By Edwin Truman
From the article:
A little-noticed but ominous new front has opened in the rivalry between the United States and China for dominance at the International Monetary Fund (IMF). On Aug. 3, 16 U.S. senators wrote to Treasury Secretary Steven Mnuchin, Secretary of State Mike Pompeo, and Defense Secretary James Mattis expressing concerns about potential requests for financial assistance from the IMF by countries that have become overly indebted in connection with China’s sprawling infrastructure program known as the Belt and Road Initiative. The letter, signed by two Democrats and 14 Republicans, cautioned against supporting IMF programs for countries that have gotten into financial trouble while taking advantage of what they called China’s “predatory” lending through the Belt and Road Initiative. Fallout from the letter, which has been endorsed by The Wall Street Journal and other conservative voices long skeptical of the IMF’s mission, needs to be handled skillfully. The United States and China must work together to ensure that this dispute does not inflict long-lasting collateral damage on the IMF, one of the key institutions of the post-World War II international financial architecture.
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Developing countries at risk of debt distress
The IMF has articulated its concerns about the rising sovereign debt of many developing countries. Loans from China’s many lending institutions, especially those associated with China’s Belt and Road Initiative, lack transparency, making the amount and terms of much of that debt unknown. This situation complicates the IMF’s capacity to monitor global financial risks for many emerging-market and developing countries. Recently, the new leader of Malaysia, Mahathir Mohamad, reportedly told Chinese authorities that his country cannot afford to take on so much debt to China, but not all countries on the receiving end of loans from China are as well placed to say no.
The Center for Global Development has identified eight countries that are at risk of sovereign-debt distress in large part because of China’s lending to them for Belt and Road projects — Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan. Except for Pakistan, these countries are small and have small IMF quotas. Excluding Pakistan, their combined IMF quota is less than $900 million. Maximum normal IMF programs for the seven would amount to less than $4 billion. Pakistan has just completed an IMF program for 216% of its quota of $2.8 billion, which it is expected to pay back over the next five years. A new program would in effect refinance these obligations to the IMF.
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