Out-Law / Your Daily Need-To-Know

China backs G20 debt relief scheme with debt suspension for 77 countries

Out-Law News | 16 Jun 2020 | 10:14 am | 1 min. read

China has announced suspension of debt repayments from 77 developing countries, including 40 in sub-Saharan Africa, in response to an agreement to support the world’s poorest countries during the coronavirus pandemic.

The G20 countries issued a communiqué (14 page / 219KB PDF) in April announcing they had agreed on a coordinated debt suspension approach with a common term sheet for the initiative.

China’s foreign minister Wang Yi confirmed in May that China was pursuing debt relief for developing countries, largely in Africa, through the G20 debt suspension initiative. Last week vice foreign minister Ma Zhaoxu said repayments had been suspended from 77 developing countries.

“We will work with other G20 members to implement the debt service suspension initiative to ease Africa's debt burden. We are also considering further bilateral support for African countries under the greatest strain to help our African brothers and sisters through this difficult time,” Wang said.

The World Bank estimates that highly indebted countries owe nearly $14 billion under bilateral agreements in 2020, with China being one of the largest creditors to many of these countries. In particular, China has signed loan agreements with a number of developing countries in relation to its ‘belt and road’ initiative to build infrastructure along the former Silk Road trading route.

Banking law and 'belt and road' initiative expert Kanyi Lui of Pinsent Masons, the law firm behind Out-Law, said questions remained on how China’s debt relief would be carried out in practice. Lui said that while the announcement does not clarify whether the debt relief would only apply to concession loans or also extend to commercial loans, the expectation is that commercial loans will be covered, as by some estimation commercial loans form over two thirds of all financings extended by China.

On how the debt suspension is likely to be implemented in practice, Lui said: “it would be more realistic to expect a long process of bilateral renegotiations, waivers, debt restructuring, and refinancings instead of a blanket one-size fit all solution given different projects will face different difficulties. Debt-equity swaps, if available at all, will likely not be a popular option due to regulatory, legal and political issues and debt-trap allegations”.

According to the G20 announcement, all bilateral official creditor countries will participate in the debt suspension initiative. The G20 called on private creditors to work through the Institute of International Finance to join the initiative on comparable terms, and asked multilateral development banks to further explore options for the suspension of debt service payments, while maintaining their current rating and low cost of funding.