Net transfers to IDA eligible countries, what is going on?
The recently published World Bank 2022 International Debt Report sheds light on some interesting trends regarding the evolution of debt financing in developing economies. The long-term trends are already well known: economic measures taken to soften out the effects of the COVID-19 economic blow, left developing countries, and in particular countries eligible to IDA (i.e., World Bank concessional loans), with rapidly accumulated debt burdens.
Over the last decade, the debt structure of these countries has experienced significant change. Debt owed to private creditors has more than quadrupled, increasing from 5% to 21% of Public and Publicly guaranteed (PPG) debt. This means that IDA eligible countries owe $133 billion to private creditors in 2021, up from $13 billion in 2010. At the same time, the share of debt owed to multilateral and bilateral creditors respectively shrunk from 59% to 47% and from 36% to 32% of total debt. In particular, non-Paris club creditors have multiplied amongst bilateral creditors (International Debt Report, 2022).
Against this backdrop, 2021 has been a year of reversals from the previous decade and this appears even more clearly when looking at the evolution of net transfers – i.e., disbursements minus debt service (both interest and principal). Whether previous trends will resume, or whether 2021 announces a permanent shift is hard to predict due to the delay in World Bank data but it seems to point to a decline in the number and diversity of lenders, and to a come-back of “traditional ”. In this perspective, the China’s Overseas Development Finance database from the Global Development Policy Center at Boston University shows that – as part of a larger global downward trend – sovereign loan commitments from the China Development Bank and the Export-Import Bank of China to IDA-eligible countries reached their lowest level in 2021, at a total value of US$ 2.1 billion. At the same time, just two of the 75 IDA governments have been able to access global capital markets, and both of them did so relatively early in the year, when the 2022 shocks were in their early manifestation phase, as per CBONDS data.
A year of paradoxes
When focusing on long-term loans to governments, 2020 was a year of crisis, and 2021 a year of paradoxes: while the DSSI was ongoing, private lenders poured record amounts of funding to IDA governments. Yet, since 2015, the multilateral system remains the most important provider of fresh funds to the group of 75-poorest countries, supporting IDA-eligible governments with countercyclical assistance at the height of COVID, when the trend amongst private and, to a lesser extent, bilateral creditors was to retreat.
Private lenders: swinging up and down!
With ultra-easy monetary policy, “risky assets”, including emerging markets bonds, made a spectacular come-back. As has been well documented, bondholders have emerged as a major – though fickle – source of funding for lower-middle income economies. Indeed, in 2014, 2017, 2018 and 2021, transfers from bondholders explained between 70% and 90% of the aggregate net transfers from private creditors.
Private bond net transfers are also concentrated on a few countries, comparably large issuers. Rather than being homogenously distributed among the 75 IDA clients, net transfers from bondholders are almost exclusively concentrated to a restricted group of the largest of these countries. For example, more than 85% of the positive figure for 2021 net transfers from private bondholders were directed towards a group of 5 eligible countries: Nigeria, Pakistan, Ghana, Uzbekistan, and Benin. Kenya, Senegal, also have benefitted from comparatively larger net transfers from bondholders than the rest of the IDA group in the years preceding 2021.
Bilateral creditors: is the world upside down?
From a borrower perspective, the allocation of bilateral net transfers remains widely concentrated among large IDA clients. Over the 2015-2021 period, Bangladesh and Pakistan have been by far the largest receivers of net transfers, with aggregated totals amounting to more than US$ 16 and 14 billion respectively. This is equivalent to 1.4% of the average GNI of IDA governments over the same period. Kenya, which is the third largest receiver of net transfers among IDA clients, received in aggregate only US$ 5 billion. The remaining IDA countries collectively received net transfers of almost $7 billion in 2015 and $5.5 billion in 2016. This amount subsequently levelled out at roughly US$ 3.5 billion per year for the years 2017 through 2020, turning into a negative net transfer of US$ 6 million in 2021.
The trend on the allocation of net transfers, from a creditor perspective, shows a higher degree of heterogeneity. While China has been the lender of choice for many IDA-eligible countries in the past decade, Beijing started to thread more carefully on net financial transfers in the last few years. While this had already been documented in the past, the IDR data on bilateral net transfers on PPG external debt shows a quite impressive shift in China’s lending behaviour since 2015. Net transfers from China as a share of IDA-countries’ aggregated GNI declined from 0.4% in 2015 – with a highest 0.54% in 2018 – to 0.09% in 2021. This drop in financial support from China has been counterbalanced by a renewed commitment of other bilateral creditors to IDA countries. During the same period, net debt transfers from Japan increased from 0.02% of IDA-countries aggregated GNI in 2015 to 0.14% in 2021, making it the largest bilateral provider of net financial transfers to IDA governments. Similarly, net transfers from France increased from 0.06% in 2015 to 0.08% in 2021.
This reduced role in China’s activity as a provider of net transfers translated to an increase in the number of countries that make net payments to China (i.e., have negative bilateral debt net transfers from China). During the 2015-2021 period, net payments to China increased from a little over 100 million US$ to more than 2 billion US$, as the number of countries which are net payers to China increased from 13 to 34. At the same time, this translated to a significant reduction in the number of countries that had China as their largest bilateral net lender. Despite its tendency to concentrate its lending to a limited group of countries, China was the largest provider of net transfers to 36 IDA governments in 2015. Nowadays, only 11 IDA clients still rely primarily on China as a net creditor.
Will China’s financial support to IDA governments come to an end in the years ahead of us or is this just a consequence of the complex features of the DSSI? To answer that question, we need to disentangle debt service (which was deferred in 2021 for all official lenders) and new disbursements. According to the International Debt Report, official bilateral creditors deferred US$ 8.9 billion of debt service payments owed in 2020 and 2021 by a group of 48 countries that participated in the DSSI. In particular, data from the IDS-DSSI Database shows that China is the bilateral that participated the most in 2021. Indeed, China deferred around 3 billion of the US$ 5.5 billion due in 2021, approximately 70% more than the Paris Club creditors combined.
Despite this, as the figure below shows, from 2018 onwards, China’s disbursements towards IDA countries (not all of which participated to the DSSI) decreased, while the debt service it received increased. In proportion to their disbursements, the multilateral system, as well as France and Japan, received a smaller share of debt service payments, thus registering larger net transfers to IDA clients.
At the same time, a reduction in Chinese net transfers to IDA countries can also indicate that there has been a shift in Beijing’s lending strategy. There might well be other types of non-bilateral credits coming from China which would not be captured in the World Bank’s data. This would be, for instance, the case of SOE-to-SOE lending, through equity-type investments. Other types of debt, such as CB swaps, are also not captured in the International Debt Statistics due to their short-term nature.
Only the future can tell us if the reduction in Chinese lending will remain so widespread across borrowing countries, or whether China will decide to focus on a few partner countries, or even increase its lending commitments once it has withered off the negative effects of COVID-19. What is certain is that the rest of bilateral creditors have returned. Japan seems to be today’s biggest player, with France following at a close distance. Moreover, we are also seeing an increased importance of “non-traditional” lenders (i.e., India and Saudi Arabia in 2021), for whom magnitudes are increasingly significant.
In addition, it is worth noting that grants – while not being the main focus of this blog - remain a quantitatively important source of assistance for IDA eligible countries. According to data from the OECD – which by construction does not include grants from China – grants net of technical assistance totalled more than 64 US$ billions in 2021 for IDA governments.
Conclusion: The role of Multilaterals, and IDA
Total net transfers to governments eligible to IDA from the multilateral system over the 2010-2021 period show that multilateral creditors acted as a buffer in 2020, providing countercyclical flows during the COVID-19 crisis. Over the whole period, they have pumped around 135 US$ billions of net flows into the economies of IDA-eligible countries.
Financing needs were well above those numbers and explain the rise of both bond markets and Chinese official and private lenders. 2021 was a year of contrasts, with a come-back of bond investors which has been largely reversed since, and a decline in loans from Chinese sources. Those evolutions provide a strong rationale to find new sources of liquidity, especially from the multilateral system (more on this topic here).
Against this background, our main conclusion is descriptive: the development finance landscape is changing under our eyes and might well undergo further structural changes during the course of 2023 and onwards. This has important implications for policy actions: amidst these changes and the high uncertainty they create, there is a need to expand multilateral development bank financing. If there is one certainty coming out of 2022, it is that MDBs seem to be the main game in town.