Due to the weight of hundreds of billions of dollars in foreign loans, the majority of which are from China’s debt trap, the biggest and most forgiving government lender in the world, twelve poor countries are at risk of experiencing economic instability and even collapse.
Asper to a survey, 12 nations most indebted to China, including Pakistan, Kenya, Zambia, Laos, and Mongolia, revealed that the tax revenue required to maintain public education, provide energy, and pay for food and gasoline is increasingly being used to pay off this debt.
China’s Debt Trap: Struggling Countries, Hidden Terms
Furthermore, it depletes the foreign exchange reserves that these nations use to pay the interest on their loans, leaving some of them with only a few months’ worth of reserves.
The main reason why other large lenders haven’t stepped in to provide money is China’s reluctance to forgive the debt and its excessive secrecy about how much money it has loaned and under what conditions.
Countries received up to 50% of their foreign loans from China, and the majority of them used more than a third of their tax revenues to service their debt.
Two of them, Zambia and Sri Lanka, have already entered default because they are unable to pay even the interest on loans used to build ports, mines, and power plants.
Millions of Pakistani textile workers have been laid off as a result of the nation’s excessive foreign debt, which prevents it from affording to keep the lights on and the machines operating.
Since Sri Lanka’s defaulted a year ago, 500,000 industrial jobs have been lost, the country’s inflation rate has reached 50%, and more than half of the population in several regions of the country now lives in poverty.
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Zambia’s Debt Crisis
Zambia, a landlocked nation of 20 million people in southern Africa, is a case study of how it has played out. During the past 20 years, Zambia has borrowed billions of dollars from Chinese state-owned banks to construct dams, trains, and roads.
The loans helped Zambia’s economy, but they also increased foreign interest payments to such a high level that the government had to reduce spending on social services, healthcare, and subsidies for fertilizer and seed to farmers.
In the past, large government lenders like the US, Japan, and France would negotiate accords to erase some debt in such situations, with each lender making it plain what they were owed and on what terms so that nobody felt duped.
In the midst of this chaos in 2020, a number of non-Chinese lenders rejected Zambia’s frantic requests to halt interest payments, even for a short period of time.
Zambia’s foreign cash reserves, which were primarily made up of US dollars and were required to pay loan interest and purchase important commodities like oil, were further depleted as a result of this denial.
Zambia ran out of reserves by November 2020 and ceased making the interest payments, locking it out of the borrowing market and starting a vicious cycle of spending cuts and increased poverty.
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