Reforming multilateral lenders is an uphill task

Just when former Indian bureaucrat N.K. Singh is sitting across the table from former Harvard University president Larry Summers to discuss ways of reforming multilateral development banks (MDBs), such as the International Monetary Fund and World Bank, there comes a reminder that overhauling such institutions would also need a closer look at both geopolitics and the domestic political dynamics of the world’s leading nations. The proposed reforms are unlikely to be linear, achievable with the push of a button. Fortunately, the Singh-Summers talks—initiated as part of India’s G20 presidency for 2023—are kicking off around the same time as the Fund-Bank’s annual spring meetings with finance ministers and central bank governors from across the world. One vexed issue that has seized attendees is the indebtedness of poor countries, which escalated during the pandemic—Zambia, for example, defaulted on its external debt—and has become unmanageable after the Russia-Ukraine war. In this mix, China’s negotiating strategy and role as a major creditor country holds out lessons for the future of MDB reforms.

China’s emergence as a large creditor and its hard-nosed bargaining tactics on the restructuring of loans has all the hallmarks of the sovereign commercial debt crisis of the 1980s. According to a 2020 article in the Harvard Business Review, the Chinese state and its subsidiaries have lent over $1.5 trillion—which works out to over 5% of global GDP—in vanilla loans, structured debt and trade credit to about 150 nations across the world. With sovereign debt defaults now a reality, there were demands (and expectations) that China take hair-cuts and provide some concessions to indebted countries. China’s counter-offer on the table at the Fund-Bank meetings, asking the World Bank to also take losses along with other creditors in a global debt rejig, took others by surprise. China’s demand demonstrated its intransigence on two counts. One, Fund-Bank loans are concessional in nature and are earmarked for nations in trouble with no other borrowing option. Chinese loans are essentially commercial, with market-linked coupons and repossession clauses. Second, no matter how desperately the world’s multilateral institutions need reforms, it is a huge stretch and an unfair comparison for China to put itself on the same pedestal as MDBs.

Fortunately, better sense may have prevailed with China subsequently softening its stance. This helped resolve the impasse, with the Bank considering a proposal to provide fresh concessional loans to nations which have defaulted on external debt. But this episode holds out an object lesson for the Singh-Summers panel that is looking at ways to reform MDBs. In this instant case, it is obvious that China is flexing its muscle to overhaul the current shareholding and derivative power structure at these two multilateral institutions. Even if Beijing’s heart happens to be in the right place, its tactics leave much to be desired. The core of the problem is the nature of partisan and combative domestic politics in the US. Any change in the Fund-Bank’s extant policies, or its shareholding pie, will require the White House to seek US Congress approval. Given the animus between America’s two rival political outlooks, and lack of bipartisan champions in the Republican party, any prospect of reforming the Fund-Bank will require extraordinary talent, and not obstinacy of the Chinese variety.

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