Debt Sustainability & The Belt & Road Initiative: Determining a U.S. Response

Debt Sustainability & The Belt & Road Initiative: Determining a U.S. Response

Debt Sustainability and the Belt and Road Initiative: ​ Determining a U.S. Response

By Joanna Anyanwu, Jatin Batra, Lauren Clark, Tom Clark, Ian Hutchcroft, Caroline Jones, Gabriel Mekbib, Sofia Alessandra Ramirez, and Corbin Stevens Mary Beth Goodman, Facilitator

December 2020

This report was prepared by Master in Public Affairs students at the School of Policy and International Affairs at Princeton University as part of a policy workshop course on China’s Belt and Road Initiative.

This report represents the conclusions of the workshop and does not necessarily reflect the views of any individual author, Princeton University, the U.S. Department of State, or any person interviewed as part of this workshop. The policy recommendations contained in this report do not constitute official U.S. government policy.

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About the Team

The authors of this report consist of the following nine Master in Public Affairs (MPA) graduate students from the School of Public and International Affairs (SPIA) at Princeton University: Joanna Anyanwu is a JD/MPA candidate in international development and a Scholars in the Nation’s Service Initiative (SINSI) recipient. She spent her SINSI fellowship rotations at the Civil Rights Division of the Department of Justice and at the Bureau of Conflict & Stabilization Operations of the Department of State. She is pursuing her law degree at Harvard Law School.

Jatin Batra is focusing on international development at Princeton. While at SPIA, Jatin interned at the U.S. International Development Finance Corporation in its structured finance group. Before coming to SPIA, he worked in investment banking, economic development, non-profit governance, and start-ups. He completed his MBA at Yale School of Management.

Lauren Clark is focusing on economics and public policy at Princeton. While at SPIA, she interned with the United Nations Economic and Social Commission for Asia and the Pacific. Previously, she worked for the Federal Reserve doing research on payment systems.

Tom Clark is focusing on international development at Princeton. He has worked on a wide range of development projects, including fiscal governance, agricultural policy and humanitarian affairs. Most recently, he worked as a data analyst at the World Food Programme.

Ian Hutchcroft is focusing on international macroeconomic issues at Princeton. Before coming to SPIA, Ian worked for the U.K. Mission to the U.N. in New York and interned at USAID in the Philippines. While at SPIA, Ian interned at the World Bank, where he assisted with comparative analyses of business regulations for the flagship Doing Business survey.

Caroline Jones is a Scholars in the Nation’s Service Initiative (SINSI) graduate fellow focusing on international relations. She spent her fellowship rotations at the Office of the Undersecretary of Defense for Policy, covering Afghanistan strategy, and at the U.S. Institute of Peace, working on security sector reform and governance.

Gabriel Mekbib is focusing on international development at Princeton. Previously, he worked in the microfinance, agricultural and health sectors in East Africa. For his summer internship, Gabriel supported Princeton faculty research on COVID-19’s impact in Sub-Saharan Africa.

Sofia Alessandra Ramirez is focusing on international development at Princeton. While at SPIA, she interned at the U.S. International Development Finance Corporation. Previously, she worked at the Council on Foreign Relations and The Economist Intelligence Unit conducting research on Latin America and China.

Corbin Stevens is focusing on cybersecurity and international relations at Princeton. While at SPIA, he interned with the Digital and Cyberspace Policy Program at the Council on Foreign Relations. Previously, he worked as a wargaming analyst at Booz Allen Hamilton focusing on government cyber incident response.

Mary Beth Goodman, Facilitator, is an international development and policy expert who has worked with governments, civil society organizations, the private sector and international institutions on a variety of issues ranging from economic development, social justice, governance and anticorruption to global health and humanitarian response. She previously served as the Special Assistant to President Obama and Senior Director for Development, Democracy and Humanitarian Affairs at the White House.

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Acknowledgements

We are grateful to the many individuals who have contributed their time, knowledge, and effort to the development and completion of this project. First, we would like to thank Mary Beth Goodman, our workshop facilitator, for her guidance, patience, and dedication to our learning. We also thank the School of Public and International Affairs staff. Additionally, we are grateful to the U.S. Department of State’s Economic Bureau, Office of Monetary Affairs, for taking an interest in our work and providing us with invaluable direction and feedback.

Lastly, we would like to thank the many individuals who shared their expertise with us, generously offering their time, and challenging our assumptions.

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Table of Contents List of Acronyms……………………………………………………..……………………….….….….….….…...5 Executive Summary……………………………………………………..……………………….….….….….…...6 Introduction………………..…………………………..…………………..………..…….….......….….….….…...7 Background……………………………………………………………………..………………..….….….….…....9 The Belt and Road Initiative………………..…………………………..………………….….….….….…9 China’s Lending………………..…………………………..…………………..…………..….….….…...10 China’s Relationship with Latin America and the Caribbean………………..…………….….….….…...13 China’s Relationship with Africa………………..…………………………..……………..….….….…...14 Debt Relief Recommendations …………………..…………………………………………….….….….….….15 Short-Term Debt Relief Solutions…...…..………………..…………………...………....….….………..15 Medium-term Debt Relief Solutions..........………..…………………………..…………….….….….….17 Long-term Debt Refief Solutions.........………………..….………………..……………….….….….…..19 Building Resiliency Recommendations………………………………..………………….…...….….…..............25

Standards and Regulations………………..…………………………..…………………….….….….…..25 Transparency and Civil Society………………..…………………………..……………….….….….…..28 Development Finance………………..…………………………..…………………..……..….….….…..30 Bilateral Relations with China…………………………………………………..….….….….….….….….….….32

Restore and Expand Forums for U.S.-China Bilateral Cooperation…..…………………….….….….…..32 Guide Chinas BRI Projects to Higher Quality Standards Through Co-Financing.………...….….…..….34 Case Studies………………………...………………………………………………………..….….….….….......36

Argentina………………………...…………………………………………………..……...….….….….36

Ecuador………………………...…………………………………………………..……….….….….…...38 Angola………………………...…………………………………………………..………...….….….…..40 Kenya………………………...…………………………………………………..…………….….….…...42 Conclusions……………………………………………………………………………………...….….….….…..44 Bibliography………..……………………………………..……………………………….……….….….….…..45

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List of Acronyms

5G Fifth Generation AIIB Asian Infrastructure Investment Bank AU African Union BDN Blue Dot Network BRI Belt and Road Initiative CCP Chinese Communist Party CDB China Development Bank CELAC Community of Latin American and Caribbean States CGD Center for Global Development CHEXIM The Export-Import Bank of China CSIS Center for Strategic and International Studies COVID-19 Coronavirus Disease 2019 CPI Corruption Perception Index CRA Credit Rating Agency DFC U.S. International Development Finance Corporation DSA Debt Sustainability Analyses DSR Digital Silk Road DSSI Debt Service Suspension Initiative ECA United Nations Economic Commision for Africa EITI The Extractive Industries Transparency Index ESIA Environmental and Social Impact Assessment E.U. European Union G20 Group of Twenty G7 Group of Seven GDP Gross Domestic Product GPS Global Positioning System HIPC Heavily Indebted Poor Countries HSR Health Silk Road ICT Information and Communications Technology IDB Inter-American Development Bank IFC International finance corporation IFI International financial institution IIF Institute of International Finance IMF International Monetary Fund IPTI Indo-Pacific Transparency Initiative ITAN Infrastructure Transaction and Assistance Network LAC Latin America and the Caribbean LMIC Low and Middle Income Countries MDB Multilateral Development Bank MDRI Multilateral Debt Relief Initiative MOU Memorandum of Understanding

OAS Organization of American States ODA Official Development Assistance OECD Organization for Economic

Co-operation and Development OOF Other Official Flows PBC People’s Bank of China S&ED US-China Strategic and Economic Dialogue SAIS-CARI Johns Hopkins School of Advanced

International Studies’ China Africa Research Initiative SDGs Sustainable Development Goals SDRs Special Drawing Rights SPV Special Purpose Vehicle SSA Sub-Saharan Africa U.S. United States U.K. United Kingdom U.N. United Nations UNDP United Nations Development Programme US$ United States Dollar WHO World Health Organization

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Executive Summary The COVID-19 pandemic has shocked economic and health systems around the world, sparing no country. But the ability of many developing countries to respond to the pandemic has been hampered by their outstanding debt loads. Facing liquidity shortages due to lower trade volumes, commodity prices, tax revenues, and inflows of private capital, governments are forced to choose between supporting strained public health systems and social safety nets, on the one hand, and repaying outstanding debt, on the other. Without immediate action from policymakers, these liquidity crunches could devolve into deeper solvency issues. Thus far, multilateral efforts to alleviate these pressures have been complicated by China’s reluctance to participate in debt relief efforts, and none are forward-looking enough to create an international debt architecture that is resilient to post-pandemic shocks.

This report recommends ways to address short- and medium-term debt relief during the COVID-19 pandemic, as well as longer-term solutions for the United States to provide global leadership on more transparent development financing with stronger environmental and technological standards. Our recommendations are presented along three themes: (1) providing debt relief in the short, medium, and long term; (2) building resilient economies; and (3) cooperating with China on shared global challenges. We find that a productive pandemic response will require engaging both Chinese and private creditors through existing, and possibly new, multilateral fora, while using U.S.-led development initiatives to shape lending practices.

Lending for infrastructure projects under China’s Belt and Road Initiative (BRI) has outstripped development financing from other major bilateral creditors. In sub-Saharan Africa (SSA), China’s aid has been both heralded for its transformative potential and condemned for its lack of transparency and unsustainability. Though slower to reach Latin America and the Caribbean (LAC), BRI financing has become sizable, and China has been quick to provide the region with medical assistance in response to COVID-19. However, with rising domestic leverage and lending stumbles abroad, China's annual BRI lending from policy banks has fallen since 2016. Whether lending resurges from policy banks or shifts to commercial banks and state-owned enterprises (SOE), BRI's influence will likely persist through other pathways, such as the Health Silk Road (HSR) and Digital Silk Road (DSR). To counter the BRI and build more resilient economies, the U.S. should use the Blue Dot Network (BDN) and U.S. International Development Finance Corporation (DFC) to fund sustainable, high quality development projects.

Additionally, the U.S. should strategically cooperate with China on areas of shared interest, such as climate change and development financing, while maintaining competition in areas such as digital technology and debt transparency. Providing multilateral organizations and BRI recipient countries the tools to push China towards higher standards on transparency, anti-corruption, and governance can reshape development finance and create a more sustainable debt environment.

Lastly, we include four case studies —Angola, Argentina, Ecuador, and Kenya—to demonstrate how our recommendations can be applied to countries that are in different stages of debt relief, face varying impacts from the pandemic, and have different exposure to BRI lending. These countries’ experiences with sharp drops in commodity prices, significant restructuring of private sector creditor debt, and navigating complex geoeconomic relationships with China are shared by many others in SSA and LAC. Their successes and shortfalls, and the specific ways in which our recommendations can strengthen domestic conditions, are therefore useful for more broadly addressing debt sustainability and China’s questionable development practices in SSA and LAC.

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Introduction COVID-19 continues to wreak havoc on the global economy. Governments around the world have taken extraordinary measures to blunt the economic damages in real time, spending vast amounts of money on social and business safety nets, financial stimulus measures, bolstering healthcare systems, and accelerating vaccine and therapeutic development. But many governments, particularly in lower income countries and emerging market economies, are facing a major fiscal crunch, torn between spending the money they need to combat COVID-19 and accruing crushing debt loads that could propel them into default and cost them years of economic growth.

For these developing countries, commodity prices have fallen dramatically, lowering export prices and increasing current account balances. Currencies have been depreciating as investors flee to “safer” currencies, and remittances and private capital inflows falter.1 Sovereign debt liquidity, solvency, and balance of payment crises may all be on the horizon.

In March 2020, African Ministers of Finance called for a coordinated effort to lessen the pandemic’s effect on African economies.2 Recognizing the potential consequences of COVID-19 on sovereign debt, the world’s major economies responded with the Debt Service Suspension Initiative (DSSI), which the Group of Twenty (G20) and the Paris Club, a group of major bilateral creditor countries, adopted in April 2020. DSSI allows for the suspension of debt service payments to official bilateral creditors from 76 eligible debtor countries; originally through 2020 but since extended until June 2021.3 DSSI is an important first step, and has bought additional time for a few of the eligible countries and for the G20 to consider next steps and what more may be needed. But it covers a minority of debt service the eligible countries owe over this time period. These countries owe approximately US$7 billion in multilateral credit and US$13 billion in private credit debt service due by 2020 year-end that is not included in the current iteration of DSSI.4 And while China is a member of the G20, it has not included all of its effectively guaranteed state-owned policy banks — China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM) — in its DSSI participation, which hold most of its BRI-related debt portfolio in DSSI-eligible countries. As of December 1, only 46 of the 73 eligible countries are participating.

This report explores what should come next for the countries for whom DSSI will be insufficient, and who will need either additional liquidity or debt treatment in the future. More importantly, however, this report seeks to place the current COVID-19 sovereign debt crisis in context, analyzing the various structural patterns and dynamics that have produced this moment. Chief among these is China’s increasingly assertive behavior on the world stage through its use of economics as a tool of statecraft, and the complex relationship between China and those who subscribe to the liberal international order, led by the United States. China’s vast lending for infrastructure development has not always followed sound economic and development principles or international norms about official bilateral lending. China has repeatedly helped developing countries build non-viable projects, leaving them with debt loads that are much greater than the recipient country can possibly repay.

1 Ahmed et al., “The Impact of COVID-19 on Emerging Market Economies’ Financial Conditions.”

2 Reuters Staff, “African Finance Ministers Call for $100 Billion Stimulus, Debt Holiday.”

3 IMF, “Questions and Answers on Sovereign Debt Issues.”

4 World Bank, “International Debt Statistics.”

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In responding to the debt distress of these countries, China has again refused to follow the existing international rulebook. China has declined to fully participate in the Paris Club, which facilitates cooperation among official creditors on the principle of comparability of treatment, and has remained an observer despite being the largest official bilateral creditor.5 China has also repeatedly declined to be transparent about its lending and refused to cooperate with other creditors in addressing debt concerns in debtor countries. This is a microcosm of the larger dynamic playing out between the U.S. and China, where two decades of efforts to bring China into the rules-based international system has met with their repeated resistance to subjecting themselves to a world order fundamentally dominated by the United States.

China’s lack of cooperation on debt relief is a threat to the existing sovereign debt architecture, which is increasingly outdated and struggling to adjust to new geopolitical and economic realities. In this architecture, traditional official bilateral creditors cover only a minority of lending, and private creditors hold significant portions of developing country debt with few incentives to cooperate on debt treatment.

Addressing the COVID-19 sovereign debt crisis involves grappling with these larger questions about U.S.-China relations, the role of rules-based institutions during the crisis and after it, and how to take advantage of this moment of upheaval to build systems, institutions, and policies that promote resilience, growth, and cooperation.

To address the current crisis, the U.S. will need to take steps to mitigate the short- and medium-term consequences of illiquidity and insolvency, as well as addressing long-term structural issues related to sovereign debt.

The U.S. will also need to consider and engage with efforts of the Chinese government tangentially related to BRI, such as the Health Silk Road, Digital Silk Road, and greening the BRI.

5 Comparability of Treatment means that a debtor country must agree to seek from non-multilateral creditors, in particular

other official bilateral creditor countries that are not members of the Paris Club and private creditors (mainly banks, bondholders and suppliers), a treatment on comparable terms to those granted by the Paris Club. The Economist, “A New Study Tracks the Surge in Chinese Loans to Poor Countries.”

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Background A. The Belt and Road Initiative The BRI, the flagship project of President Xi Jinping launched in 2013, has since become a major component of China’s foreign policy. The initiative finances large-scale development projects around the world to promote policy coordination, facilities connectivity, unimpeded trade, financial integration, and people-to-people exchanges (the “five pillars”).6 BRI projects focus on infrastructure development, thus far concentrated in the transportation, energy, and information and communications technology (ICT) sectors. Beyond infrastructure, economic agreements between China and BRI countries include creating special economic zones, currency swap agreements, and favorable terms of trade.7 Lending for BRI projects is estimated in the US$1 trillion range, with a substantial portion financed through public or publicly guaranteed debt.8 Many BRI recipient countries have thus taken on substantial debt to fund these projects. As of mid-2020, 138 countries have signed onto the BRI via bilateral memorandums of understanding (MOUs) with China.9 Six of the seven developing countries in debt distress have signed onto the BRI.10 The Center for Global Development (CGD) estimated as early as 2018 that eight countries were “at particular risk of debt distress” due to their BRI borrowings,11 and the pandemic has exacerbated this trend in other countries.

BRI has become both an integral aspect of global development and the subject of great speculation. Opaque borrowing terms and loan amounts from Chinese policy banks shroud the BRI in questions and accusations of ulterior motives. While BRI may grow China’s economy by creating more accessible trade routes and partners, the initiative is also undoubtedly motivated by China’s desire to expand political and strategic power globally.12 COVID-19 has taken a toll on BRI projects. In June, the Chinese Foreign Ministry announced that about 20 percent of BRI projects were affected by the pandemic.13 There are a number of ways the pandemic may have slowed ongoing projects: recipient countries may fall behind on debt repayments, fewer personnel may be able to work due to social distancing requirements or sickness, Chinese contractors may have been called home, and China itself may face financial strains. In Q1 2020, China’s gross domestic product (GDP) contracted by ten percent, a 6.8% year-over-year decline.14 While in the following two quarters, growth has rebounded, Q3 growth (a 4.9% increase year-over-year) was lower than anticipated.15 With a rising domestic debt-to-GDP ratio, high profile failures in countries like Sri Lanka and Ecuador, requests for renegotiations, and pushback from countries like Myanmar and Russia, China has reduced BRI lending from its 2016.16 China has, however, seized this opportunity to expand its “Health Silk Road” by providing countries with medical aid.

6 UN, “United Nations Poised to Support Alignment of China’s Belt and Road Initiative with Sustainable Development Goals, Secretary-General Says at Opening Ceremony.”

7 Rolland, “A Concise Guide to the Belt and Road Initiative.”

8 Bandiera and Tsiropoulos, “A Framework to Assess Debt Sustainability and Fiscal Risks under the BRI.” 9 Nedopil, “Countries of the Belt and Road Initiative.”

10 IMF, “List of LIC DSAs for PRGT-Eligible Countries.”

11 Hurley, Morris, and Portelance, “Examining the Debt Implications of the BRI from a Policy Perspective,” 1.

12 Rolland, “A Concise Guide to the Belt and Road Initiative.”

13 Lee, “COVID-19: The Nail in the Coffin of China’s Belt and Road Initiative?”

14 OECD, “Quarterly GDP.” 15 Barrett, “China’s GDP growth in Q3 offers little for other economies to emulate.”

16 Mingey, Matthew and Agatha Kratz, "China's Belt and Road: Down but not Out." 9

The movement to virtual workspaces and classrooms has also caused an increase in internet use during the pandemic, corresponding to a lengthening of the “Digital Silk Road.”17 Thus, although the pandemic has set back some of BRI’s infrastructure projects, it has provided new space for China to expand global outreach and influence along the Health and Digital Silk Roads.

B. China’s Lending Putting numbers on China’s overseas lending is notoriously difficult. The government publishes no formal data on its lending and is not transparent about loans. The most complete and up-to-date dataset of China's worldwide lending, assembled in 2019 by researchers at the National Bureau of Economic Research, estimates that China has cumulatively lent over US$1.5 trillion in total funds to 150 countries as of 2017, making it the world’s largest creditor.18 This paper found that “50% of China’s loans to developing countries go unreported, meaning that these debt stocks do not appear in the ‘gold standard’ data sources provided by the World Bank, the IMF, or credit-rating agencies.”19 Common estimates of the size of BRI lending are usually between US$690 billion and US$1 trillion. Between 2013, when the BRI was announced, and 2018, Chinese lending to Africa amounted to US$92.8 billion, and to US$65.3 billion in LAC.20 After including portfolio debt such as U.S. Treasuries and trade credit, total Chinese global claims exceed US$5 trillion.21 However, BRI's momentum has slowed recently, with 2019 annual lending volume down 94 percent from the 2016 peak, according to a lending database managed by Boston University (BU).22 Notably, BU's database only tracks sovereign lending from China's two policy banks and does not account for delayed posting of project and loan records. While a dramatic decrease in policy banks' sovereign lending is significant, this database captures neither BRI lending from policy banks to non-sovereign borrowers, nor from commercial banks and SOEs to both sovereign and non-sovereign borrowers. Nonetheless, other sources have confirmed that by 2018, BRI lending may have fallen between 30 percent and 82 percent from previous peaks.23 The NBER dataset is the most recent to document Chinese lending worldwide, making it useful for understanding global trends, but region-specific datasets offer more granularity and real time updates. According to the Johns Hopkins School of Advanced International Studies’ China Africa Research Initiative (SAIS-CARI), from 2000 through 2018 China made at least 1,076 loans to African countries worth around US$148 billion, the largest portion of which has been a cumulative 256 loans worth US$43 billion to Angola.24 The bulk of these loans have gone towards three main sectors: transport (US$44 billion), power (US$37 billion), and mining (US$19 billion).25 China’s largest lending year was 2016, at US$29 billion (US$19 billion of which went to Angola). In 2018, China committed 48 loans worth US$8.9 billion.26 The major sources of Chinese lending to African countries have been its policy banks, CHEXIM (US$86 billion) and the CDB (US$37 billion), although the Chinese government, Chinese companies, and Chinese commercial banks have also provided loans on the continent.27 17 Lee, “COVID-19: The Nail in the Coffin of China’s Belt and Road Initiative?”

18 Horn, Reinhart, Trebesch, “How Much Money Does the World Owe China?”

19 There is no definitive or authoritative quantification of Chinese lending, and the final numbers vary significantly. The data in this section is to give a sense of the approximate scale. Horn, Reinhart, Trebesch, “How Much Money Does the World Owe China?”

20 Gallagher and Meyers. “China-Latin America Finance Database;” Brautigam et al., “China Africa Research Initiative Loans

Database.”

21 Horn, Reinhart, Trebesch, “How Much Money Does the World Owe China?”

22 Boston University Global Development Policy Center, "China's Overseas Development Finance." Boston University.

23 Mingey, Matthew and Agatha Kratz, "China's Belt and Road: Down but not Out." 24 Brautigam et al., “China Africa Research Initiative Loans Database.”

25 Brautigam et al., “China Africa Research Initiative Loans Database”.

26 Brautigam et al., “China Africa Research Initiative Loans Database”.

27 Brautigam, Huang, and Acker, “Risky Business: New Data on Chinese Loans and Africa’s Debt Problem.” Acker, Brautigam, and Huang, “Debt Relief with Chinese Characteristics.”

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Box 1: Health Silk Road The origins of China’s Health Silk Road date to January 2017, when President Xi Jinping visited the Geneva headquarters of the World Health Organization (WHO) to sign a MOU on the initiative with former Director-General Margaret Chan.28 Chan, the first Chinese national to lead a major U.N. organization, played an instrumental role in integrating China with broader global health governance structures: under her leadership from 2006–2017, WHO staff were directed to embrace Chinese traditional medicine, refer to Taiwan as a province of China, and align WHO programs with the BRI.29 Later in 2017, China hosted a conference called the “Belt and Road Forum on Health Cooperation: Toward a Health Silk Road,” with new Director-General Tedros Adhanom Ghebreyesus in attendance. In his speech, Dr. Tedros lauded HSR as a visionary initiative and pledged WHO cooperation.30 The policy document from the conference, called the Beijing Communique, aimed to associate the BRI with the health outcomes articulated in the SDGs and was endorsed by several dozen health ministers and multilateral representatives.

Much like the BRI itself, the definitions, scope, and ambitions of HSR remain ambiguous. Yet as the COVID-19 pandemic continues to alter the global economic and geopolitical landscape, the Chinese Communist Party (CCP) has three clear reasons to elevate the initiative in its domestic messaging and international engagements: 1. HSR serves to legitimize the CCP in the eyes of its domestic audience. Viewed in this light, China seeks to leverage foreign assistance and global leadership to assuage a bruised sense of national pride following widespread international condemnation for its failure to prevent and contain the initial Wuhan outbreak in December 2019. To this end, Chinese officials attempted to shift the narrative around the pandemic,

with Chinese Foreign Ministry spokesperson Zhao Lijian blaming the U.S. military for bringing the coronavirus to Wuhan.31 2. HSR provides an opportunity for Chinese authorities to adapt BRI to new global realities. Powered by its technology champions and 5G wireless networks, China is seeking to merge HSR with elements of the DSR in the areas of communication, surveillance, and telemedicine. These new forms of mask diplomacy threaten U.S. interests by increasing the market power of Chinese firms, facilitating widespread data collection by authoritarian regimes, and undermining democratic norms.32 3. Chinese authorities aim to utilize HSR to project power on the international stage. As China faces a slowdown in economic growth and some participant countries confront a looming debt crisis, HSR provides a convenient framework for the CCP to expand its international footprint.33 For example, President Xi declared to the World Health Assembly in May 2020 that “COVID-19 vaccine development and deployment in China, when available, will be made a global public good.”34 The U.S. has thus far resisted such a declaration. In this way, China seeks to utilize HSR to rewrite the narrative on its (mis)management of the coronavirus crisis and tout its model of socialism with Chinese characteristics.

Global health policy need not be viewed as zero-sum; indeed, the HSR is not necessarily a nefarious plot to dislodge the U.S. from key international chokepoints.

Nevertheless, the U.S. should push back strongly in the areas where HSR threatens its core interests: CCP attempts to shift the narrative around the origins of the virus; efforts by Huawei and other tech champions to construct 5G networks in allied nations; and the anti-competitive practices that have made China the word's largest exporter of medical equipment.

28 Lancaster, Rubin, and Rapp-Hooper, “Mapping China’s Health Silk Road.”

29 VanderKlippe, “Margaret Chan Reshaped the WHO and Brought It Closer to China.”

30 World Health Organization, “Towards a Health Silk Road.”

31 Zhu, “Interpreting China’s ‘Wolf-Warrior Diplomacy’”.

32 Lee and Rasser, “China’s Health Silk Road Is a Dead-End Street.”

33 Lancaster, Rubin, and Rapp-Hooper, “Mapping China’s Health Silk Road.”

34 Wheaton, “Chinese Vaccine Would Be ‘Global Public Good,’ Xi Says.”

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Analysis by CDG finds that Chinese lending terms tend to be less concessional than the World Bank, although almost all Chinese loans include concessional terms.35 SAIS-CARI research, on the other hand, suggests that “Chinese terms and interest rates [in Africa] vary considerably by lender, and type of project.”36 They also note that, contrary to widespread belief, “commodity secured loans account for 25% of commitments in [the] data,” and find only a single case in Africa in which a sovereign borrower put up property as collateral.37 China’s lending has not always prioritized economic sustainability, and several developing countries have since taken on unsustainable debt. COVID-19 has only exacerbated matters and significantly increased the risk of sovereign debt defaults, as evidenced by Zambia’s recent default on eurobond payments.38 The World Bank and the International Monetary Fund (IMF) work with low and middle-income countries to generate regular Debt Sustainability Analyses (DSAs), which are structured, case-by-case evaluations of a country’s ability to repay its debt.39 The DSA provides a final rating of the risk of external and overall debt distress as follows: low risk, moderate risk, high risk, or in debt distress. According to SAIS-CARI, “[t]he DSSI data suggest that for the 40 [DSSI-eligible] low income African countries, debt to China adds up to US$64 billion and accounts for 22% of the [public and publicly guaranteed] debt stock in 2018, and an estimated 29% of debt service due in 2020.

[At US$62 billion], [t]he outstanding debt to the World Bank is very close to this figure…[but] debt service is lower.”40 It is also worth noting that with the exclusion of Angola, only 18% of African debt service due in 2020 is Chinese.41 Further, of the 22 African countries designated as high risk or in debt distress as of June 2020 and eligible for DSSI, in seven (Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia, Kenya, and Zambia), China holds 25% or more of all external debt while in over half (12 countries), China loans a small share (under 15%) of debt stock with a medium share (15–25%) of debt stock in the three remaining countries.42 In Latin America and the Caribbean, China plays a less significant creditor role. Private bondholders are by far the biggest creditors across the region: of the region’s US$2 trillion debt pile, they hold 60%. By contrast, International Financial Institutions (IFIs) hold 18% and official bilateral loans tally to six percent, of which China holds the largest share.43 The notable exception is Venezuela, which is China’s largest debtor in both the region and the world, having received over 47% (US$67 billion) of total policy bank finance since 2005.44 Between 2005 and 2019, China loaned US$137 billion to the region, 67% of which was for energy projects and 20% for infrastructure.45 China has been able to profit from Latin American resentment towards onerous loan conditionality from IFIs and Western governments. Moreover, poor credit ratings have inhibited LAC borrowing on international markets. By contrast, China has been willing to lend with far fewer conditions and often at better rates.

Beijing hedges risk using natural resources: roughly half of China’s loans to Latin America are secured in oil.46 Despite limited evidence, some BRI critics worry that China may take equity, or ownership in, foreign countries’ assets in the event of a debtor default to China.47 Others are concerned about China using its markets, influence, and military in the South China Sea to block off aid and support to regional U.S. allies and partners.

35 Morris, Parks, and Gardner, “Chinese and World Bank Lending Terms: A Systematic Comparison Across 157 Countries and 15 Years.”

36 Brautigam, Huang, and Acker, “Risky Business: New Data on Chinese Loans and Africa’s Debt Problem,” 4.

37 Brautigam, Huang, and Acker, “Risky Business,” 5-6.

38 Elliot Smith, “Zambia Becomes Africa’s First Coronavirus-Era Default: What Happens Now?” 39 World Bank, “Interactive Guide on Debt Sustainability Framework for Low-Income Countries.”

40 Brautigam, Huang, and Acker, “Risky Business: New Data on Chinese Loans and Africa’s Debt Problem,” 5-6.

41 Brautigam, Huang, and Acker, “Risky Business,” 12.

42 Brautigam, Huang, and Acker, “Risky Business,” 7-11.

43 Ray and Gallagher, “China Alone Can’t Solve Latin America’s Looming Debt Crisis.”

44 Myers and Gallagher, “Chinese Development Finance in LAC, 2018.”

45 Sullivan and Lum, “China’s Engagement with Latin America and the Caribbean.”

46 Singh, “The Myth of ‘Debt-Trap Diplomacy’ and Realities of Chinese Development Finance.”

47 Deborah Brautigam, “A Critical Look at Chinese ‘Debt-Trap Diplomacy’: The Rise of a Meme.”

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Box 2: Debt Transparency Although success of the DSSI is most threatened by private sector debt, China's lending looms large over BRI-recipient countries and remains opaque. China accounts for an estimated two-thirds of bilateral debt service due to official creditors over the next four years, the terms of which are largely unknown.48 While other major bilateral creditors share lending data via the Paris Club, Chinese credit is subject to no such review and often does not align with international lending standards.49 The lack of information on BRI financing presents challenges for assessing borrower countries’ debt sustainability and global financial risk.

Estimates of the volume of China’s lending have been compiled by a number of sources including the College of William and Mary’s AidData research lab, CSIS’s Reconnecting Asia project, and the Inter American Dialogue’s China-Latin America Finance Database. However, information on the lending bank, interest rate, and other contractual obligations are more difficult to ascertain. In the context of the pandemic, the main reason that unknown terms of BRI financing are worrisome is that Paris Club members do not know whether or how China will restructure debt. When Sri Lanka could not meet payments on the Hambantota Port Development Project in 2017, the country ended up handing 15,000 acres of land and the port to China for 99 years.50 There is concern that pandemic induced restructurings could similarly take advantage of indebted countries and cede strategic infrastructure to China.

Convincing China to join the Paris Club does not appear feasible at this time. Seeing this, in July 2020, World Bank President David Malpass publicly appealed to borrowing countries to provide details on their debts to “protect their rights.”51 This would bypass the need to work directly with China. Public reporting mechanisms such as the International Aid Transparency Initiative already exist for this purpose.

China has nominally committed to improved transparency. In April 2019, Beijing announced the BRI Debt Sustainability Framework, in part reacting to criticism from partner countries that sought to review, renegotiate, cancel or scale down BRI projects due to concerns over costs, erosion of sovereignty, and corruption.52 However, this commitment has not been legally codified, nor does it offer any specific mechanisms to ensure open and transparent BRI implementation.

C. China’s Relationship with Latin America and the Caribbean When the BRI was first announced in 2013, LAC was notably excluded from the policy. But a number of LAC governments pursued inclusion, primarily seeking access to greater infrastructure financing, and in 2017 China began labelling its growing list of infrastructure projects in the region as official BRI projects.53 China treads carefully in the Western Hemisphere, given U.S. dominance in the region. China has taken a backseat role in the regional institutions the U.S. participates in, for example the Inter-American Development Bank (IDB), and has primarily promoted its BRI policy through the one regional organization that excludes the United States—the Community of Latin American and Caribbean States (CELAC).54 CELAC is a politically 48 Garnder et al., “Bargaining with Beijing: A Tale of Two Borrowers.”

49 Hurley et al., “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.”

50 Abi-Habib, “How China Got Sri Lanka to Cough Up a Port.”

51 World Bank, “World Bank Group President David Malpass: Remarks for G20 Finance Ministers and Central Bank Governors Meeting.”

52 Rana and Ji, “Belt and Road Forum 2019: BRI 2.0 In The Making?”

53 Myers, “China’s Regional Engagement Goals in Latin America.”

54 Myers, “China’s Regional Engagement Goals in Latin America.”

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charged organization, spearheaded by anti-U.S. governments in the region as an alternative to the Organization of American States (OAS). In 2014, China established the China-CELAC forum as a platform to convey its policy goals for the region, especially the BRI, and coordinate broader regional relations.55 China-LAC cooperation on the BRI and associated lending are primarily governed by bilateral MOUs, the content of which is not publicly available. Most Chinese investment in LAC is in energy infrastructure projects, with smaller amounts in railroads, highways, and ports. And while infrastructure funding did not dramatically increase when the region was formally included in the BRI, China has provided significant aid and medical supplies to the region to fight COVID-19. It seems to have succeeded in using the crisis to deepen cooperation with the region. Especially in light of the absence of U.S. leadership through the pandemic, the China-LAC relationship looks poised to take off post-COVID-19—albeit with less emphasis on infrastructure investment.

D. China’s Relationship with Africa China’s regional engagement with Africa on the BRI primarily focuses on the United Nations Economic Commission for Africa (ECA) and the African Union (AU). Broadly, China’s BRI engagements with the AU are based upon political synergy while its relationship with the ECA is more premised on technical and implementational alignment.

The ECA considers the BRI an integral part of development in the continent due to its infrastructural capacity building. As the knowledge institution of economic development on the continent, the ECA can assess the technical legitimacy of the BRI’s proposed economic generation capabilities. In March 2019, Dr. Vera Songwe, the ECA’s executive secretary, hailed the possible role of the BRI noting that it “can play a major role in closing some of the missing links of major transport corridors including the Trans-Africa Highway network.”56 Additionally, Dr. Songwe noted that the BRI has the potential to catalyze focus areas of the Programme for Infrastructure Development in Africa and Agenda 2063, such as the continental high-speed railway network.

However, since the pandemic, the ECA has focused on the unfolding debt situation across the continent with Dr. Songwe recently calling for China to participate in DSSI and urging more transparent processes in both China and African countries to assure that resources go to the most vulnerable.57 The AU has generally welcomed BRI initiatives with high-level political support. In May 2019, the AU representative for infrastructure development, Mr. Raila Odinga, called for increased collaboration between China and Africa within the context of the BRI to boost intra-continental connectivity and energy development.58 China’s strong relationship with the AU has been cemented by considerable financial support. China fully funded the US$200 million African Union building in 2012.59 Additionally, China has committed to help finance the African Center for Disease Control building.60 The value of China’s goodwill gestures to the AU have been harmed by recent events. The Chinese were caught spying on the AU headquarters in 2017. According to Le Monde, the AU kept the surveillance secret for a year.

When the spying allegation surfaced in media outlets, it did not lead to any official condemnation by the AU. The AU did, however, raise official complaints over the inhumane treatment of Africans in China during the pandemic, specifically in Guangzhou.61 55 Myers, “China’s Regional Engagement Goals in Latin America.”

56 Songwe, “Leveraging the Belt and Road Initiative to Link African Countries to Regional and Global Markets.”

57 UNECA, “Vera Songwe Urges China to Participate in the G20 Debt Service Suspension Initiative in Support of Africa’s Liquidity Needs.”

58 Xinhua, “AU, Chinese Officials Agree to Expedite China-Africa Cooperation under BRI.” 59 The Guardian, “China Rejects Claim it Bugged Headquarters It Built for African Union.”

60 African Union, “Ground Breaking and Unveiling Ceremony for Africa CDC HQ.” 61 SABC News, “AU Meets Chinese Ambassador over ‘African Evictions’ Reports.”

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Debt Relief Recommendations Due to the immediate strains of the pandemic and the reluctance of China and private sector lenders to fully participate in the DSSI, several countries in SSA and LAC are facing a liquidity crunch. The need to broadly increase access to finance for debt-distressed nations, encourage private sector participation in debt negotiations, and streamline international governance of the debt architecture is apparent.

To address these debt sustainability concerns, in the short-term, we propose measures that provide additional liquidity and enhance coordination efforts to better support national responses to the pandemic. In the medium term, our recommendations explore how financial instruments can increase private creditor participation, providing frameworks for our case studies on Argentina and Ecuador. In the long-term, we focus on sustainability and structural reforms to improve the debt relief systems that have produced and repeated unsustainable debt loads. This will be further explored in our analyses of Angola and Kenya.

A. Short-term Debt Relief Solutions Roughly 24% (US$17 trillion) of total global public debt is on the balance sheets of emerging market economies.62 With the exception of a few countries that have already defaulted on their sovereign debt (e.g., Venezuela and Zambia), most countries in LAC and SSA are facing liquidity crises in the short run. Fundamentally, liquidity crises occur due to a duration mismatch between short- and long-term cash flows; in other words, immediate demands on resources may exceed current payment capacities even if assets are greater than liabilities in a net present value sense. Liquidity problems may threaten a country’s long-run solvency if, for example, cash flow issues force austerity measures or increase the costs of borrowing. To the extent that the COVID-19 pandemic has restricted global trade volumes, reduced flows of private capital to developing countries, and lowered tax revenues, the crisis has precipitated a global liquidity crunch. Therefore, the focus for policymakers in the immediate future should be to prevent nascent liquidity issues from metastasizing into larger solvency crises. Indeed, the IMF has warned that an emerging market debt crisis may be imminent.63 Authorities have adopted a number of measures to address these pressing economic issues. Over 100 countries have received financial assistance from the IMF, with the organization extending debt relief to 25 countries under the Catastrophe Containment and Relief Trust.64 Furthermore, in October 2020 the G20 Finance Ministers and Central Bank Governors Meeting announced that eligible countries could suspend official bilateral debt service payments for an additional six months under the DSSI; the group later reaffirmed its commitment to the initiative in its Leaders’ Declaration of November 2020.65 The United Nations (U.N.) estimates that US$2.5 trillion will be needed to address the impacts of the pandemic in developing countries.66 Much more remains to be done. To mitigate the economic fallout from the pandemic in the near term, we recommend that the U.S. pursue the following three policy options:

62 Economist, “Which Emerging Markets Are in Most Financial Peril?”

63 Bulow, Reinhart, Rogoff, and Trebesch, “The Debt Pandemic.”

64 International Monetary Fund, “IMF Executive Board Approves Immediate Debt Relief for 25 Countries.”

65 G20, “Communique: G20 Finance Ministers and Central Bank Governors Meeting.”

66 Ghatak, Jaravel and Weigel, “The World Has a $2.5 Trillion Problem. Here’s How to Solve It.” 15

1. Extend DSSI Until the End of 2022.

Working within the G20 and Paris Club, the U.S. should advocate the extension of DSSI in order to guarantee fiscal space for the duration of the pandemic and “flatten the curve” of potential defaults and restructurings.

Lengthening DSSI would give countries a chance to use resources to address the immediate public health needs and begin recovery from the economic shock caused by the pandemic before external debt service restarts. Extending the timeline would also allow the G20 and Paris Club to begin debt restructuring for countries that need it. However, DSSI extension faces resistance from credit ratings agencies (CRAs). Fitch Ratings, for example, warned participating multilateral development banks (MDBs) that prolonged delays in repayment constitute a credit event that could lead to a future ratings downgrade.67 Despite the objections of some private creditor groups, the U.S. should proceed with DSSI extension because the program extends relief that is net present value neutral: countries will be required to repay the equivalent amounts to creditors, albeit over longer periods.

Since DSSI entails deferred payments rather than debt relief, impacts to exposed domestic lenders will be minimal. Furthermore, the initiative promises to improve aggregate market outcomes by attenuating the short-run asset-liability mismatches caused by the pandemic.

2. Provide Dollar Liquidity Swap Lines to Countries Participating in DSSI. Central banks use swap lines to exchange currencies through short-term transactions. In addition to increasing dollar liquidity in markets and facilitating the Federal Reserve’s (Fed’s) function as a lender of last resort, swap lines help restore investor confidence by signaling cooperation between central banks.68 There is a long-established precedent for the Federal Open Market Committee to utilize swap lines during economic crises to avert financial contagion and alleviate funding pressures on dollar-denominated transactions.

Since October 2013, the Fed has established unlimited swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the Swiss National Bank, and the European Central Bank.69 In March 2020, the Fed opened dollar swap lines worth US$30-US$60 billion per country with an additional nine banks, mostly in advanced economies.70 The Fed should build on these initiatives by expanding its swap lines and repurchase agreement facilities to the 29 SSA countries and three LAC countries that are participating in DSSI.71 Such an expansion would serve as an incentive for other debt distressed countries to participate in the program, potentially strengthening the negotiating position of debtor countries against private creditors. To be sure, proposals to open up swap lines with low-income countries might be contentious in the U.S. According to Alan Blinder, a former Fed Vice Chairman, “it would be very hard politically for the Fed to sell the idea that they should establish swap lines with a whole bunch of poor countries.”72 While short-term swaps do not expose the Fed to exchange risk, many in Congress would question using the institution in a manner that might appear tangential to its domestic mandate. Yet as the aftershocks of the pandemic linger and the global headwinds to U.S. recovery heighten, strong measures by the Fed will be needed to halt economic backsliding.

67 White & Case, “The G20 Debt Service Suspension Initiative – Reaction from Key Market Participants.”

68 Bordo, Humpage, and Schwartz, “The Evolution of the Federal Reserve Swap Lines since 1962,” 369.

69 Federal Reserve Bank of New York, “Central Bank Swap Arrangements.”

70 Board of Governors of the Federal Reserve System, “Federal Reserve Board Announces the Extensions of Its Temporary U.S. Dollar Liquidity Swap Lines and the Temporary Repurchase Agreement Facility for Foreign and International Monetary Authorities (FIMA repo facility) Through March 31, 2021.”

71 World Bank, “COVID-19: Debt Service Suspension Initiative.”

72 Rosalsky, “Why Is The Fed Sending Billions Of Dollars All Over The World?”

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3. Expand IMF Special Drawing Rights (SDRs) by US$500 Billion.

SDRs could also increase the supply of dollar liquidity in international markets. SDRs are essentially claims of IMF members to a basket of five major reserve currencies, and are primarily utilized as currency pooling arrangements that facilitate the transfer of liquidity to countries in need. The U.S. Secretary of the Treasury can support SDR allocations of up to US$649.3 billion without congressional authorization.73 U.S. support of the initiative would be crucial, as the country has de facto veto power over changes to SDR issuance.

Due to its trade patterns and economic structures, SSA stands to gain more than any other region from an additional US$500 billion IMF allocation.74 If successful, the policy would substantially boost the reserves of 77 IMF members, with emerging market economies receiving 38.45% of the quota. Zimbabwe, Burundi, Sudan, Zambia, and Liberia would be among the biggest beneficiaries in the region.75 Although the U.S. House of Representatives passed legislation in July 2020 authorizing the allocation of over US$2 trillion in SDRs, the proposal has stagnated in the Senate, due in part to fears that the proceeds might provide resources to countries of concern (such as China and Iran) without the inclusion of conditionality.76 However, Iran has not been a net user of SDRs for over three decades and China holds the world’s largest foreign exchange reserves. While these changes would be crucial in addressing the short-term liquidity crisis, particularly for emerging market economies not covered under DSSI, SDR issuance alone would not solve deeper long-run solvency issues.

B. Medium-term Debt Relief Solutions 1. Launch a New “COVID Brady Plan” to Support Write-Downs of Privately-Held Sovereign Debt.

We propose a “COVID Brady Plan” under which distressed sovereigns would utilize a special-purpose vehicle (SPV) to swap sovereign debt for commercial paper that facilitates sustainable spending and state-contingent repayment. The original Brady Plan, named after the then U.S. Treasury Secretary, resolved the Latin American debt crisis of the late 1980s by unveiling a mechanism to support large-scale write-downs on the principal and interest of outstanding public loans. Ultimately, Brady Plan initiatives were successful in forgiving around 32% of the US$191 billion in outstanding loans to commercial creditors in participating countries and returning debt burdens in Latin America to sustainable levels.77 Due to the high level of debt held by commercial creditors and the lack of access to affordable commercial financing, a refreshed Brady plan would largely be appropriate for SSA nations seeking liquidity. External commercial lenders comprise a significant component of debt in Africa. In 2018, 32% of Africa’s loans were owed to private creditors, compared to 35% to multilateral institutions, 20% to China, and 10% to Paris Club lenders.78 With a few exceptions, LAC countries generally have larger shares of public debt held in domestic currencies than their SSA counterparts; these countries are often solvent but illiquid.79 However, LAC countries still maintain access to credit through sovereign bond markets. According to Fitch, LAC utilized bond markets at a higher rate and for larger amounts in 2020 than in 2019. Latin American external issuances had surpassed 2019 totals 73 Davies, “The SDR Is an Idea Whose Time Has Come.”

74 Fofack, “IMF Special Drawing Rights Offer Africa a Lifeline.”

75 Collins and Truman, “IMF’s Special Drawing Rights to the Rescue.”

76 Truman, “The United States Should Finally Support an Allocation of the IMF’s Special Drawing Rights.”

77 Ketkar and Ratha, “Innovative Financing for Development: Overview”.

78 Jubilee Debt, “Africa’s Growing Debt Crisis: Who Is the Debt Owed To?” 79 Sabbadini, “Overcoming the Original Sin: Gains from Local Currency External Debt.”

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(US$34.5 billion) by October 2020 (US$42.5 billion).80 However, nations such as Ecuador and Suriname could be eligible under the proposed plan due to their loss of market access as a result of prior defaults and commercial debt restructuring.

In the revamped plan, the SPV could be utilized to convert non-performing commercial loans into bonds underwritten by a triple-A rated multilateral institution or official bilateral partner such as the IMF.81 Similar to the original Brady Plan, commercial lenders would take a haircut on the net present value of outstanding debt, but to encourage involvement, bonds could offer longer maturities and lower coupons to reduce potential collective action concerns with holdout creditors. One such proposal, “Bendy Bonds,” would apply principles from current corporate-debt markets to the sovereign debt market. In a crisis, these bonds would offer maturity extensions and interest deferral in the short to medium-term for additional interest payments at the conclusion of the bonds’ payment period.82 It would be important to cap additional interest payments to avoid increasing debt burdens in the long-term.

Given its excellent credit rating, the U.S. could collateralize some of the debt with long-maturity U.S. Treasury zero-coupon bonds. Countries facing bond spreads that exceed U.S. Treasury securities by over 1,000 basis points, including Angola and El Salvador, should be prioritized for debt forgiveness.83 2. Restructure Debt Sustainability Criteria to Include Broader Development Objectives.

The World Bank and IMF’s criteria for debt sustainability focus on a country’s ability to service its debt repayments while maintaining macroeconomic stability. However, broadening the scope of debt sustainability to include development objectives could bolster macroeconomic resilience for Low and Middle Income Countries (LMIC) to respond to external shocks as well as improve public debt management systems.

Previous multilateral debt relief programs in Africa started with the Fifth Dimension of the Strategic Partnership with Africa in September 1987. Led by the Group of Seven (G7) and the Paris Club, similar programs continued throughout the 1990s, culminating in the launch of the Heavily Indebted Poor Countries (HIPC) Initiative in September 1996.84 To supplement HIPC, the Multilateral Debt Relief Initiative (MDRI) was developed to reorient the HIPC Initiative towards the Millennium Development Goals by offering full relief on multilateral debt.

Additionally, MDRI aimed to allocate funds to debtor countries according to performance on key policy indicators. Aiming to ensure that reform programs were not derailed by high public debt burdens, the HIPC Initiative offered conditional relief on multilateral debt to 41 countries eligible for International Development Association lending. According to the IMF, these initiatives provided US$76 billion in debt service relief and enabled HIPC countries to increase social spending, reduce their debt service, and improve public debt management.85 The architects of both the MDRI and the HIPC Initiative expected that conditional debt relief would translate into long-run public debt management improvements. However, current events reveal the limitations of the initiatives’ success. In part, this is because some inputs to debt sustainability, like commodity prices, are beyond the control of debtor nations and can be very volatile. Currently, commodity exporting nations such as Angola have experienced credit downgrades due to the weakening of local currency and subsequent increased debt servicing costs as a result of globally reduced oil prices.86 80 Fitch Ratings. “LatAm Sovereign YTD International Bond Issuance Exceeds 2019 Total.”

81 Soto, “Africa Eyes Own ‘Brady Plan’ as Debt Relief Proposal Takes Shape.”

82 Heller and Virketis, “Prefer to Defer: Has the Time for ‘Bendybonds’ Finally Come?”

83 Maki, “Why There’s a Looming Debt Crisis in Emerging Markets.”

84 Gamarra, Pollock, Dömeland and Braga, “Debt Relief and Sustainability.”

85 IMF, “Debt Relief Under the Heavily Indebted Poor Countries Initiative.”

86 Fitch Ratings, “Fitch Downgrades Angola to CCC.” 18

Incorporating additional, less volatile, financial recovery schemes to debt relief sustainability evaluations could improve debtor nation’s institutions and policies for public debt management. For example, to promote climate resiliency and public health spending, some of these securities for sovereign debt could be backed by World Bank and IMF policy-based guarantees related to the U.N.’s Sustainable Development Goals (SDGs), climate, or COVID-19 response and recovery such as ‘debt-to-climate’ or ‘debt-to-SDG’ swaps.87 Swapping debt for earmarked funds to spend towards an SDG target in a debt-to-SDG swap would avoid the possibility that the Paris Club’s debt suspension, or eventual relief, will simply free up funds to repay debt to China or private creditors.

The Global Fund, which provides countries with support on global health challenges, has previously swapped debt for funding public health systems to combat HIV, tuberculosis, and malaria.88 These “debt-to-health” swaps are similar in nature to debt-to-SDG swaps and could adopt a bilateral form. The swaps could be facilitated and monitored by multilateral institutions to develop specific ways to incorporate SDGs into policy responses and programs.

The U.S. could encourage China to partake in these arrangements through pressure at the U.N., emphasizing the importance that the U.S. reassert itself as a U.N. leader. Considering China’s financing of green initiatives, it could specifically earmark debt it swaps with activities such as installation of emissions-reducing technology in energy plants it finances, or for generating employment through businesses located on ports it finances. This recommendation could also incorporate private creditors by offering certification from an international sustainability accreditation organization that certifies businesses or funds as being sustainable, improving the private creditor’s credibility and fulfilling corporate social responsibility obligations. Furthermore, the DSSI does not include debt owed to multilateral institutions. These types of financial institutions are highly likely to promote SDGs with their funds, and may be most compliant with debt-to-SDG swaps. These initiatives would be similar in intent to the MDRI, whose funds were allocated to debtor countries according to performance on key policy indicators such as a national development policy.89 Finally, to provide fiscal space for countries to continue social spending during the debt restructuring phase, the U.S. should maintain or increase current levels of official development assistance to countries in LAC and SSA. Although aid flows to low-income countries increased steadily from 1970-1995, the initiation of the HIPC Initiative in 1996 is associated with the precipitous decline in net resource transfers as a fraction of output.90 Sixty percent of the US$8.3 billion in debt forgiven by Paris Club creditors between 2002 and 2007 was swapped for foreign assistance.91 To the extent that aid flows are important for supporting public spending on welfare programs, debt reductions must be pursued alongside well-funded foreign assistance programs.

C. Long-term Debt Relief Solutions In the long term, the U.S. should focus on policies to address structural issues that contribute to the repeated debt distress of certain developing countries, particularly the role of China and the private sector. Reforming the debt architecture should help prevent liquidity crises by aligning information and incentives in ways that help avoid self-fulfilling crisis prophecies, and should create a more institutionalized, streamlined, and coordinated solution for debt relief, accelerate debt treatment processes, and minimize the economic pain imposed on debtor countries.

87 Landers, “Addressing Private Sector Debt through Sustainable Bond Guarantees.”

88 Pallares, “Global Fund Relaunches Debt-to-Health Swaps After Six-Year Hiatus.”

89 IMF, “Multilateral Debt Relief Initiative — Questions and Answers.”

90 Henry, “Prepared Statement: Building on International Debt Relief Initiatives.”

91 Gamarra, Pollock, Dömeland, Braga, “Debt Relief and Sustainability” 19

1. Coordinate Sovereign Debt Relief Under the Auspices of the G20.

As the principal forum for international economic cooperation, the G20 should create a sovereign debt committee that effectively replaces the Paris Club in sovereign debt renegotiations. The G20 has been gradually linking itself with the Paris Club, which seems to have accelerated given the institutions’ respective roles in DSSI, with the G20 in the driver’s seat.92 China’s continued refusal to participate in Paris Club processes, especially as the largest bilateral lender to both LAC and SSA, undermines both the legitimacy and efficacy of the institution as a coordinating body for bilateral sovereign lending. To be sure, moving debt restructuring into the G20 would come at the expense of U.S.-European Union (E.U.) control over sovereign debt management and the established institutional frameworks in the Paris Club. However, China is more willing to cooperate in the G20 than in other fora, as it is one of the few multilateral institutions in which it operates as an economic equal to Western powers.93 Securing China’s cooperation on debt relief and developing a set of common rules and norms will require Western concessions, given China’s considerable leverage in this arena. However, failure to make these concessions will result in continued instances of other creditors bailing out China, or failing to grant debt relief at the expense of citizens in debt-distressed countries.

The Paris Club is, at its core, a set of procedures and principles for debt treatment. These procedures and principles can be migrated into another institution without fundamentally changing the character of the debt treatment process. Provided that the G20 can agree to the core Paris Club principles, the most significant change would be to membership. In addition to the U.S., the Paris Club has 22 members; 11 of these countries are also members of the G20.94 Of the 11 countries that are members of the Paris Club but not of the G20, eight are represented in the G20 by the E.U.; the remaining countries are Israel, Norway, and Switzerland.

To ensure that these three countries are not shut out of the process, the sovereign debt committee could adopt a main working format composed of G20 countries plus all significant bilateral creditor nations—namely those in the Paris Club but not the G20. Much as other countries are invited to participate in G20 summits, such a format will ensure all relevant players are involved and minimize impediments to the transition. The flexibility of the G20 should be exploited to work primarily in this format. An expanded format that incorporates representatives of private creditors (e.g., the Institute of International Finance (IIF)), and regional organizations (e.g, the AU and the OAS), should be used when specific debt relief, restructuring, or changes to terms/payment schedules are being agreed. Given that the presidency of the G20 rotates, and the G20 does not have a secretariat, the French Treasury could continue to serve as the secretariat for this body, as it does for the Paris Club.

Italy will assume the G20’s annual rotating presidency in January 2021. As Italy is a member of the BRI, the G20, and the Paris Club, its presidency has the potential to bridge the institutional divides that separate these organizations. There is ample opportunity for the U.S. to work with Italy to build on common interests and make debt restructuring more effective and cooperative in 2021. Emphasizing the role of the G20 and respecting China’s place within it may be key to securing China’s cooperation on debt relief.

92 Segal, “Giving Credit (Relief) Where It Is Due.” 93 He, “China’s Goals in the G20: Expectation, Strategy and Agenda.”

94 Weiss, Martin A. “The Paris Club and International Debt Relief.”

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Box 3: Regulating Credit Agencies Oversight of credit rating agencies is currently non-existent. Furthermore, transparency behind the decision-making processes of these entities is scant. This lack of regulation was recently addressed by The UN Economic Commission for Latin America and the Caribbean, who proposed and endorsed measures for credit rating regulation and for establishing a public CRA.95 CRAs operate both as market analyzers and market players, distorting incentives for unbiased evaluation incentives. Current methodology for ratings agencies narrowly prioritizes government institutions’ ability to respond to economic and political shocks at the expense of a more holistic evaluation of government market interventions.

The U.S. has previously attempted to regulate domestic ratings agencies, but could work with global forums such as the U.N. to regulate how CRAs evaluate debt-distressed nations. For example, to address development financing in the post-COVID-19 era, the U.N. held discussion groups on pandemic response, recovery, and resilience.96 Proposals from the liquidity shortage and debt crisis group provided key recommendations for improving CRA methodologies: 1. National governments, as advised by their respective central banks, can provide guidance for CRAs by providing frameworks for their financial ecosystems that highlight market fundamentals such as risk-informed standards and risk management rules to promote SDG investments.97 2. CRA regulators could work with rating agencies to progressively adopt and incorporate longer-term environmental and social indicators, such as progress towards SDGs in agency rating assessments.98 These metrics would provide a wider array of tools for CRAs to qualify and understand risks pertaining to areas such as climate and inequality.

2. Support establishing an impartial multilateral credit rating agency.

The current system, in which large private credit rating agencies evaluate risk, serves to destabilize debt sustainability and complicate debt treatment efforts. The Basel III international banking regulatory framework enshrines the procyclical role of large CRAs in assessing default risk. Basel III sets out minimum capital requirements for banks, and uses a risk-weighted capital approach that encourages banks to load relatively “lower risk” sovereign debt onto their balance sheets.99 The role of CRAs in assessing risk increases their role in determining market prices, not just through the signaling effects of the ratings framework but also through pre-ratings “outlooks,” “reviews,” and “watches.”100 Ratings downgrades — or even the suggestion of one — can be highly procyclical as a result.101 Countries are incentivized to wait until they can’t avoid it to seek debt restructuring or take advantage of debt relief mechanisms, even if acting sooner might have prevented it. Private CRAs also have unreliable track records in accurately assessing risk in many developing and emerging market economies.

CRAs often reward sovereigns who adopt damaging austerity measures and grant higher ratings to countries that are culturally closer to their home country.102 95 ECLAC, “Financing for Development in the Era of COVID-19 and Beyond: Urgent Considerations for the Caribbean,” 10.

96 U.N., “Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Heads of State and Government, Part I.” 97 U.N., “Financing for Development in the Era of COVID-19 and Beyond,” 44.

98 U.N., “Financing for Development in the Era of COVID-19 and Beyond,” 49.

99 Salmon, “The Biggest Weakness of Basel III.” 100 IMF, Global Financial Stability Report, October 2010: Sovereigns, Funding, and Systemic Liquidity, 105.

101 Financial Stability Board, “COVID-19 Pandemic: Financial Stability Implications and Policy Measures Taken,” 7.

102 Barta and Johnston, “Rating Politics? Partisan Discrimination in Credit Ratings in Developed Economies,” 587; Fuchs and Gehring, “The Home Bias in Sovereign Ratings.”

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An impartial multilateral credit rating agency would democratize access to credit and ensure countries with similar risk profiles do not face higher costs of capital because of discrimination. To insulate this public option from undue political influence, given its limited mandate and tiny size, it should be situated within an existing international institution that can help insulate the agency and rebuff influence attempts. It likely makes sense to situate it officially within the IMF, but should have an organizational structure and reporting hierarchy that maximizes its independence. This will be a challenge. The funding structure should also be carefully designed to limit possibilities for future influence as much as possible, perhaps by funding it up front for several decades.

Private investors may not be initially inclined to pay attention to this public CRA, but they are well aware that private credit rating agencies are not infallible assessors of risk. Such an agency may gain market traction if it can demonstrate independence, niche expertise in sovereign debt sustainability, and a lack of bottom line or market incentives.

3. Review and Reform Sovereign Debt Indemnification Laws.

Previous efforts at negotiating an international sovereign debt restructuring mechanism stalled in the 2000s.

However, much of the benefit of such a mechanism can be captured purely through changes to U.S. (and United Kingdom (U.K.)) law that limit the ability of private creditors to sue foreign governments for bond repayments.

The U.S. should specifically consider passing laws that prevent any creditor from suing for more than they would have received if they had participated in a restructuring or relief process.

The most significant obstacle to orderly debt restructurings is private creditor holdouts, including the so-called “vulture funds,” whose continued legal challenges greatly prolong debt restructurings to over seven years on average.103 The overwhelming majority of sovereign bonds issued in international markets are governed by British or American law.104 Starting in the 1970s, when both jurisdictions introduced laws restricting sovereign immunity and allowing private creditors to sue foreign governments for commercial activities, countries have become increasingly beholden to the demands of foreign capital.105 Whereas bonds governed by local law can be amended through legislative means and foreign bondholders would find it more challenging to pursue their claims in domestic courts, the use of foreign law means that in the event of a dispute, courts treat countries as private commercial entities, which favors creditors.

Repealing such laws across the G20 and restoring sovereign immunity would likely be met with fierce backlash from private creditors and might contract low- and middle-income country access to private capital in a counterproductive manner. However, the U.K. successfully accomplished a more limited objective with the Debt Relief (Developing Countries) Act of 2010, barring creditors from suing countries eligible for the HIPC initiative for more than the creditor would have obtained if they had engaged in debt relief.106 The U.S. should go further and permanently reform its legal codes to bar creditors from suing for more than the terms of Paris Club (or its successor) debt treatment, and restrict or prohibit vulture funds who buy discounted debt in secondary markets from litigating for the full value of the debts. The U.S. should strongly encourage all G20 countries, with a particular emphasis on the U.K., to do the same.

103 IMF, “The International Architecture For Resolving Sovereign Debt Involving Private-Sector Creditors—

Recent Developments, Challenges, And Reform Options.”

104 Meyer, Reinhart, and Trebesch, “Sovereign Bonds Since Waterloo,” A5.

105 Weidemaier, “Sovereign Debt and Sovereign Immunity,” 71 and 88.

106 UK Parliament, Debt Relief (Developing Countries) Act 2010.

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Box 4. Ecuador's 2020 Private Debt Restructuring On August 3, 2020, Ecuador won approval to successfully restructure US$17.4 billion in private creditor debt in a deal that participating bondholders claimed, “set a precedent for COVID-19 era restructurings.”107 The country was able to swap ten bonds maturing between 2022 and 2030 for three bonds due between 2030 and 2040 at a nine percent haircut and significantly reduced interest rates.108 Multiple sources credited Ecuador’s success to early actions that demonstrated good faith negotiations to creditors, such as transparency and realistic expectations, and that its proposed debt exchange was both beneficial for creditors and in its own best interest.109 However, one coalition of bondholders did continuously reject Ecuador’s proposal and unsuccessfully sought relief through U.S. courts. Although Ecuador handled its private creditor debt renegotiation process well, its success must be seen in relation to its broader debt relief initiatives outlined in our case study on Ecuador on page 38.

renegotiation to Ecuador avoiding default and paying the principal on time.111 Beginning in mid-June, officials from Ecuador worked with its various creditors to come to an agreement on a longer-term debt relief package, before the August 15 deadline. On July 7, just weeks after beginning negotiations, Ecuador was able to come to an agreement on a debt exchange with a major group of bondholders, known as the Ad Hoc Ecuador Bondholder Group (Ad Hoc), that initially held 45% of the bonds being targeted for restructuring.112 In its statement, the Ad Hoc group mentioned that: “The current restructuring process sets an important precedent for postCOVID emerging market sovereign debt resolutions, and demonstrates how a debtor-creditor relationship founded on principles of good faith and mutual understanding can lead to a positive outcome for all parties.”113 However, the collective action clauses in Ecuador’s sovereign bonds required that at least 67% or 75% of bondholders to accept an exchange agreement before it can go through, and this group represented only 45%.114

After devastating economic impacts related to COVID-19, Ecuador had to move quickly to avoid default on its private creditor debt obligations in March 2020. After ignoring calls from some members of its Congress to default, Ecuador paid off US$325 million of the remaining principal on its bonds due March 2020. Next, utilizing its 30-day grace period on coupon payments due at the end of March, Ecuador had requested bondholders in nine bonds representing US$19.2 billion in value to defer US$811 million in coupon payments due between March 27 and July 15, until August 15.110 The request was accepted by a majority of bondholders on April 17. Both the government and major bondholders attributed the smooth

A major challenge came from two other organized groups of bondholders that together represented 25% of the bonds and who were advised by BroadSpan Capital and UBS.115 One of the groups that included Amundi, Contrarian Capital Management, GMO, and T Rowe Price, rejected the offer because “the terms... do not represent Ecuador’s best effort to reach an equitable restructuring with a majority of bondholders or its ability to implement social development goal principles to build a sustainable future.”116 It instead

107 West, “A Tale of Two Sovereigns: Negotiation Attitudes Foretell Differing Fortunes for LatAm Restructurers.”

108 Reuters, “Ecuador Ploughs on with $17.4 Billion Debt Revamp with Major Creditor Support.”

109 West, “A Tale of Two Sovereign;” Long, “Ecuador Basks in Glow of Debt Restructuring Success.”

110 Reuters, “Ecuador Bondholders Agree to Delay Interest Payments Through August;” West, “Ecuador Asks for Coupon

Holiday.”

111 West, “A Tale of Two Sovereigns.”

112 This group included funds managed by AllianceBernstein, Ashmore, BlackRock, BlueBay Asset Management, and Wellington Management; and its legal counsel was White & Case.

113 White & Case, “Ad Hoc Ecuador Bondholder Group Has Reached An Agreement.”

114 Bartenstein, “Ecuador Wins Approval to Restructure $17.4 Billion of Debt.”

115 Bruni, “Bondholder Groups Reject Ecuador’s Restructuring Offer.”; Van Voris, “Judge in Ecuador Debt Case Says She Needs More

Arguments.”

116 Bruni, “Bondholder Groups Reject Ecuador’s Restructuring Offer.”

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proposed a counter offer on July 16. Ecuador did not back down and continued to amass support with the Ad Hoc group, after it was able to demonstrate that it was going to secure a new deal with the IMF.117 After exceeding the necessary thresholds to go forward with the bond exchange, Contrarian Capital Management and GMO sued Ecuador on July 29, claiming that “the country had used coercive actions to try to force the bondholders to agree to consent solicitations…” However, on July 31, U.S. District Judge Valerie Caproni in Manhattan denied their request for a “temporary restraining order that blocked Ecuador’s plan to restructure US$17.4 billion of sovereign debt.”118 “Caproni disagreed with the funds’ contention that Ecuador lied when it denied, in a press release, that its offer to investors was ‘coercive.’ The judge said, ‘no one is being compelled or forced to comply with the tender offer.’”119 One week later, the deadline in which bondholders had to respond, 98% of holders in US$15.3 billion of bonds and 95% of holders in US$1.9 billion of bonds agreed to the exchange.

inflow of capital to other bond mutual funds this year.

The end result, however, was that one of its bond fund’s assets “shrunk by 69% to US$2 billion, forcing it to sell Argentine, Ecuadorian and Lebanese bonds.”122 The pressures from growing losses, investor withdrawals, and higher cost of capital in equity markets, may have incentivized Ashmore to participate in a bond exchange as soon as possible to cut its losses and also to fulfill its obligation to return capital to its investors. One potential lever for the U.S. government then may be to pull federal investments from private sector creditor funds that are deemed to be obstructive to DSSI efforts; as the withdrawal of funds from Connecticut may have enabled a more successful Ecuadorian debt restructuring.

While it is not certain what made the bond exchange more attractive to creditors in the Ad Hoc group vs. creditors in the other two groups, it is possible that pressures from their individual investors and from each other played a role. Specifically, the Wall Street Journal revealed that other Ad Hoc group members, including Blackrock and Wellington Management, had taken short positions in Ashmore, a co-member.120 This placed downward pressure on Ashmore’s stock price and raised its cost of capital. Additionally, investors started pulling their money out of funds managed by Ashmore, including those that were invested in Ecuadorean sovereign bonds. For example, Connecticut’s state treasury pulled billions of dollars invested on behalf of its state retirement plan and Goldman Sachs removed the fund as an option for its employee 401k retirement plans.121 Part of this was driven from the funds’s poor performance this year due to losses on sovereign bonds from Ecuador, Argentina, and Lebanon; but this is in contrast to the significant 117 The Cuenca Dispatch, “Ecuador Renegotiates its Foreign Debt and Holds Off Bond Default.”

118 The Cuenca Dispatch, “Ecuador Renegotiates its Foreign Debt and Holds Off Bond Default.”

119 Van Voris, “U.S. Judge Lets Ecuador $17.4 Billion Debt-Swap Deal Proceed.”

120 Wirz, “Reclusive Billionaire’s Bond Bets Backfire.”

121 Wirz, “Reclusive Billionaire’s Bond Bets Backfire.”

122 Wirz, “Reclusive Billionaire’s Bond Bets Backfire.”

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Building Resilency Recovering and rebuilding in a post-COVID-19 world presents an opportunity to move beyond providing debt relief to improving standards around development policy and cooperation on global imperatives, such as climate change. The U.S. needs to act on measures aimed at (1) strengthening development standards and regulations, (2) supporting transparency and civil society, and (3) improving development financing. Seizing this moment of recovery to build stronger economies will make the world more resilient to future shocks.

A. Standards and Regulations The Blue Dot Network (BDN), launched by the U.S., Japan, and Australia in 2019, is an infrastructure standards assessment and certification program which signals project quality and mobilizes private sector capital.123 Its bedrock principles are laid out in three foundational documents: the G20 Principles for Quality Infrastructure Investment, the G7 Charlevoix Commitment on Innovative Financing for Development, and the Equator Principles.124 The BDN helps to counter the BRI by raising standards for infrastructure and facilitating potential joint ventures among participating countries to compete against Chinese investment in the Indo-Pacific region. However, as it stands, the BDN is too narrow in scope and operational capacity to serve as a viable alternative to the BRI for developing countries in Latin America and Africa. Therefore, we recommend expanding and re-orienting the BDN in three ways: 1. The BDN Should Include a “Seal of Approval” For All Development Private Sector Stakeholders.

This could, for example, include creditors, suppliers, contractors, and tool and equipment manufacturers. In order to encourage companies to join the BDN, the U.S. should offer numerous incentives such as fast-tracking applications for and conferring preferred vendor status on BDN-participant companies bidding on infrastructure projects. The U.S. should also seek to incorporate more G7 countries into the BDN, to establish the development network as a multilateral coalition of peers.

2. The U.S. Should Revise the BDN Assessment Process to be Completed on a Per Company Basis.

The BDN’s current method, which assesses companies on a project-to-project basis, is largely inefficient and slows down the administrative approval process. This is in contrast to BRI projects that are much less concerned with establishing quality control standards but are nonetheless attractive to developing countries because of the speed at which these projects can be approved.125 Additionally, per project assessment does not guarantee that firms will adhere to the same standard for projects undertaken in other countries with different regulatory environments. This makes it difficult for governments to accurately assess companies bidding for lucrative contracts. By switching BDN assessments to a per-company basis, countries participating in BDN would have an immediate indicator of quality without having to undergo a lengthy review process. As such, specific assessment criteria and ongoing evaluation mechanisms should be established for BDN-eligible firms.

123 United States Department of State. “Blue Dot Network.”

124 G20, “G20 Principles for Quality Infrastructure Investment;” G7, “Charlevoix Commitment on Innovative Financing for Development;” Equator Principles, “The Equator Principles July 2020.”

125 Olsen, “China Will Likely Speed up Its Belt and Road Projects amid US Tensions: Citi.”

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3. The BDN Should Incorporate Digital Technology as Part of its Portfolio in Order to Compete with China’s DSR, by Adopting the U.S. State Department’s Clean Network Program.

Established in 2020, the Clean Network is a U.S.-led effort to implement internationally-accepted digital trust standards among partner states. The program aims to safeguard data privacy, security, human rights, and principled collaboration in the Network’s ICT sector from malign authoritarian actors.126 The Clean Network should be rolled into the BDN to promote technology standards and companies that demonstrate cybersecurity best practices. This would keep with BDN’s existing objectives of signaling social, environmental, health, and quality standards in infrastructure projects.127 A key component of combining these programs would be utilizing the U.S. State Department and U.S. cybersecurity companies to offer digital standards capacity building for signatory countries. This would be an expansion of the Infrastructure Transaction and Assistance Network’s (ITAN) portfolio, which currently assists Indo-Pacific governments in improving their regulatory and procurement environments for traditional infrastructure projects.128 The State Department should provide programs and training for governments taught by administration officials from U.S. agencies, such as the Cybersecurity and Infrastructure Security Agency (CISA), to develop native cyber expertise, train government officials on cyber best practices, and provide consultation on necessary cyber legislation. The U.S. could utilize the new program to facilitate assistance from G7-based private cybersecurity firms (plus Australia) to provide threat intelligence for signatory countries and assist domestic businesses in developing basic cybersecurity standards.

Importantly, Chinese firms should be allowed to join the digital trade zone established by the BDN and Clean Network program if they can prove they meet the Clean Network security standards. This would require changing the admittance criteria of the Clean Network to no longer classify the Chinese Communist Party (CCP) as a “malign actor” or at least carve out a space where CCP-aligned firms can operate.129 While the CCP is certainly involved in malicious cyber activity and should be kept out of critical digital infrastructure such as fifth generation (5G) technology, applying a blanket ban on all companies associated with the CCP is counterproductive.

Chinese technology companies have a significant presence in developing countries and are integral to citizens’ lives.130 Companies from the U.S. or allied countries simply cannot compete in these arenas and thus, the BDN will be a non-starter for most countries if Chinese digital firms are not allowed to participate in some capacity.

Allowing Chinese companies to participate in the BDN would entice countries in Africa and Latin America to sign onto the digital trade zone, putting pressure on Chinese technology companies to invest in better cybersecurity. It would also allow the U.S. to appeal directly to the concerns of citizens in these countries by offering the means to protect their data and privacy. For example, while Chinese smartphones are extremely popular in the African market, they have generated controversy and increased scrutiny as they often come pre-installed with malware that steals user information and downloads suspicious apps.131 The Clean Network program would provide participating governments with more leverage to demand these companies engage in more rigorous inspection of their products and their suppliers.

126 United States Department of State, “The Clean Network.”

127 United States Department of State, “Blue Dot Network.”

128 United States Department of State, “A Free and Open Indo-Pacific. Advancing a Shared Vision,” 15.

129 United States Department of State, “The Clean Network.”

130 Fairman, “Transsion: A Chinese Prodigy in Africa?”

131 Fairman, “Transsion: A Chinese Prodigy in Africa?”

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Box 5: Digital Silk Road A key component of China’s BRI is bringing digital technology infrastructure to signatory countries, a policy known as the Digital Silk Road. DSR was initially conceived in 2015 as a response to China’s optical fiber and cable industries exceeding market demand by 50 percent, requiring increased foreign market access to remain solvent.132 Hou Weigei, chairman of Chinese telecom firm ZTE, published an article in the official CCP magazine, Seeking Truth, calling for an “information Silk Road” to complement the larger BRI project.133 Since then, the scope of DSR has evolved to become a vital part of China’s global foreign policy strategy, as it sees technology as the sphere where it can most directly compete with and challenge the United States without risking direct military confrontation.134 Currently, DSR has five principal objectives: 1. Addressing Domestic Industrial Overcapacity: China views DSR as a complementary component to more traditional industries partaking in BRI, as many infrastructure projects require ICT components in order to operate. Additionally, DSR has helped expand and reorganize transnational trade networks by facilitating the rise of online, raw material trading platforms.135 2. Facilitating International Expansion of Chinese Technology: As BRI is primarily directed at poor and developing countries, DSR is seen as a way to build foundational digital infrastructure that would enable other Chinese companies to expand their operations into countries that would otherwise not have the technological base to support such firms. Equally important, DSR is being used as a mechanism to export Chinese-owned technical standards for ICT technology in order to allow Chinese digital firms to gain significant global market share, particularly with Chinese 5G telecoms Huawei and ZTE.136 3. Supporting the Internationalization of the Renminbi: China wants to use the DSR to build its own transnational financial data network that increases circulation of the renminbi, thereby contributing to one of its highest foreign policy priorities of making its currency central to the global economy. China also views creating its own financial network, known as the Cross-border Interbank Payment System (CIPS), as a national security imperative to decrease the country’s dependence on the U.S.-dominated Society for Worldwide Interbank Financial Telecommunications (SWIFT) system.137 4. Creating China-controlled Digital Infrastructure: China is using DSR to gain greater control over transnational submarine cables, the undersea fiber optic cables that transfer online communications between countries and across continents. Similarly, China is using DSR to push BRI countries to integrate their digital infrastructure with BeiDou, a Chinese alternative to the U.S.-based Global Positioning System (GPS), meant to deepen international reliance on China for space-based services at the expense of the United States.138 5. Promoting an Inclusive but Illiberal Globalization Enabled by Cyberspace: A driving ideological component of the DSR is China’s vision of utilizing BRI and technology to lead the world in a third wave of globalization by exporting cutting edge digital technologies with the goal of creating networked “smart cities.” However, a significant portion of the technology being exported to countries through DSR has been surveillance and censorship technologies, which has made it easier for authoritarian-inclined regimes to monitor and repress their citizens.139

132 Shen, “Building a Digital Silk Road? Situating the Internet in China’s Belt and Road Initiative,” p. 19 133 Hou, “Building an information Silk Road” 134 Cheney, “China’s Digital Silk Road: Strategic Technological Competition and Exporting Political Illiberalism.”

135 Abkowitz,. “China’s Tech Leaders Try Teaching Dinosaurs to Dance.”

136 Shen, “Building a Digital Silk Road? Situating the Internet in China’s Belt and Road Initiative,” p. 19 137 Farrell and Newman. “Weaponized Interdependence: How Global Economic Networks Shape State Coercion,” p. 50 138 Halappanavar, “China’s Answer to GPS Is Now Fully Complete.”

139 Weiss, “A World Safe for Autocracy?”

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B. Transparency and Civil Society The U.S., along with its allies and multilateral institutions such as the U.N., Organisation for Economic Co-operation and Development (OECD), and the World Bank, must work to create the conditions that will enable countries fighting corruption to succeed. Along with U.S. support for better standards and regulations should come increased support for programs that produce greater transparency. These efforts are even more critical as COVID-19 exacerbates existing governance challenges and may lead to democratic backsliding, human rights abuses, pervasive corruption, and malign foreign influence in developing countries. The U.S. government should therefore focus on immediate corruption concerns as they relate to COVID-19 needs as well as mediumto long-term initiatives that address the rule of law and governance standards of BRI recipient countries.

1. Support Transparency Measures in IMF and World Bank Emergency COVID-19 Lending.

The devastating scale of the economic crisis due to COVID-19 has pushed multilateral institutions to provide governments the funds they need to effectively respond to the crisis. While fast disbursement of funds is necessary, it may reduce accountability and transparency without proper safeguards in place. The IMF has asked countries “to commit in their Letters of Intent to ensuring that emergency assistance is used for the very urgent purpose of resolving the current crisis and not diverted for other purposes.”140 The World Bank, for its part, recently released a report that puts forth recommendations to improve public procurement, customs administration, and service delivery during and post-pandemic.141 While this is a step in the right direction, it is insufficient to ensure that emergency funding actually goes to protecting lives and livelihoods.

Within the IMF and the World Bank, the U.S. should support measures to require transparency from the countries to which the organizations lend emergency funding.142 Specifically, the IMF and World Bank should apply anti-corruption measures to all loans, requiring governments to publish procurement plans and conduct independent audits. These measures would go far in safeguarding funds from capture.

2. Establish New Inter-Agency Transparency Initiatives and Funds for SSA and LAC, with Special Focus on Countries with the Highest BRI Capital Inflow.

The problems posed by China’s lack of an overseas anti-corruption legal framework or enforcement process are compounded by the fact that many of its BRI partner countries lack the regulatory capacity to enforce transparency themselves.143 Many countries that receive BRI investments are plagued with high levels of corruption.144 Transparency International’s Corruption Perception Index (CPI) scores suggest that perceived corruption in Belt and Road corridor economies is higher than the global average and is highest among lower-middle- and low-income corridor economies.145 These countries tend to have obscure legislative processes, weak accountability, and constrained press freedom.

140 IMF, “How the IMF is Promoting Transparent and Accountable Use of COVID-19 Financial Assistance.”

141 Bajpai and Myers, “Enhancing Government Effectiveness and Transparency: The Fight Against Corruption.”

142 A letter to the IMF by 97 human rights and good governance organizations has put forth numerous recommendations to

ensure transparency. Human Rights Watch, “Letter to IMF Managing Director Re: Anti-corruption and the Role of Civil Society in Monitoring IMF Emergency Funding.”

143 Land, “China And Global Integrity-building: Challenges And Prospects For Engagement.”

144 On the TRACE Bribery Risk Matrix, the vast majority of BRI recipients rank in the bottom half, with 10 BRI recipients ranking among the lowest 25 countries worldwide. TRACE Anti-Bribery Compliance Solutions, “TRACE Bribery Matrix.”

145 World Bank Group, “Belt and Road Economics: Opportunities and Risks of Transport Corridors.”

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Box 6: Clean Silk Road The Beijing Initiative for the Clean Silk Road was jointly launched by China and partner countries on April 25, 2019 at the opening ceremony of the Thematic Forum on Clean Silk Road of the second Belt and Road Forum.

China’s leaders pledged an “open, green, and clean” BRI and President Xi Jinping asserted that “in pursuing Belt and Road cooperation, everything should be done in a transparent way.”146 Since the BRI’s establishment in 2013, various projects around the world have been plagued by corruption, environmental degradation, and lack of transparency. The initiative called on participating companies and governments to make information more readily available and to strengthen supervision of BRI projects.147 It also encouraged BRI partner countries to bolster their ability to fight corruption and bribery through stronger legal systems.

While China has taken steps to comply with anti-corruption standards, the governance, transparency, and oversight of BRI projects remain opaque. China’s own government think tanks publicly recognize that China continues to struggle with flows of public information. The 2018-2019 China’s Companies Public Transparency report by the Chinese Academy of Social Sciences found that Chinese companies largely “failed to meet standards” with respect to transparency. The report also found that Chinese companies tended to disclose information only in annual reports and “rarely respond to specific requests for information from the public.”148 On the government’s end, the contents of BRI MOUs are not yet publicly available and the government portal for the BRI is focused on official speeches and trade statistics rather than information regarding project contracts.149 On the whole, there is little indication that Beijing has taken good-faith measures to enhance and facilitate access to public information in regard to its BRI projects.

China’s non-adherence to high anti-corruption and transparency standards undermine U.S. foreign policy and economic interests.150 China’s large financial presence in many developing countries may cause BRI recipient countries to adopt less stringent governance and rule of law standards, eroding decades of U.S. funding and progress on this front. While it may seem that China’s lax governance standards abroad give it a comparative advantage, the benefits of allowing corruption and bribery to continue unchecked are shortsighted. As China’s outward investment increases through BRI, the possibilities for bribery allegations against Chinese nationals or corporations will increase. Local perceptions of China in its investment destinations will then deteriorate, harming China’s political interest in solidifying its reputation as a responsible benefactor.

Raising the standards of China’s BRI requires raising standards in BRI recipient countries themselves. Similar to the Department of State-led Indo-Pacific Transparency Initiative (IPTI), which is a commitment of US$1.2 billion to promote governance across that region, the U.S. should build two interagency Transparency Initiatives for LAC and SSA that commit foreign aid to civil society, rule of law, and accountability programs, with more funding for countries with a high concentration of BRI projects.151 The Department of State should also seek authorities to establish LAC and SSA Transparency Funds, similar to the Indo-Pacific Transparency Fund led by the Bureau of Democracy, Human Rights, and Labor (DRL). Both of these regions have received significant interest from Chinese investment and face governance and transparency challenges. Sub-Saharan Africa is the lowest-scoring region on the CPI,152 while Latin America has failed to improve its progress on corruption for four consecutive years.153 146 Staats and Tower, “China’s Belt and Road: Progress on ‘Open, Green and Clean?’”

147 China Daily, “Full text: Beijing Initiative for the Clean Silk Road.”

148 Staats and Tower, “China’s Belt and Road: Progress on ‘Open, Green and Clean?’”

149 Staats and Tower, “China’s Belt and Road: Progress on ‘Open, Green and Clean?’”

150 Dezenski, “Below the Belt and Road: Corruption and Illicit Dealings in China’s Global Infrastructure.”

151 U.S. Department of State, “Indo-Pacific Transparency Initiative.”

152 Transparency International, “CPI 2019: Sub-Saharan Africa.”

153 Transparency International, “CPI 2019: Americas.”

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The Transparency Initiatives would move beyond fragmented programming across countries to establishing region-wide funding with contributions from multiple U.S. government agencies. The Department of State-led Transparency Initiatives should mimic the IPTI, which has succeeded in leveraging the expertise of agencies such as the United States Agency for International Development (USAID), Department of Justice, and the Department of Agriculture, to create over 200 programs in the Indo-Pacific focused on everything from anti-corruption and fiscal transparency to media and internet freedom.154 The Transparency Funds would complement the work of the Transparency Initiatives by establishing public-private partnerships to support the development of transparency and anti-corruption proposals. Rather than piecemeal and inconsistent programming, LAC and SSA would benefit from the same type of multi-agency approach to transparency and anti-corruption efforts.

The Transparency Initiatives and Transparency Funds for LAC and SSA may include funding for programming that advances the following: technical assistance for the government agencies in developing countries responsible for investigating corrupt practices, support for the ability to monitor and evaluate the disbursement of public funding in BRI recipient countries, and civil society training to conduct community monitoring and citizen report cards, which build the capacity of civil society groups in BRI recipient countries to advocate for transparency and accountability.

C. Development Finance Expanding the BDN, as previously described, will increase the demand for services offered by BDN-certified companies. This demand needs to be met with a new supply of financing. Part of this will come from more private sector investment, which will see BDN-certification as a signal of quality and G7 approval, and thus of lower risk. However, private sector investors and creditors cannot provide concessional loans, so additional capacity is needed from the Development Finance Corporation (DFC) to fill this gap. The balance sheet expansion should prioritize concessional financing for environmental sustainability and 5G-related projects to actively compete with greening the BRI and DSR lending.

1. Seek Congressional Authority to Expand the Development Finance Corporation’s Balance Sheet From US$60 billion to US$120 billion by 2025.155 DFC should review operations and lessons learned from 2020 and adopt policy revisions to increase its competitiveness with China’s sovereign lending. For example, DFC’s current individual project finance limit is US$1 billion and some of its country-limits are less than US$1 billion. If DFC had to turn down requests for larger, multi-year infrastructure projects because of these limits, it should thoroughly review its risk management policies and perhaps revise them. DFC should work closely with the BDN team to gauge demand for various projects. Following this review, the U.S. should seek congressional approval to steadily increase the budget to US$120 billion from Q1 2022 to Q4 2025.

DFC will need congressional approval for an expanded balance sheet, which may prove challenging. However, the Better Utilization of Investments Leading to Development Act that established DFC in 2018 passed with broad bipartisan support, and was estimated to decrease direct government spending by US$20 million over 10 years.156 Additionally, DFC’s predecessor (the Overseas Private Investment Corporation) operated at zero net cost to the government for 39 consecutive years.157 To make the case for expanding its balance sheet, DFC can draw on previous bipartisan support and emphasize the possible benefits to taxpayers and ability to further strategic interests abroad. Stressing the need to counter China’s lending may also help win congressional support.

154 U.S. Department of State, “Indo-Pacific Transparency Initiative.”

155 The current maximum contingent liability of DFC is $60 billion, as set forth in 22 USC § 9633.

156 U.S. Senate Committee on Foreign Relations, “Corker-Coons BUILD Act to Become Law.” 157 Runde, “We Shouldn’t Be Eliminating OPIC, We Should Be Putting it On Steroids.”

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Gradually expanding the balance sheet from Q1 2022 through Q4 2025 will allow for incremental assessments of the benefits and returns from the additional investment.

2. Prioritize Environmental Sustainability and 5G-Related Projects with DFC Funds.

DFC already funds green projects and assists other countries in acquiring 5G-enabling equipment. Recent projects have funded a secure telecommunications cable across the Indo-Pacific and marine conservation efforts in Kenya and Saint Lucia.158 These types of projects fall squarely in line with DFC’s mandate, which includes making “financially sustainable investments designed to generate measurable social benefits and build technical capacity in addition to financial returns.”159 Technology is also one of the priorities listed in DFC’s Congressional Budget Justification for fiscal year 2021.160 Intensifying the focus on green and technology projects thus achieves DFC objectives and allows the U.S. to compete with similar investments from China. Furthermore, providing concessional climate financing is a global imperative. A recent Oxfam report warns that private and non-concessional lending for sustainable development is already driving poorer countries to take on unmanageable debt loads.161 Expanding DFC’s balance sheet to finance more projects related to climate change resiliency and technology modernization is therefore a worthy endeavor.

The additional technological projects that DFC finances should target investment in SSA, where digital infrastructure and regulations governing development projects are weaker than in LAC. The U.S. can seize this moment to compete with China’s technological development on the African continent. In August 2020, the U.S. Department of Commerce announced that non-U.S. companies would be prohibited from selling semiconductors (chips) produced with U.S. lithography technology to Chinese technology giant, Huawei. This decision is considered by many to be a “lethal blow,” as Huawei no longer has access to high-quality chips necessary for its smartphones and 5G technology, and likely cannot reproduce these chips domestically.162 Due to the uncertain future of Huawei, African countries will likely forgo partnering with Huawei to build 5G infrastructure out of concern that the telecom firm will not be able to supply and maintain gear for their networks with U.S. restrictions in place. Financing 5G deployment in SSA with DFC’s expanded balance sheet offers a cost-effective way to capitalize on China’s setbacks and spur economic growth in African countries post-pandemic.

Simultaneously, the U.S. should work to help Latin American countries improve their laws and regulations related to cyber security, privacy, and data rights. Already, the U.S. has used DFC to provide the European technology firm Ericsson with financing in its bid to become the main 5G supplier in Brazil.163 While LAC has not prioritized cybersecurity in past digital infrastructure and has a long-standing relationship with Huawei in their 3G and 4G networks, Nokia, Ericsson, and other telecom companies utilizing their equipment, such as AT&T, have significant market presence in LAC and plenty of experience operating in that region. Accordingly, with Huawei no longer having access to high-quality chips, providing DFC funding for European 5G bids in LAC will make it easy for governments to lock in infrastructure free of China’s influence.

158 Development Finance Corporation, “DFC Approves Nearly $900 Million for Global Development Projects.”

159 22 USC § 9621.

160 Development Finance Corporation, “Congressional Budget Justification: Fiscal Year 2021.”

161 Harvey, “Climate finance driving poor countries deeper into debt, says Oxfam.”

162 Pham, “New Sanctions Deal ‘lethal Blow’ to Huawei. China Decries US Bullying.”

163 Davies, “US to Use Financial Incentives to Muscle Huawei out of Brazil.”

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Bilateral Relations with China While there are areas in which the U.S. should continue to compete with China, there are other areas that present opportunities for cooperation. Foremost, both sides can use climate change to foment stronger ties via mechanisms such as knowledge transfer and development aid. In addition, the U.S. should take advantage of Beijing’s increasing use of multilateralism to encourage its continued entry into co-financing agreements with multilateral development banks.

China’s global footprint and investments via the BRI mean that it cannot be ignored in discussions surrounding sovereign debt relief. While Beijing has been participating in some capacity in debt restructuring this year, it continues to do so on its own terms outside of the Paris Club and with high levels of discretion. Policy makers in Beijing have incentives to continue operating in this manner: China has developed its own competitive systems, institutions and bilateral relationships, such that it may not see any advantage in engaging with global institutions such as the Paris Club, in which the U.S. has demonstrated long-standing leadership.

Shared areas of interest, such as global welfare, climate and resilience, require cooperation in addition to potentially encouraging more participation in multilateral debt relief measures, perhaps in ways outside of the Paris Club or World Bank and IMF. This does not require a significant reversal in U.S.-China relations. The U.S. can continue to compete heavily in areas of strategic importance and national security. However, competing and cooperating are not mutually exclusive; they should be seen as complements, not substitutes. We see a convergence of unique and time-limited opportunities for the U.S. and China to bolster their cooperation in areas of mutual interest.

A. Restore and Expand Forums for U.S.-China Bilateral Cooperation & Joint Information and Resource Sharing The U.S. should restore former partnerships such as the U.S.-China Strategic & Economic Dialogue (S&ED; now the China Comprehensive Economic Dialogue) and potentially create new ones, similar to the U.S.-China Clean Energy Research Center. As the world’s largest economies and emitters in absolute (China) and per capita terms (U.S.), China and the U.S. have a unique opportunity to show leadership on issues of mutual interest and a heightened responsibility to sustain global environmental governance.164 Where the U.S. has ceded influence in the fight against climate change through actions such as withdrawal from the Paris Climate Agreement and extensive rollbacks of climate regulation, China has largely stepped in to fill the void such that it has become a global leader in clean energy investment and capacity, boasting “the world’s largest installed capacity of wind, solar, and hydropower as well as the biggest market for electric vehicles” as of 2018.165 China is also on pace to meet its climate commitments early under the Paris Agreement — namely to peak carbon emissions by 2030 — and recently pledged to achieve carbon neutrality by 2060.166 Simultaneously, China has come under increasing fire for its overseas energy investments, which remain heavily implicated 164 United Nations Environment Programme, “Emissions Gap Report 2020.” Stevens, “US Leads Greenhouse Gas Emissions on a

per Capita Basis.”

165 Gallagher and Qi, “Policies Governing China’s Overseas Development Finance,” 31.

166 “China | Climate Action Tracker;” Harvey, “China Pledges to Become Carbon Neutral before 2060;” Asia Society Policy

Institute, “U.S. and China Climate Goals: Scenarios for 2030 and Mid-Century;” United Nations Environment Programme, “Emissions Gap Report 2020.”

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in fossil fuels.167 Unlike the main foreign multilateral development banks and OECD export credit agencies which have policies limiting lending for coal-fired power plants, China’s global policy banks, CBD and CHEXIM, as well as state-owned commercial banks still actively invest in coal-fired power plants.168 Of the 270 loans issued by China’s policy banks for energy projects from 2000 through 2019, fossil fuel projects received the bulk of financing.169 According to a 2019 policy brief by the Center for Strategic and International Studies, “at a combined 48%, China and BRI countries emit roughly as much CO2 as the rest of the world combined,” lending great urgency to addressing China’s investments with respect to their impact on climate change.170 In response to heightened criticism, China has expressed a commitment to ensuring its investments are green, low-carbon, and sustainable, including by launching a multitude of multilateral initiatives aimed at ‘greening’ its Belt and Road Initiative at the second Belt and Road Forum in 2019.171 However, numerous agencies regulate different aspects of Chinese foreign investment and none have thus far promulgated a formal, binding law governing environmental standards in China’s overseas lending, with the only mandate being adherence to recipient country rules.172 As such, it is unclear whether these ‘green’ initiatives will have much impact. Additionally, as these institutions are both fairly new and somewhat obscure in their operations, it is difficult to assess their effects over and above initiatives already in place, and some of the initiatives may be redundant rather than mutually reinforcing.173 The U.S. has the opportunity to reprise its role as a leader in tackling climate change and other pressing global challenges by restoring and creating new partnerships with China. The previously established S&ED, for instance, featured the Domestic Policy Dialogue, which provided “a bilateral forum for sharing lessons learned from each nation’s climate policy experiences to date.”174 The U.S. should engage to glean best practices that could be applied to U.S. domestic policy on climate and other issues. A bilateral forum would also provide the U.S. with a space to confront China over the harmful social and environmental effects of its lending policies.

Whereas China’s domestic climate policies are relatively strict and legally binding, environmental guidance on overseas investments and financing is comparatively weak and largely voluntary.175 The U.S. has taken some action on this issue — previously declaring it would not provide public funding for new coal plants overseas except in “rare circumstances” and issuing an executive order requiring government agencies to consider climate resiliency in international development work.176 Both countries have the opportunity to display a united front by jointly devising more robust, harmonized climate standards for international aid and development financing that curb the flow of public funds into carbon polluting projects and that have the force of law.

In addition to bilateral partnerships, the U.S. also has the opportunity to reestablish leadership in multilateral fora through cooperation with China. Developing countries currently have little or no fiscal room to fund and implement climate change mitigation and adaptation along with other poverty reduction measures due to the COVID-19 pandemic. Further, notwithstanding any potential debt relief, many developing countries will face budget shortfalls while lacking the essential technologies and technical know-how to engage in climate mitigation and adaptation.

167 Ma, Gallagher, and Guo, “China’s Global Energy Finance 2019.”

168 Gallagher and Qi, “Policies Governing China’s Overseas Development Finance,” 3.

169 Ma, Gallagher, and Guo, “China’s Global Energy Finance 2019.”

170 Carey and Ladislaw, “Chinese Multilateralism and the Promise of a Green Belt and Road,” 4.

171 Carey and Ladislaw, “Chinese Multilateralism and the Promise of a Green Belt and Road,” 6–7.

172 Carey and Ladislaw, “Chinese Multilateralism and the Promise of a Green Belt and Road,” 5; Gallagher and Qi, “Policies

Governing China’s Overseas Development Finance.”

173 Carey and Ladislaw, “Chinese Multilateralism and the Promise of a Green Belt and Road,” 7.

174 Hart, Ogden, and Gallagher, “Green Finance: The Next Frontier for U.S.-China Climate Cooperation.”

175 Gallagher and Qi, “Policies Governing China’s Overseas Development Finance.”

176 Hart, Ogden, and Gallagher, “Green Finance.”

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The U.S. and China were jointly instrumental to concluding the historic, though insufficient, Paris Agreement.

However, while China remains on track to meet its obligations under the accord, the United States formally exited the Agreement on November 4, 2020 and has largely retreated from global climate action. In recent years, the U.S. has also broadly eschewed multilateralism, which is and will be indispensable to solving the collective action problems inherent in the climate crisis and other global challenges. As such, the U.S. has much to do to regain credibility on the world stage. The U.S. can revive its reputation on climate and other global development goals in part by pursuing the following actions.

First, given their disproportionate contributions to the climate crisis and access to greater resources, the U.S. and China should jointly commit to funding research into clean energy infrastructure, carbon dioxide removal and storage, and other technologies that may be too expensive for developing countries to undertake, and facilitate knowledge and skills transfer at low cost to these countries. They should cooperate through initiatives like the U.S.-China Clean Energy Research Center, which “brings U.S. and Chinese experts together for joint clean energy technology development.”177 Second, in addition to rejoining the Paris Agreement and setting ambitious Nationally Determined Contributions targets for greenhouse gas emissions reductions, the U.S. should work with China to bolster the efforts of international institutions to respond to climate change and achieve sustainable development objectives. This may include dedicating additional grant funds and financing to initiatives like the Green Climate Fund, providing technical assistance and capacity-building, securing international legal recognition and protections for climate refugees, and engaging in joint diplomatic efforts aimed at attaining broad consensus on necessary concerted action. Lastly, given the continued lack of meaningful global progress toward climate targets and the increasing urgency of the crisis, the U.S. should work with China to develop a framework for cooperation and significant action ahead of the 2021 United Nations Climate Change Conference of the Parties (COP26).178

B. Guide China’s BRI Projects to Higher Quality Standards by Encouraging Co-Financing The U.S. should encourage and facilitate China’s efforts to enter into co-financing agreements with multilateral development banks wherever possible, in order to align BRI development standards with those of the International Finance Corporation (IFC). By engaging in co-financing on development projects with multilateral banks, China’s banks must adhere to high, internationally recognized transparency and governance standards, such as IFC’s Environmental and Social Impact Assessment (ESIA) standards which have become the global norm for development finance institutions. Even though the vast majority of China’s development finance continues to be disbursed through bilateral channels, both CHEXIM and the CDB are seeking to expand their cooperation with international development lenders. Therefore, China’s openness for engagement can provide entry points for better enforcement of risk management, governance, and corruption prevention while ensuring projects meet higher environmental, social and human rights standards.

One avenue for this proposal may be within the Inter-American Development Bank, which is now under the U.S. leadership of Mauricio Claver-Clarone. In this position, President Claver-Clarone should push for renewed financial commitments from China through its existing co-financing fund. In 2013 the IDB and the People’s Bank of China (PBC) approved the China Co-financing Fund for Latin America and the Caribbean (henceforth China Fund) to support public and private sector projects that promote sustainable economic growth in the region. By the end of 2019, the Fund had approved approximately US$1.4 billion of the US$2 billion to finance 56 projects in 18 countries.179 In 2019 alone, the partners approved six new projects for a total of US$178.5 177 Hart, Ogden, and Gallagher, “Green Finance.”

178 Harvey, “World Is in Danger of Missing Paris Climate Target, Summit Is Warned.”

179 Inter-American Development Bank, “Project Details.”

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million under the China Fund.180 The U.S. should work within the IDB to encourage China to replenish the Fund and pledge additional money for co-financing projects, as opposed to bilateral agreements.

The IDB has other advantages in that China, through its development banks, has historically been and continues to be an important partner for the IDB since it was admitted as a donor member in 2008. In addition to bilateral financial support for the bank through contributions and co-financing facilities, China has engaged with the IDB through numerous multilateral institutions, such as the Asian Infrastructure Investment Bank, the New Development Bank (NDB), and the Multilateral Cooperation Center for Development Finance. It is also important to note that the China Fund is financing projects in countries that do not have diplomatic relations with China, such as Honduras, and there are proposed projects in others such as Nicaragua. This contrasts with other financing vehicles China has created for Latin America, which demand diplomatic recognition.181 Though China’s membership in IDB has facilitated the establishment of co-financing facilities, challenges to deepening co-financing exist. The main barriers are the availability of projects in the region, the different operating practices that Chinese and Latin American banks have,182 and potential future pullbacks as domestic debt in China continues to rise.183 On the first barrier, China’s institutions are often interested in funding mega projects, usually around US$250 million, which are hard to find in the region. Second, Chinese banks operate differently in terms of project-level assessment, management, and risk mitigation including procurement processes and foreign exchange risks. And lastly, the IIF estimates that China’s total debt-to-GDP has risen to 335% in the third quarter of 2020. This continued credit boom may place limitations on future financing as China may require both fiscal and monetary policy space to address any economic weakness that typically accompanies sharp increases in household debt.184 On the first and third barriers, a limitation on eligible projects or available financing will impact both transparent co-financed projects and opaque BRI projects. And despite the persistence of the second barrier, China has continually demonstrated its interest in expanding co-financing. A white paper the Chinese government issued on its policy toward Latin America and the Caribbean in 2016 stressed the importance of financial cooperation and mentioned the role that regional financial institutions could have for expanding it under a wider range of instruments.185 In 2019, China’s Ministry of Finance set up the Multilateral Cooperation Center for Development Finance, which includes regional and global financial institutions among its founding members. It aims to facilitate the coordination of multilateral development finance institutions along the Belt and Road.186

180 Inter-American Development Bank, “2019 Partnership Report: Financing a Sustainable Future.”

181 Dussel Peters, “China’s Financing in Latin America and the Caribbean.”

182 Dussel Peters, “China’s Financing in Latin America and the Caribbean.”

183 Tiftik, “Attack of the Debt Tsunami.”

184 Schularick and Taylor, “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008.”

185 The State Council, The People’s Republic of China, “Full Text of China’s Policy Paper on Latin America and the Caribbean.”

186 Xinhua Net, “Full Text: List of Deliverables of Belt and Road Forum.”

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Case Studies To demonstrate how the recommendations in this report could be operationalized, we present four case studies on Argentina, Ecuador, Kenya and Angola. The case studies provide meaningful insight on how our recommendations can be applied to countries representing a range in multiple dimensions: geography, economic size, commodity production, public health impact, capital markets access, economic ties to China, and solvency. In addition, these four countries were selected because many comparisons can also be drawn amongst the four countries and to countries in the broader SSA and LAC regions. For example, Angola and Ecuador are both major oil producers that were significantly impacted by the collapse in oil prices resulting from the pandemic, and both Argentina and Ecuador had successfully restructured private sector creditor debt during 2020. Within each case study there is a situational overview and a detailed spotlight on one of our major recommendations.

A. Argentina: Providing Alternatives to China’s Financing 1. Background The COVID-19 pandemic has exacerbated financial woes in Argentina. While Argentina was able to successfully restructure about US$100 billion in sovereign bonds in September, formally ending its ninth default, the country is entering its third year of recession. The IMF is predicting a GDP contraction of 11.3%. Inflation is expected to reach 40% by the end of 2020.187 Its credit rating stands at CCC, though this is up from SD since its successful September debt restructuring.188 In November 2020, Argentina and the IMF began talks for an extended fund facility program, a plan that requires committing to significant economic reforms, to replace its current US$57 billion IMF program that was launched in 2018 as the largest program in the Fund’s 75-year history.

An extended fund facility typically requires countries to make deep, structural economic changes, according to the IMF’s guidelines, but would allow Argentina to defer US$45 billion in payments over the coming years.189 Within this context of financial stress and macroeconomic instability, China has deepened its relations with Argentina under the administration of President Alberto Fernández. Since March, China has helped Argentina in the fight against COVID-19 by sending medical supplies.190 In April 2020, it overtook Brazil as Argentina’s main trading partner. In August 2020, China renewed one of its two currency swaps with Argentina, which together are worth US$18.7 billion, boosting reserves in the Central Bank of Argentina to US$43.3 billion.191 The currency swap agreement highlights the strengthening of trade, investment, and monetary ties. Most recently, in October 2020, Argentina formally joined the Asian Infrastructure Investment Bank (AIIB), becoming the third Latin American country to do so after Ecuador and Uruguay.192 AIIB membership opens up the possibility of infrastructure development credit that would usually go through the World Bank or the IDB. President Fernández has expressed interest in the BRI. If Argentina joined, it would become the largest economy in Latin America to participate in the BRI. Joining the BRI would allow Argentina to resume various infrastructure projects around the country that were halted under the administration of former president Mauricio Macri. It would also allow Argentina to deepen other projects, such as investment in digital and space 187 Do Rosario, “Argentina to Request Extended Fund Facility Program From IMF.”, Bloomberg, November 9, 2020.

188 Fitch Ratings, “Argentina.”

189 IMF, “IMF Extended Fund Facility.”

190 Xinhua, “Xi Says China Ready To Continue Helping Argentina With Covid-19 Prevention, Aid.” 191 AFP, “Central Bank Renews Currency Swap Deal With China For Another Three Years.”

192 Premat, “Argentina Joins Beijing’s Asian Bank.”

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technology. With its economy in recession and intense investment and foreign exchange needs, Argentina would benefit greatly from capital from China. Simultaneously, the country must balance its relations between China and the U.S., its largest creditor which also has great influence within the IMF. It is clear that China-Argentina relations will continue to deepen despite the political complications Argentina may face.

Within this context, various report recommendations would work to alleviate some of Argentina’s financial distress and promote greater transparency in the country. Namely, Argentina would benefit from the establishment of an impartial multilateral credit rating agency. Given Argentina’s long history of defaults and credit downgrades, the country is well-aware of the adverse impacts that a downgrade, or a hint of one, from private CRAs can have on access to international capital markets. Credit ratings have been particularly influential in Argentina not only for providing a benchmark for private investment, but because policymakers are compelled to implement policies that reduce sovereign risk, often at high costs for sustained economic growth.193 An impartial multilateral credit rating agency would provide incentives for systemically optimal decisions about when a country should seek debt treatment, something that private CRAs are unable to do. Argentina may also benefit from changes to U.S. indemnification laws. Argentina is by and large beholden to its private bondholders, given that they hold 36 percent of total public debt. In previous debt restructurings, Argentina has struggled to appease private creditor holdouts, including more aggressive “vulture funds” whose legal challenges have prolonged its debt restructurings. Lastly, U.S-Argentina relations may greatly benefit from greater U.S. and multilateral investments in the country through changes and expansions to DFC, particularly in the technological sphere, to ensure that regulatory standards do not fall as investment ties with China deepen.

2. Recommendation The U.S. should ensure that regulatory standards and digital technology in Argentina are safeguarded against deeper Chinese investment by leveraging the capabilities of the expanded BDN to encourage private sector investment and by apportioning greater funding for digital and ICT infrastructure in Argentina, a sector that China is aggressively funding. The U.S. must continue to encourage strategic investments in Argentina from the multilateral institutions to which it belongs, such as the IDB, and its G7 partner countries. Providing alternatives to Chinese financing will remain vital to ensuring that both infrastructure and transparency standards do not weaken in Argentina.

China is investing heavily in digital infrastructure in Argentina. In 2018, operations began for a US$50 million satellite and space mission control station built by the Chinese military in Argentina’s Patagonia region.194 In January 2020, China agreed to send 90 satellites on its Long March-6 carrier rocket into orbit from the Taiyuan Satellite Launch Center for Satellogic, an Argentine company.195 These actions serve to push China’s partner countries to integrate their digital infrastructure with BeiDou, a Chinese alternative to the U.S.-based GPS, to deepen international reliance on China for space-based services at the expense of the United States.196 These investments are deepening in the ICT industry as well, with CDB recently loaning US$100 million to Telecom Argentina, which it plans to use for the purchase of telecommunication equipment. Lastly, Argentina remains vulnerable to investments from China’s Huawei and ZTE. In 2019, ZTE secured a deal worth US$28 million with the Argentine province of Jujuy to build fiber optic cable systems.197 Given that companies from China have been aggressively positioning themselves for success in Argentina’s telecommunications industry, the U.S. must push to persuade Argentina to shy away from China’s 193 Datz, “Reframing Development and Accountability: The Influence of Sovereign Credit Ratings on Policy Making in Developing Countries.”

194 Londoño, “From a Space Station in Argentina, China Expands Its Reach in Latin America.”

195 Xinhua, “90 Argentine satellites to be launched in China.”

196 Halappanavar, “China’s Answer to GPS Is Now Fully Complete.”

197 Shen and Bai, “Argentina Secures ZTE Deal Amid Us Assault Against Chinese Tech Companies.”

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telecommunications equipment by offering financial assistance for alternatives. Here, DFC funding in these industries will be critical. DFC should fund projects in Argentina that build out 5G-enabling equipment and other ICT. Intensifying the focus on technology projects in Argentina will allow the U.S. to compete with similar investments from China, and protect regulatory standards in highly critical technology.

B. Ecuador: Moving from Debt Relief to Debt Sustainability 1. Background While fiscal pressures were building in Ecuador in early 2020, they reached a fever pitch in March as COVID-19 and the related economic fallout depleted the country’s capacity to adequately service its debt. By late March, Ecuador had the highest per-capita case rate in Latin America, faced a collapse in oil prices (which created a US$12 billion revenue shortfall by May), and had no control over its monetary policy as it uses the U.S. dollar.198 By March-end, its central bank international reserves fell to only 43 percent of reserve requirements, and its GDP shrank by 12.4 percent in the second quarter of 2020.199 At the same time, Ecuador had US$325 million in debt service due on March 24 for its 2020 bonds and an additional US$200 million of coupon payments due on three other bonds just a few days later, all of which were part of US$4.1 billion in total debt repayment due in 2020.200 As of March 2020, Ecuador’s total public debt was US$58 billion (or about 53% of its GDP), of which US$36 billion was foreign debt.201 At this time members of Ecuador’s congress were calling for the government to suspend payments to bondholders to focus instead on responding to COVID-19.202 In fact, Ecuador up until this point had been a serial defaulter on its obligations such that making the US$325 million payment on its 2020 bonds “would only be the second time it ha[d] repaid a bond in its history dating back to 1830.”203 In 2008, when Ecuador suspended debt payments to bondholders, it was largely closed out of capital markets for six years, and in early 2020 Ecuador again seemed to be at that very same precipice.204 Not without major challenges, Ecuador was able to confront this debt crisis and resolve immediate and medium-term liquidity needs through a multi-pronged approach.

1. In March, Ecuador made the US$325 million in payments on its 2020 bonds, later credited as one of the secrets to its ultimate debt relief success for showing good faith.205 2. Shortly after, it reached an agreement with investors in ten different bonds, worth US$19.2 billion, to defer US$800 million in interest payments due between March 27 and July 31 to August 2020, to buy time to work out a restructuring package.206 3. In May, the government announced US$4 billion in public spending cuts. 207

198 Long, “Ecuador Takes Far-reaching Measures to Save Economy;” Long,“Ecuador Basks in Glow of Debt Restructuring Success.”

199 IMF Country Focus, “Helping Ecuador Confront the Pandemic.”

200 Long, “Ecuadorean Bonds drop as Government Calls for Time.”

201 Reuters, “Ecuador Cuts Public Spending by $4 Billion in Face of New Debt Crisis;” Stott, “’This is a Real World War’: Ecuador’s President on the Virus.”

202 Kueffner and Bartenstein, “Ecuador Default Odds Surge as Virus Prompts Calls for Moratorium.”

203 Kueffner and Bartenstein, “Ecuador Default Odds Surge as Virus Prompts Calls for Moratorium.”

204 Valencia, “Coronavirus Outbreak Boosts Pressure on Ecuador to Default on Foreign Debt.”

205 Long, “Ecuador Basks in Glow of Debt Restructuring Success.”

206 Rapoza, “The Pandemic Blues: Ecuador Second Latin American Nation to Default in 4 Weeks.”

207 Reuters, “Ecuador Cuts Public Spending by $4 Billion in Face of New Debt Crisis.”

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4. In August, Ecuador convinced a supermajority of investors in US$17.4 billion of its bonds to swap bonds maturing before 2030 for bonds maturing past 2030, providing US$16 billion in debt relief over the next 10 years at a 9 percent haircut (see Ecuador’s 2020 Private Creditor Debt Restructuring on page 23).208 5. Also in August, Ecuador received a one-year debt suspension from CDB on US$417 million in debt due between the end of 2020 and mid-2021, which allowed for future repayment in quarterly payments over 3 years and a postponement of oil shipments.209 6. At August-end, the IMF agreed to lend Ecuador a new US$6.5 billion, 27-month Extended Fund Facility to replace the existing three-year US$4.2 billion fund. The August bond exchange was contingent on securing this new facility by September 1.210 7. In December, it was set to receive a US$500 million credit line from the World Bank, following a US$500 million line in May and a US$260 million line in July. 211 8. Currently, Ecuador is continuing to negotiate a restructuring of the existing debt held by its state-owned PetroEcuador for a new US$1.4 billion oil-backed loan with CDB.212 While Ecuador has received immediate and medium-term debt relief, many challenges remain to put the country on a more sustainable path. From a liquidity perspective, as late as November 2020, the country was still looking for additional funds before year-end as the US$1.4 billion oil-linked loan from China was not expected to be finalized before 2021.213 From a political perspective, risk remains that conditional fiscal reforms as required by the IMF may not be passed under a new administration after elections are held in February 2021.214 From a public health perspective, many have fallen ill or lost their lives, and many still lack access to adequate healthcare.

From a macroeconomic perspective, unemployment remains elevated and is expected to stay high in 2021.215 And lastly, while crude oil prices have recovered somewhat from early Spring lows, they remain below US$50 a barrel and pre-pandemic demand has not returned.

The United Nations Development Programme (UNDP) has put forward several recommendations in its Socioeconomic Assessment of COVID-19 in Ecuador, including injecting capital and diversifying markets, strengthening the value chain to increase domestic consumption, improving the telecommunication network and electrical and water infrastructure, and incorporating more sustainable and circular production models that include green growth.216 UNDP’s recommendations can be addressed by implementing many of the recommendations put forward in our report. Specifically, expanding DFC’s balance sheet in order to provide more concessional loans for infrastructure investments in water sanitation and hygiene, telecommunications, and renewable energy; expanding and pivoting the BDN to bestow benefits to private sector companies across the Ecuadorian value chain in exchange for meeting higher quality and more sustainable standards; cooperating with China to provide joint expertise and research to Ecuador on climate change mitigation and adaptation; and lastly providing development co-financing with China through IDB.

208 Reuters, “Ecuador Ploughs on With $17.4 Billion Debt Revamp With Major Creditor Support.”

209 Bruni, Jo, “Ecuador Gets Debt Reprieve from China.”

210 Smith, Colby, “IMF Agrees to Lend Ecuador $6.5bn.”

211 Giurleo, “World Bank to Discuss Approval for Credit Line to Ecuador.”

212 Garip, “Ecuador to Ink China Oil-backed Loan in Nov: Minister.”

213 Economist Intelligence Unit, “Bilateral Financing from China Stalls.”

214 Economist Intelligence Unit, “Country Risk Service– Ecuador.”

215 IMF, “World Economic Outlook, October 2020: A Long and Difficult Ascent.”

216 UNDP, “In Ecuador, COVID-19 Could Cause 11 Percent Dive in GDP this Year.”

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2. Recommendation China has become the single largest creditor to Ecuador in the last decade with various sources estimating total borrowings since 2010 ranging between US$11 billion to US$19 billion, not including new loans being negotiated during the COVID-19 pandemic.217 Many of these loans went towards notorious BRI projects that were shoddily built and shrouded in corruption such as the Coca Codo Sinclair Hydroelectric Dam built by Sinohydro.218 As the New York Times pointed out: “nearly every top Ecuadorean official involved in the dam’s construction is either imprisoned or sentenced on bribery charges.”219 Additionally, many of these loans are backed by reduced price oil shipments in lieu of payment and come with conditionality to hire Chinese workers and companies that end up producing low quality final projects.

One of the ways in which the U.S. can guide Ecuador towards more sustainable infrastructure projects that are built with higher standards, financed through transparent debt contracts, and are more rigorous with anti-corruption standards is to direct more Chinese investment through co-financing with other MDBs such as the IDB. Ecuador has real financing needs, made even more severe by the COVID-19 pandemic, that cannot be met without the help of China. It is imperative to raise the standards of Chinese investments to put Ecuador on a more sustainable path going forward.

Through co-financing with IDB directly or replenishing funds to IDB and PBC’s China Fund, the Ecuadorian people can be assured that social, environmental, and human rights standards, such as IFC’s ESIA standards will be met. With Claver-Clarone currently at the helm of the IDB, the U.S. can play a role in directing more Chinese capital towards this fund. Additionally, in December 2020, the AIIB made a modest foray into Latin America, co-financing a US$50 million loan with the World Bank to Ecuador’s largest public bank. The loan is a part of AIIB’s COVID-19 Crisis Recovery Facility, which currently stands at US$13 billion.220 This is another entity to co-finance with in order to ensure higher standards than China’s policy banks.

C. Angola: Spearheading a Transparency Inititative 1. Background With a population of over 30 million, Angola is the fourth-largest economy in Africa. As a resource-rich country, it derives most of its income from oil, which accounts for one-third of GDP and over 90% of exports.

Despite successfully maintaining political stability since the end of its 27-year civil war in 2002, Angola faces significant development challenges, including pervasive rates of poverty and unemployment. Its current president, João Lourenço, came to power in 2017, promising to end the widespread and massive corruption that was endemic under the 38-year presidency of his predecessor, José Eduardo dos Santos. Most recently, dos Santos’ daughter, Isabel, has been accused of making her fortune through illegal access to lucrative deals involving land, oil, diamonds and telecoms.

Following the end of its civil war, Angola sought financing from Beijing to rebuild its economy, making the country an early testing ground for Chinese commodity-for-infrastructure loans, a model later extended to other resource-rich countries around the world. With outstanding Chinese debt of roughly US$20 billion, Angola is Africa’s largest recipient of Chinese credit, holding around a third of its total loans to the continent.221 This 217 Lozano, “Can Latin America’s First AIIB Member Learn from Past Mistakes?”; Casey and Krauss, “It Doesn’t Matter if Ecuador Can Afford This Dam. China Still Gets Paid.”

218 Casey and Krauss, “It Doesn’t Matter if Ecuador Can Afford This Dam. China Still Gets Paid.”

219 Casey and Krauss, “It Doesn’t Matter if Ecuador Can Afford This Dam. China Still Gets Paid.”

220 The Asset, “Ecuador Draws from AIIB COVID-19 Recovery Fund.”

221 Cotterill, “Angola Sharpens Fight to Recover Stolen Cash as Debt Pressure Mounts.”; Hodgson, “China Strikes Debt Deals with Poor Nations under G20 Scheme.”

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figure represents about 45% of Angola’s total external debt,222 which itself is estimated at 123% of GDP.223 CDB and CHEXIM are by far its largest creditors, accounting for US$14.5 billion and US$5 billion, respectively.224 Having already endured five years of recession prior to the pandemic, the Angolan economy has been acutely damaged by this year’s crash in commodity prices. The country is participating in DSSI and the IMF has granted relief of around US$2.5 billion, while negotiations on a further US$6.7 billion are ongoing with China.

In recent years, the country has been engulfed in a corruption scandal; the president, João Lourenço, claims that at least US$24 billion was looted under his predecessor’s administration.225 Investigations have also implicated organizations with links to China, including two Angolan-Chinese companies and the China International Fund, a group of Hong Kong-based investors whose chief executive was detained by Beijing authorities in 2015.226 2. Recommendation The incredible extent of corruption in Angola has done untold damage to the country. Chinese credit, vast in quantity and with few strings attached, has served to exacerbate the scale and pervasion of graft throughout Angola. More money has been stolen than the entire amount of outstanding debt to China and is twice the value of Angola’s current liquid foreign reserves.227 The U.S. and its partners should address this problem via a Transparency Initiative for sub-Saharan Africa.

While the Initiative would be region-wide, it would place special focus on countries which receive the largest shares of BRI capital, such as Angola. By seeking to raise transparency standards in BRI recipient countries, the U.S. can indirectly apply pressure aimed at improving the transparency of China’s own lending practices.

Having promised to crack down on graft when he took office in 2017, President Lourenço has undertaken far-reaching reforms and conducted high-profile criminal investigations.228 He has also appealed to the international community for help in clawing back assets lost to corruption under his predecessor’s regime.229 In Lourenço, then, the U.S. would find a partner who is receptive to the Transparency Initiative and willing to pursue bold solutions.

Via the Initiative, the U.S. should spearhead anti-corruption efforts across several areas, deploying expertise from its own agencies and multilateral bodies to provide technical assistance on fiscal governance. Such assistance would seek to build resources, capacity and expertise within Angola’s Ministry of Finance, legislative oversight bodies and civil society organizations to improve the country’s budget processes and accountability mechanisms. Technical assistance can also support the drafting of anti-corruption laws, procurement reform, publication of government revenues and expenditure, and auditing.

The U.S. and its partners should also utilize existing international frameworks where possible and could insist on some efforts as conditionality for debt relief. In particular, they should encourage Angola to join the Extractive Industries Transparency Initiative (EITI), a global standard which promotes the open and accountable

222 Hodgson, “China Strikes Debt Deals with Poor Nations under G20 Scheme.”

223 Nyabiage, “China is Behind Billion Dollar Debt Restructure for Angola, Analysts Say.” 224 Strohecker and Bavier, “Angola Negotiates $6.2 Billion Debt Relief from Creditors.”

225 Cotterill, “Angola Sharpens Fight to Recover Stolen Cash as Debt Pressure Mounts.”

226 Burgis, Hornby and Anderlini, “Queensway Tycoon Sam Pa Is Detained in Communist Probe.”

227 Keeler, “Emerging and Growth Markets, October 10th 2020.”

228 Covington, “Angola.”

229 Browning, “Angola Pleads for Help to Claw Back Assets Lost to Corruption.”

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management of oil, gas and mineral resources.230 Implementing the EITI Standard would improve the transparency and accessibility of Angola’s oil sector, while facilitating dialogue and co-operation among its 52 members, which include countries such as Myanmar that, like Angola, also have ties to China. In a similar vein, the US should also promote Angolan participation in the Blue Dot Network to encourage regulatory standards for infrastructure projects. Taken together, the BDN and EITI would improve the sustainability and transparency of capital flows into Angola.

The U.S. should also apply pressure on other countries to support Angola’s anti-corruption drive. For instance, the Portuguese government recently seized the assets of Isabel dos Santos, a move that may help Luanda claw back around US$2 billion worth of stolen money. Despite this welcome move, some have criticized Portugal for taking too long to take action. Moreover, the measures did not prohibit dos Santos from selling her sizable portfolio of Portuguese shares.231 Therefore, in response to President Lourenço’s request for international support in the pursuit of corruption investigations, the U.S. should take a leading role both in pressuring countries such as Portugal to respond more robustly to allegations of corruption, as well as fomenting international co-operation to limit the opportunities such individuals have to embezzle money.

Taken together, these measures would improve the sustainability of investments into Angola. Furthermore, by reinforcing norms surrounding anti-corruption, both internationally and within Angola, these measures would help to raise minimum standards and expectations pertaining to BRI inflows.

D. Kenya: Setting New Standards in Development Finance 1. Background Kenya has been classified by the Financial Times Stock Exchange Group as a “frontier market economy” that is at risk of debt default.232 Kenya is eligible for a US$803 million debt payment suspension in 2020 under DSSI, and the current finance minister has hinted that the country is “now strongly considering joining the arrangement.”233 According to the European Network on Debt and Development, the country’s participation in DSSI has been delayed by the fear of a ratings downgrade and increased debt service payments to private creditors starting in 2022.234 Kenya is therefore one of the countries that stands to gain from the creation of an impartial multilateral credit rating agency.

Even prior to the pandemic, the country faced high public debt, steep borrowing costs, and low reserve cover.235 Moreover, Kenya’s debt-to-GDP ratio is rising at an unsustainable rate, according to Fitch Ratings.236 As of 2019, 16% of total public debt in Kenya was owed to official bilateral creditors, an additional 16% to multilateral creditors, and 18% to commercial lenders.237 Payments to private and public creditors in China account for 33% of total external debt service.238 One notable Chinese-financed initiative, the US$3.6 billion Mombasa-Nairobi Standard Gauge Railway, has been touted as the biggest infrastructural project since independence; the port of Mombasa was allegedly utilized as collateral, although China’s opaque lending practices have made 230 EITI, “Angola Urged to Join the EITI amid Corruption Allegations.”

231 Transparency International, “Seizure of Dos Santos Assets in Portugal Welcome.”

232 FTSE Russell, “FTSE Country Classification of Equity Markets.”

233 Reuters Staff, “Kenya makes U-turn on joining G20 debt relief initiative.”

234 Munevar, “Kenya.”

235 The Economist, "Which Emerging Markets Are in Most Financial Peril?”

236 Nyawira, “Kenya Urged to Seek Debt Relief, Channel Funds to Contain Covid-19.”

237 International Budget Partnership, “The State of Kenya’s Public Debt.”

238 Al Jazeera, "China Is Africa’s Top Creditor, but Will It Lead Debt Relief?”

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anecdotal reports difficult to confirm.239 With its strategic geography, Kenya is a key node in both the BRI and the U.S.’s Free and Open Indo-Pacific Strategy.

Ethnic politics are a key determinant of public good provision in sub-Saharan Africa, and external flows of development finance are often directed by dominant ethnic coalitions to local constituencies. For example, Jomo Kenyatta, the first postcolonial leader of Kenya, “made ‘ethnic arithmetic’ the linchpin of his regime’s legitimacy,” and the trend has continued under his son Uhuru Kenyatta, the current president.240 In contrast to the conditionality of traditional donors, China is nominally committed to giving assistance with few strings attached, rendering its aid flows particularly vulnerable to cooptation at the domestic level. One geospatial study examined Chinese official development assistance (ODA) and other official finance (OOF)-like flows, finding that when African “leaders hold power their birth regions receive substantially more funding from China than other subnational regions.”241 2. Recommendation The example of Kenya demonstrates the importance of setting international standards and regulations for development finance, speicifcally, leveraging the BDN to promote transparent and inclusive projects in priority sectors and ensuring that capital flows do not corrupt political institutions in recipient countries.

According to the G20 Principles for Quality Infrastructure Investment, adopted by the BDN as a foundational policy document, “access to infrastructure services should be secured in a non-discriminatory manner […] inclusiveness should be mainstreamed throughout the project life cycle.”242 In Kenya, adherence to these principles necessitates greater geographic dispersion of externally financed projects.

From 2000 to 2014, six ethnic groups dominated national politics: the Kalenjin, Gikuyu, Kamba, Luo, Embu, and Meru.243 Unsurprisingly, the ethnic heartlands of these six groups also received the lion’s share of China’s ODA- and OOF-like flows. Given that three of four postcolonial Kenyan presidents have been ethnically Gikuyu (including the incumbent), this finding is not surprising. However, the Kamba appear to receive the priciest projects. Although there are only eight geocoded projects in Kamba areas, a whopping US$11.3 billion was allocated to these regions, constituting around 35% of China’s total development finance in Kenya.

Insofar as BDN leverages its “seal of approval” and the ITAN portfolio to build capacity across bidding, procurement, financing, and implementation of traditional infrastructure programs, the initiative could help to alleviate inequities in the regional distribution of the projects. In this regard, best practices from established multilateral lenders can lead the way: one empirical study found “no evidence that World Bank funding flows disproportionally to the political leaders’ birth regions or to areas populated by the ethnic group to which political leaders belong.”244 Although there are no easy fixes to neo-patrimonial politics, part of the solution is to balance aid disbursements among central governments, local authorities, and civil society organizations.

Public-private partnerships should also be utilized to crowd in private investment in priority sectors, such as public health and clean energy. The proposed region-wide interagency Transparency Initiative (see p. 28) could be tasked with evaluating BDN projects across several domains, including accountability and ethnic inclusivity.

By establishing new norms around development finance through the BDN and the Transparency Initiative, the U.S. can promote good governance in Kenya and help the country achieve a stable growth trajectory.

239 Taylor, “Kenya’s New Lunatic Express: The Standard Gauge Railway,” 40.

240 Muigai, “Jomo Kenyatta & the Rise of the Ethno-Nationalist State in Kenya,” 200-217.

241 Dreher et al., “Aid on Demand: African Leaders and the Geography of China’s Foreign Assistance,” 1.

242 Ministry of Foreign Affairs of Japan, “G20 Principles for Quality Infrastructure Investment.”

243 Greenbaum, “The East is Red (Ink): China, Aid, and Debt Diplomacy in Sub-Saharan Africa,” 49.

244 Dreher et al., “Aid on Demand: African Leaders and the Geography of China’s Foreign Assistance,” 6.

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Conclusion The global public health crisis brought on by COVID-19 has been accompanied by widespread economic devastation that has particularly hit debt-laden developing countries. Many of these governments do not have adequate liquidity or capacity to address both the pandemic’s health and economic impacts. Consequently, developing countries have turned to the global community to seek temporary debt relief in order to divert funds to combatting the pandemic. However, current efforts to provide relief, such as the DSSI, fall short in scope, scale, and duration. Compounding matters, time is of the essence as urgent action is required to prevent more easily addressed liquidity crises from turning into prolonged solvency crises.

Therefore, it is imperative that the U.S. expand the tools and programs available to these struggling countries both multilaterally, through organizations such the G20 and IMF, and bilaterally, through initiatives such as DFC projects and the BDN. It is also important to recognize that many developing countries will not be able to withstand the health and economic crises without more active participation from China and private sector creditors. This was evident in Angola’s purported restructuring of its bilateral debt from China, and Argentina’s and Ecuador’s large restructurings of private sector creditor debt. Although the pandemic may have slowed China’s infrastructure lending, the growing Digital and Health Silk Roads indicate that China will continue its global expansion in the future.

Even if immediate debt relief is expanded, it will not significantly improve debt sustainability unless followed by longer-term structural changes to build more resilient economies. In Argentina, Ecuador, Kenya, and Angola, expanding the BDN is a promising way to bolster standards for infrastructure development. In LAC, regional agencies such as the OAS and IDB can be used to facilitate co-financing ventures and collaborate with China on climate sustainability. In SSA, Transparency Initiatives could go far towards making development finance more productive in the region. The U.S. can lead both regions to emerge from the pandemic with stronger economies if these measures are taken now.

Our recommendations provide guidance for the U.S. to respond to the pandemic in ways that improve debt sustainability, rebuild stronger economies, and strategically collaborate and compete with China. How the U.S. responds to debt sustainability during the COVID-19 pandemic has potential to shape international and U.S.-China relations for years to come.

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