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Economy

China joins IMF on cash-strapped countries' calling lists

Concerns grow that Beijing's largesse could increase debt load for poor nations

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Zhu Min, former deputy managing director of the IMF, at the 2015 IMF/World Bank Annual Meetings in Lima, Peru in October 2015.   © Reuters

It is no longer just the International Monetary Fund in Washington that hears from developing countries when they run into financial problems. Beijing, too, gets a call.

In October, Egypt agreed a three year 18 billion yuan-Egyptian pound swap with China as part of the process of securing $12 billion in IMF loan financing. Mongolia is engaging with both the IMF and China to fund its trade deficit and finance $1.5 billion in sovereign bond repayments that fall due this year.

These new financing options provide additional liquidity for cash-strapped governments. Yet some see causes for concern in a development that could encourage greater indebtedness among poor countries. When China lent $6 billion to the Democratic Republic of the Congo in 2007 as part of a mining deal, the IMF responded by making further credit available on easier terms, increasing the country's debt burden.

However, the countries asking for support from Beijing see benefit in exploring what is on offer. And it is not just China that receives such requests. For example, Saudi Arabia and the United Arab Emirates are together providing $3 billion in financing to Egypt.

The world's changing economic patterns make these changes in credit availability inevitable. Indeed, diversity of financing is a benefit of globalization, not a cost. But greater choice creates a responsibility for government leaders to make wise decisions about which offer to take, and on what terms. Free lunches are unlikely to be on the menu, especially for countries in crisis.

IMF support has always come with strings attached. The policy adjustments it specifies are often much-needed, but politically difficult or impossible to implement without outside intervention. IMF involvement can provide political cover for critical changes, but others may just see a diminution of sovereignty and loss of face.

A 1998 photograph of President Suharto of Indonesia signing an IMF agreement under the gaze of IMF managing director Michel Camdessus still provokes reactions against the West for imposing its will on poorer countries in return for lending.

Financing from China is also conditional, although the costs may not be monetary. China's strategic agenda includes access to resources and improving international connectivity through its Belt and Road Initiative, a proposed network of transport routes.

Chinese banks often fund large-scale projects, which can be large enough to shape the economic conditions of the receiving country. Offering yuan currency swap facilities promotes the Chinese currency internationally and provides liquidity to fund imports from Chinese enterprises.

Cost-benefit analysis

For any country, the decision about how to engage with the IMF or China becomes a question of trade-offs. Leaders need to assess the costs, benefits and interplay of support from different sources -- and to do this in the interests of their people rather than of vested interests among the elites.

This puts the spotlight on effective governance. Better governance strengthens sovereignty. A decision on asking for IMF or Chinese support then becomes a choice, not an imposition.

Critically though, the relationship with China is bilateral rather than multilateral. This means that the politics and economics of the relationship become intertwined much more readily. Popular concerns about over-reliance on a foreign country can become more emotive than concerns about the IMF.

In Sri Lanka, China agreed to convert debt incurred in its construction of the Magampura Mahinda Rajapaksa Port in Hambantota into a lease, rather than freehold ownership, to assuage local concerns about land sales to foreigners. There is also a security dimension to the Sri Lanka-China relationship. In 2015, India voiced concerns about Chinese submarines visiting Colombo.

In northeast Asia, a recent visit to Mongolia by the Dalai Lama prompted the Chinese to postpone key meetings to discuss financial support to the country. This led the Mongolian government to announce that it felt "sorry" for allowing the visit. It added that the Dalai Lama "probably won't be visiting Mongolia again during this administration."

But managing these considerations is part of the business of day-to-day governing. Mongolia has long had a "Third Neighbor" policy to balance its delicate relationships with China and Russia. Sri Lanka constantly needs to reflect on its geopolitical position between India, China, the West and Japan.

Beyond the provision of financing, China is scarcely in active competition with the IMF. Much of the IMF's work involves systematic monitoring of national economies, supported by policy recommendations -- both in "normal" times and when a specific IMF program is required. It brings high-quality macro-economic expertise to countries that may lack such skills.

China is not seeking to replicate this. Beijing's advice on development policy is rooted in informal and case-by-case advice on how the Chinese economy developed and on the successful implementation of individual projects.

The IMF has been criticized for an overly standardized "Washington consensus" on the over-riding value of free-market policies. But it is mainly within the IMF that the Washington consensus is being updated and improved. Its acceptance that capital account controls can play a positive role in managing national economies was highly influential, for example.

Chinese advocacy of any competing "Beijing consensus" is low-key. And China also continues to engage very actively with the IMF. The yuan's recent addition to the IMF's special drawing rights basket was a top priority for Beijing. As the first Chinese deputy managing director of the IMF, Zhu Min held a strong and prominent role from 2011 to 2016.

With its increasing integration in the world economy, China will be a natural stakeholder in the economic fortunes of most developing countries. At its simplest, China now offers those countries an extra choice in addressing crises and laying foundations for the future.

It is bringing additional financial capacity and a different approach to supporting development. Some will like this and some will not. What remains critical is that governments in difficulties make their own choices wisely about how to find and finance better paths for their countries.

Andrew Cainey is a senior adviser to Lumen Capital Investors, a Singapore-based wealth management company, and an adviser to Asian governments on economic and financial reform.

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