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China’s AIIB calls for multilateral lenders to keep prized preferred creditor status

One of China’s most senior development finance officials has said that multilateral institutions must retain a status that limits their losses in sovereign debt restructurings in the longer term, amid calls from Beijing for these lenders to share the burden with other creditors.

Jin Liqun, president of the Beijing-headquartered Asian Infrastructure Investment Bank, said lenders such as the World Bank and IMF needed to maintain their so-called preferred creditor status as they had a unique role to play in providing loans to developing countries in financial distress.

The AIIB is also classed as a multilateral lender and enjoys preferred creditor status. Jin said that while he could not “speak on behalf of” other multilateral lenders, “the important mission of the MDBs [was] to provide new money to sustain [highly indebted countries’] economies particularly in very difficult times”.

“It’s an issue that we need to balance for the MDBs [multilateral development banks]. They enjoy preferred credit status and they enjoy very high rating[s] so that they can raise capital at the lowest cost. That is the advantage,” Jin told the Financial Times. “Looking way ahead I think it is important to keep all this.”

On the other hand, he acknowledged, there was the question of “to what extent MDBs should help those highly indebted countries in partnering with the major creditors”. He declined to take a position on whether multilateral institutions should participate directly in restructurings.

Jin’s comments come ahead of a joint IMF, World Bank and G20 global sovereign debt roundtable event in Washington aimed at breaking the deadlock in negotiations over sovereign debt restructurings.

China wants to use the IMF and World Bank’s spring meetings to argue that multilateral institutions must participate with other creditors in a debt restructuring for Zambia. However, expectations of a breakthrough are low, with the World Bank refusing to put its preferred creditor status on the table for discussion.

Anna Bjerde, managing director of operations at the World Bank, told the Financial Times that the multilateral lender’s role was as “a convener”, helping to facilitate discussions that would lead to “collective engagement by bilateral and commercial creditors” on debt relief.

A number of sovereign debtors are in distress besides Zambia, including Ghana and Sri Lanka, with last year’s surge in global borrowing costs raising debt burdens worldwide.

Fitch, the rating agency, has said that nine sovereign debtors have defaulted since 2020.

Restructurings, meanwhile, are taking three times as long as in previous decades in part because of highly complex negotiations between China, the world’s largest bilateral lender, other bilateral and multilateral creditors and private bondholders.

China last year agreed in principle to give Zambia relief on its debt in tandem with other official creditors through a G20 process known as the common framework.

But in January, China’s foreign ministry called for multilateral financial institutions to participate in the restructuring, saying they accounted for 24 per cent of Zambia’s debt.

However, that stance would throw into doubt their preferred creditor status and is opposed by many other G20 members.

China’s reluctance to agree a deal on debt relief without participation from MDBs has been one factor that has led negotiations to stall. The IMF has warned that it cannot disburse a $188mn tranche of a $1.3bn bailout programme for Zambia until the restructuring plan is approved.

Fitch said this month that China’s proposal could include some compensation to multilateral institutions from their shareholders to partially offset their participation in any restructuring, as happened during multilateral debt relief in the 2000s.

The AIIB was launched in 2016 as a Chinese-led alternative to the World Bank and other western-led multilateral organisations. Its membership has rapidly grown to 106 members, including important shareholders such as India, the UK, France, Australia and South Korea. The US and Japan are not members. China is the largest shareholder with 26.6 per cent voting rights.

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