment, PayPal competition environment that we’re in and also, the Ukraine question. I think I completely agree with you, Creon, as well that there will be probably green finance performance indicators and to debt restructuring or whatever arrangement comes up. This is an opportunity for Africa, but also, it’s got to be – need to be fairly well thought through to make sure it doesn’t become a bottleneck that prevents Africa for fully leveraging debt restructuring, because of the state on green finance and the unique issues that green finance budgets have on the continent.

Now, the tensions, and this is really my last point, is that, you know, as Europe and North America were trying to create the debt trap narrative argument, arguing that China was pushing Africa into debt, which is not the case, suddenly that all seems to be forgotten, given the G7 Infrastructure Initiative in Europe’s Global Gateway. They’re real questions around what – how this impact debt, how this be paid for. Yes, we can have a certain amount of private sector involvement, but I think, you know, as you pointed out earlier, you know, there’s sort of limits to that and that’s really one of our big concerns, is that, there’s a, sort of, great power push to demonstrate the value act that Europe and North America can bring to the infrastructure question, which is great, you know, because, you know, China can’t do everything and Africa has unique needs. How’s that going to impact debt?

I think the war in Ukraine obviously is met with certain prioritisation and spending, we’ve seen that, but really what it’s done is increase political economy tensions on the line, which I think when anyone who has been following the Africa story, in terms of how African governments voted on the new resolution against the Russian invasion on the Ukraine, I think they were quite surprised. It was almost a 50/50, in terms of half said yes, you know, this is wrong, and half either abstained or I think there were one or two that voted against it, and of course, people started naming China for that. But it’s like, no, there’s a political economy around the political stances that different governments are taking and of course, there’s no single story there.

Of course, the war in Ukraine has had massive macroeconomic consequences that have trickled into fiscal problems, but we can talk into that later. Part of it is this triple [inaudible – 33:10] debt services, you know, so we are seeing this massive, kind of, pressure on exchange rates in the context of increased inflationary pressure and rising cost of external debt. It’s a real problem for a lot of African countries and they now have quite a bit of external debt. And, in terms of the exporting into composition, if you’re looking at the windfall of commodity prices, particularly fossils and fuels, obviously, the African countries that are exporters of fossil fuels, it’s a windfall for them, but for other countries, you know, such as much of East Africa, it’s having a real impact on our import receipts and adding pressure on the, sort of, level of dollars that we do need to raise for that alone.

So, I think I’m going to stop there and allow the conversation to continue, thank you.

Creon Butler

Brilliant, Anzetse, so, thank you very much. I just wanted to follow-up, particularly on the analysis of debt trap diplomacy and I agree very much with what you and others have said. And yet, as you say, this is still around and, you know, in governments and in the media and so on, it’s still there and I just wondered, and I’ll come to Gareth just to ask in a minute whether he thinks there’s a different, kind of, dynamic going on in relation to South Asia, but as far as you can see from Africa, what – why – what is the reason that this story persists? ‘Cause I think you’ve described all the consequences it has, but why do you think it’s out there, I mean, particularly looking from a US perspective?

Anzetse Were

Yeah, I think there are two main reasons. I think first is as bit of a hero complex, you know, to put it quite candidly. It’s a symptom of, I think, particularly Europe and North America and the US in particular, seeing itself as the good guy. And the debt trap now has almost become a tool for psychological self-soothing, to be like, oh, we’re the good guys, you know, we’re the ones helping Africa, you know, when the reality is that everybody comes with its benefit and challenges, any sort of African technocrat will tell you that. So, there is a bit of a psychological self-soothing mechanism that, sort of – and I see it in these stories and just about every media publication, to the point that I almost stopped commenting on those publications. There’s a certain narrative that gets clicks, that makes people happy, that’s a bit, you know, separate from what’s actually going on, on the ground. So I think that’s one really big piece, in terms of public perception.

I think the other thing is an attempt to sway African – the minds of African publics, you know, because there is this understanding that a lot of – and just to bear in mind that the average age of an African is 19, right? So, you need to separate who you’re targeting, in terms of the mass media versus the people who are actually sitting in decision-making positions, else I think something is often lost on, sort of, massive narrative pushes.

But there is, you know, the reality that most Africans do read a lot of European, North American, you know, whether it’s English or French, enough of the people, even Chinese outlets, and so that is understood as an avenue to try and sway the minds of African publics, in the context of great power competition. I must say that some of it has had an effect, you know, in terms of Africans, particularly young Africans sometimes have a very misguided understanding of what’s going on. But I think what I find is that we’re now, sort of, that’s plateauing as, sort of, more facts are coming to the ground, but I think the people who have never been convinced in the work that I do are our leaders in private sector, public sector and development. They just know that there’s no – so I think that there is a counter balance beginning to happen, but I don’t think that’s a psychological self-soothing impetus is going away.

Creon Butler

Sure, and how far do you think, in a way, China has contributed to this through the lack of transparency around its lending? You know, is that – I mean, is that a major factor, do you think, in allowing this to continue, in a sense?

Anzetse Were

Well, I mean, it depends on who you ask. I think from an African government perspective and we’re in debt from private sector perspective, China has a right to approach its style however it wants. One of the breaths of fresh air they’re trying to bring to the continent was an intellectual approach that was new, interesting and not really it’s rooted in, sort of, bigoted, colonial, imperialistic tendencies that we’ve, sort of, seen from our European and North American partners, you know.

So, one of the things that actually allowed China to get big so quickly, and I actually explored this in a piece I did for The Diplomat, is that fresh, intellectual approach, which means that you have the right to decide how you’re going to do it, you know? Obviously, now, they’re beginning to see the limits of that. But I think this assumption that European and North America have that you’ve just, sort of, got to do things the way we do, I think a lot of, you know, a lot of the people on the continent are, like, “No, actually, let’s see a different approach is possible and then, you know, as times goes on we’ll see the benefits and the problems of each.” ‘Cause we saw the problems with the European and North American style. One of the big ones being that they no longer wanted to fund infrastructure because, you know, corruption or whatever, they were busy lecturing African companies about that. So, China saw that chance linked to the Texas capacity to solve that problem with it’s own style.

So, I think, you really see that in the continent, you know, particularly when you’re sitting with people who are sort of making the big financial and policy decisions, they appreciate the multipolarity that the world is going into, you know? Europe is no longer really a bloc since Brexit, you know, frankly, and we’re seeing a lot of players coming in from India, from Turkey, China is one of them, we’re seeing a lot of appetite from Brazil and that creates its own challenges for Africa, but I think you’ll find that that multilateralism and that multipolarity is welcome.

Creon Butler

Yeah, thank you very much. Gareth, maybe I could move to you now and in a sense, follow the same theme. Because, obviously, Sri Lanka was also a country that was very much cited as an example of debt trap diplomacy, particularly because of the way in which debt was converted into control over port assets and so on. Do you see it the same way as Anzetse or do you think it’s different in the South Asia experience and in any other aspects that you would highlight in relation to that discussion?

Dr Gareth Price

When I think about this question, I think about – I did a lot of work in the early mid-2000s when India started its own aid programme and it involved – it’s very similar to China’s and it involved lines of credit. And because India, like China, doesn’t interfere in the sovereignty of other countries, it does what the other governments says – asks for. And it had a tipping point – it had a couple of tipping points, but the main one was when the President of Ghana said, “Can I have a Presidential palace?” And so, India said, “Fine, that’s what he’s asked for,” and then there were protests, and then, the next step for India was to set up a special cell in the Ministry of External Affairs just to kind of evaluate, just to have a double-take on what the other government has asked for, just to make sure this won’t get us into trouble down the line.

Now, China started doing this earlier in this part of the world. It built things – you mentioned the port. There’s an airport in the President’s constituency, there’s a revolving restaurant, it doesn’t work, there’s a conference centre that’s empty and it’s – my question is not, is it or is it not debt trap diplomacy, but why is there zero due diligence? That would be my way of looking at it, and I think to be honest, in the case of Sri Lanka, we will find out soon.

Creon Butler

You mean, from the Chinese side, why is there zero due diligence from the Chinese side or…?

Dr Gareth Price

Yes, yes, completely. I mean, the World Bank looked at this port and said, “This port is not economically viable. You’ve got Columbo port just around the corner and that’s where all the ships will go.” And they just – I think it was the World Bank, I think one of the studies were done, and the Chinese said “No, they’ve asked for this port, so we’ll build it,” and in that case they did control it on a 99 year lease.

I think, in the case of Sri Lanka, we will find out the answer to this over the next few months because now Sri Lanka has its IMF agreement. Japan has noted the question in the chat, Japan’s been charged – Sri Lanka’s bilateral debt is between India, Japan and China and, as has just been said, the Chinese element, estimates of its value vary. We know what the Indian debt is and we know what the Japanese debt is. So, Japan is going to start engaging with China and India on a restructuring package for this bilateral debt. It’s China’s chance, if you like, to disprove the debt trap thesis once and for all by saying, “Okay, we’ll restructure the debt, rather than say we’re going to claim some more assets in Sri Lanka.” So, I won’t answer that question definitely, until we find out what happens in the weeks to come.

Creon Butler

I mean, one of the arguments, and it may be that either you or Anzetse want to comment on this, is that part of the reason that, as you say, from a creditor’s point of view, you would expect there to be oversight just to make sure that the things you were investing in were such that they could contribute to repaying the debt. I mean, one of the arguments is that, in a way, there was a very distributed, disorganised, somewhat chaotic approach, in terms of Chinese lending. It had many different institutions, at least in the early stages, that weren’t properly co-ordinated and, to some extent, were competing under the sort of broader, sort of, banner of delivering the Belt and Road Initiative. But there’s also an argument that that is now changing, in a sense, because of the experience of debt distress, the central authorities are getting a lot more control over what’s going on and, in a sense, there’s a simultaneous, if you like, co-ordination, in relation to dealing with historic debt. But also, potentially, this may lead to a more sustainable approach to future Chinese lending. So, I – perhaps I could come to Anzetse and say is that – do you have that perception of how China’s approach is changing or would you see it somewhat differently?

Anzetse Were

I think that’s part of it, absolutely. I think people often – I should just start with saying people forget how young China is than Africa, you know. It doesn’t have the history of colonisation and building well with the 1800s. Literally, China started serious builds in Africa, about 70 years ago. So part of it has just been inexperience, just not really knowing what it means to enter into an infrastructure deal with African governments. Now it’s got about 20 years under its belt, it’s beginning to understand, “Ah, this is what it means.” So, I think on the feasibility question, I absolutely agree that without [inaudible – 44:11]. I think part of if was an experience, part of it was over an overaccommodation of vested interests, you know? And I think now, you know, you’re, sort of, seeing this maturity and that’s why really, in my view, what we’re seeing in the Africa-China relationship, we’re going into a Phase Two.

Phase One is the 20 years of let’s build stuff, you know, let’s add value, let’s, you know, do all of this and now we’re going into a Phase Two where, first of all, there’s an understanding with the fallout that comes when you do overaccommodate vested interest. There is an understanding of what happens when product feasibility is done poorly, but there’s now also an understanding of the political economy of technocracy in Africa. I think to the point about the feasibility, it’s not also always China’s fault.

China is also courting the regional competition that economies have. In East Africa, everybody wants to have the main port, right? Tanzania’s got its port, Kenya has its port, Kenya has two ports now, Tanzania has another port, everybody’s trying to fight to raise, you know, traffic, you know, each government has its objections on how Africa’s going to increase to its ports. So, I think we, again, let us know act as though African governments are, sort of, infants. They don’t understand that these [inaudible – 45:23] are going on, and there needs to be responsibility borne on both sides. So, I do think, as I’m saying, sort of, this next phase in Africa-China relationships, we will see a lot more rigour, not just on the financial modelling or fiscal modelling, but on the environmental and the green side as well.

I think China’s very aligned, not only to the reputation of risk that it’s getting, but also, the opportunity that the greener climate has for rejigging and reupdating its BRI leveraging and more to the digital and technology investments that it’s made on the continent.

Creon Butler

Great, thank you very much. I want to come back to the interaction between debt and climate finance next, but just before doing so, I want to take some of the questions that we’re receiving and again, encourage any of our participants to please put your questions in the Q&A function. But, Gareth, there are two that relate specifically to Sri Lanka, as you’ve identified. One of them relates to the kind of transparency about the process going forward and in particular, the extent to which the fund programme will tackle the underlying issues of corruption and governance and so on, in Sri Lanka, which goes back to, in a sense, what we were saying about, is this – could this be a start of something different? And then, related to that, is the prospect ,which you’ve, to some extent, answered already around agreement in the creditor’s committee – on official creditor’s committee on – between three countries, basically: Japan, China and India, which brings in all, kinds of, different dynamics in a way to what we’ve seen in the discussion so far in Africa. So – because in Africa, we’ve not really had a dominant Western creditor in quite the same way that we do have in Sri Lanka. So, any thoughts about basically this process going forward? And maybe do you just want to say a little bit about just where we are now and what the next steps are that you see? Thank you.

Dr Gareth Price

I think, as you say, I mean, it’s – Sri Lanka has to restructure its debts and a deadline has been given of December, and there’s, in total, 30 billion you know, give or take, of debt. I think it’s complex because there’s a political set of questions, in the sense of, where is that going, is the country full of protests, etc.? So, that bit of the puzzle, then you’ve got another bit of the puzzle, which is, what’s going on with the economy, because all those, sort of, bits of the economy, aside from potentially remittances going back up, you know, tourism still isn’t good. It’s – can the economy start to get back to normal? Can the political situation be okay? And those will feed into what’s happening and what the IMF is able to achieve and what governments are able to achieve.

I think it’s, kind of – it’s a very complex, sort of, cycle where everything affects everything else, and in a country, which like I said at the start, its longstanding problem has been that people don’t pay enough tax and expect higher levels of government spending and they import more than they export. And now, it’s all come to the rub. And I think it all basically goes to, you know, have things fallen apart and do they start to gradually, sort of, improve? In which case, I imagine, its process will be tricky, but not impossible. Or does it go down a more negative path?

You’ve got a government that votes – you know, that Parliament is made up of people that supported the previous President. The current President comes from a party with one person elected. So, I wouldn’t focus on the – necessarily on the transparency, because I think that would be a function of other factors, the politics and the economics.

I think it would be really interesting to see what happens. I don’t know what will happen because I think it goes to the wider question of, how does Japan manage to engage with India? Should – I think that would be imminently, sort of, feasible. With China, it will be very interesting. And I don’t know if, from the Chinese perspective, there’s a sense that it – does it set a precedent for other distressed Chinese assets, potentially in other countries? And I think that must be part of it.

Just to follow-up on what was said earlier about China, I had another quick comment. China’s approach, I think, has evolved and I remember talking to some people in Nepal a few years ago and it so evolved into, “We will do whatever you ask for, but you need to make sure it’s economically viable. It’s not our job to do the due diligence part of it, but you need to make sure.” But when you’re dealing with lots of countries in South Asia and potentially elsewhere, you might be better advised to do a little bit of your own just to check.

Creon Butler

Thank you very much. What I’d like to do, we’re getting a few more questions in, but before we go to those, and I’ll group theme together, Anzetse, if you could just follow-up on your previous comments, regarding the interaction between tackling debt distress and at the same time, the need for very large amounts of external – I think it’s external finance, not withstanding what you’ve said about domestic finance, but external finance, to help deal with the issues of climate adaptation. I mean, do you – how do you think this should be addressed?

I mean, there is as point, for example, a lot of people are focused on the idea of debt for climate swaps. So basically, that in return for reductions in debt countries would agree, or commit more strongly to particular actions on climate change and that this would in some way be supported partly by a contribution from private financial institutions, support from the IFIs. But I think, you know, one of the challenges with that is, it’s not the kind of thing you can do in the middle of a crisis. This is complex and equally, if you’re not in a crisis, you don’t necessarily have the creditors in the position where they’re willing to make substantial contributions through that route. But any observations on that – the interaction between those two themes, would be most welcome.

Anzetse Were

Yeah, sure, and thank you for that question. It is something that I’m very alive to and converse on. I think, ultimately, it’s who’s climate priorities will be prioritised, that’s fundamentally what is – and agreeing to whether it matters for Africa or not. But I think, on one hand, you know, you’ve also got the supplier side that’s very much around mitigation, we know that Africa’s focused on adaptation. But I think more importantly, the reality is that climate and, sort of, climate change, in the African context, is a function of economic development. It is linked directly to economic development, so the priorities, if you’re looking at this from a political economic objective, African governments are like, “Yes, yes, climate, that’s fine, we already know that. We know our agriculture’s already been affected, our tourism sector’s already been affected, our agriculture, fisheries, they’re already being affected. What we’re prioritising is economic development and how do we deal with climate in that?”

Whereas with, I think, on the supply side there’s a bit of a different emphasis. So, I think the real struggles that we’re seeing, you know, we’re going to see the role of COP27 and, sort of, as people get more serious about this, is how we’re going to deal with that mismatch, where the supply side is, sort of, at war, you’ve, sort of, got the economic development piece figured out in a way. I still think obviously those models could improve, so we’re trying to really look at how this climate create a new lease supply, how do we deal with all this damage?

But I think on the other side of the – on the African side as well, our priority is economic development, in the context of climate justice as well. This is the big piece that I always get crickets on and say, well, if you’re looking at, you know, historical contributions and if you’re looking at emissions per capita, climate justice, you know, and the FBB has, sort of, written some interesting work around that. So, I think we’ll end up seeing the seriousness that people have, you know, the level of maturity people are going to bring to the table, but I think the real opportunity for both sides is to build up the adaptation side.

One, because it will be a stabilising factor for African economies. If you look at the GDP and labour exposure to sectors that are directly impacted by climate change, such as agriculture, tourism, fisheries, forestry, that’s a sizeable chunk of GDP, and I wrote an article on this by the OECD. So, we’ve got to start looking at private finance as a stabilising factor that allows economic stability and therefore fiscal stability to, sort of, sit on top of that.

If that’s, sort of, the view, I think you’ll start getting a bit more of an appetite on the African side to start putting serious brains and money behind it. But if there’s still the, sort of, supply driven mitigation, carbon emission conversation, I think we’ll just continue just seeing money funnel into newborn energy projects, you know? It’s, sort of, how we limit, in terms of their usefulness.

Creon Butler

Thank you very much. Very, very good points. I mean, do you – just to clarify, are you saying, in a sense, that one needs to tackle the flow of finance for adaption first and in a way that will then make the issues of debt vulnerability easier to tackle? I mean, if that were the case, it would have to be official finance, ‘cause I guess the private finance is going to be influenced by this situation or do you think, actually, there’s a way of compartmentalising the two issues?

Anzetse Were

I think you’re going to have to and actually, I have a piece coming up for COP27, British International Investment. One of the biggest problems, if you’re looking at the challenge of primary finance flows, is a port a pipeline in Africa. So, if you’re looking outside of debt swaps, you know, and so the demand side, you know, there’s got to be a shift in the intellectual approach from looking for deals to looking at the financial architecture. You know, if you’re not going to deal with the fact that [inaudible – 55:44] all the way through to disclosure sporting, measurements reporting on all of that, there’d be a fundamental bottleneck, in terms of how that works. Whether you’re looking at mitigation and adaptation, you’re going to just, sort of, sit around and talk about no bankable projects in Africa forever, right? So, I think this is really the time to talk about a restructuring of a global financial architecture beyond the debt question and you’re actually going to be like, “We seriously need to deploy and there is opportunity for growth in Africa on this,” we’ve got to look at the financial architecture piece. So, when that comes out I’ll be happy to share that.

Creon Butler

No, and it would be really good, thank you very much. Well, actually, that is – gets me to the, sort of, final point, which I’d like to put to both of you very briefly and it captures a number of points made in the questions, which is really about the role of the IMF more generally.

Now, the interesting thing about the Common Framework is that it has kept the IMF right at the centre of the process of dealing with sovereign debt, I mean, through – both through its work with the World Bank on debt sustainability, its role in the lending into arrears, the role it plays in encouraging Official Creditors Committee to come up with debt treatments and so on.

One of our questioners said, “Well, you know, is there a, kind of, equivalent IMF debt trap?” There’s another question about “whether China’s influence is better or worse than US’s influence in relation to debt restructuring?” We’ve all seen in the past where the US has had enormous influence, sometimes actually pushing the IMF to do things, which weren’t necessarily in everybody’s interest. But – so, any quick comments, and if I come to Gareth first and then Anzetse, first, on the role of the IMF generally, and perhaps also the role of its, kind of, key shareholders, particularly the US?

Dr Gareth Price

Yeah, I mean, going back to what I was saying earlier, I mean, I’m very interested to see how it plays out in Sri Lanka. I’m very interested to see how they engage. My view of the IMF over the years has mostly – it has mostly been playing a role in Pakistan and it has suddenly, when the IMF package appears, none of which have ever got to the end and the IMF says, “You need to cut your development spending,” and what Pakistan does not need to do is cut its development spending. It needs to cut its military spending. The IMF understands it’s politically unrealistic for it to cut its military spending, so it says to cut its development spending. And I’ve seen it so many times and then, each of those package – well, none of the packages has actually got to the end of…

Creon Butler

And do you think the IMF should say that, even though they know, you know, it’s not going to have traction?

Dr Gareth Price

Well, if you’re going to the IMF because you’ve run out of money, you’re probably spending it on the wrong things.

Creon Butler.

Right, okay.

Dr Gareth Price

And Pakistan’s underlying problem has been the role of the army in their country and its inability to develop civilian institutions. Now, so, just allowing that to continue, which essentially it does, the IMF gives a package, which enables [inaudible – 58:54].

Now, I understand it would be politically sensitive, but if then, they don’t get the IMF package, they won’t have an army at all.

Creon Butler

Yeah, yeah, no, I understand. I understand.

Dr Gareth Price

So, that’s – the country that I followed that’s had most engagement with the IMF, Sri Lanka is another country, which has lots of IMF packages and none of them have actually got to the bottom of the very simple, it imports more than it exports and the government spends more than it taxes. So, you have very uber-austerity for a short period of time, which is then politically unpopular and those people then struggle to remain in power. Without, certainly in the South Asian context that I can think of, encouraging a shift to the long-term trends, which you are know are the problems. So, it’s a short-term fix. Which is why – let’s see what happens with Sri Lanka and let’s see what happens because there are other bilateral creditors, which are different, and most notably, China. And so, can there be some, kind of, positive virtuous circle to booster the immediate crisis, but to encourage a longer-term trend towards a more financially stable Sri Lanka, in this case, or is it another short-term fix?

Creon Butler

Yeah. Well, thanks, Gareth. We’re almost out of time, but I do want to give Anzetse the opportunity to express any very quick views either on the funds’ role or on the role of its, kind of, continuing leading shareholders in relation to this.

Anzetse Were

Yeah, I’ll just be very quick because this will evolve. I think, really, we’re going to see this is a test of legitimacy of what a lot of all the creditors in Africa. There’s been a legitimacy problem, in terms of their power in Africa and in order to historical, the IMF, the big one and for the structure adjustment programme, to listen to them then, where did that leave that, right? But I think I have seen a bit of a shift also, in the vote of some of these funders. I don’t think that they have noticed any behaviour [inaudible – 60:51], you know, ten/15 years ago. But ultimately, in the context of global debt, etc., whatever action that they take will be due to the amount of legitimacy and whether these are, you know, growing concerns of African government, do tend to go to.

Creon Butler

Great, well, I’m afraid we are out of time. I would, first of all, like to thank our two experts, Anzetse and Gareth, for some really brilliant contributions. I am fascinated. I could keep talking for ages, but anyway, we are out of time. Thank you very much, and I’d also like to thank our panellists – our participants for joining us and for their questions they put in and with that, until our next opportunity, thank you very much everybody and see you again in the future. Bye.