The crisis the world is experiencing due to the outbreak of the Corona virus has depleted the reserves of the less wealthy countries, leaving them unable to commit to paying their external debts.

Although the G20 countries pledged to reschedule the debt to help overcome the difficult situation in the global economy, China seemed to tweet out the swarm.

In their report, published by the American "Foreign Affairs" magazine, the writers Ben Steele and Benjamin Dela Rocca said that the new Corona virus has caused the engine of the global economy to stop completely. Global growth is expected to drop from 2.9% last year to a negative growth rate in 2020, which has not happened since World War II until 2009. 

It is clear - according to the report - that the process of recovering the global economy will be slow and painful, as government restrictions to prevent the virus from reappearing will hinder the resumption of the production and consumption chain as required, as well as causing many borrowers to default on loans and bankrupt some Corporations, and layoffs will lead to growing unemployment.

The authors stressed that the consequences of the global economic recession will not affect all countries of the world to the same degree, because poor countries suffer from poor health infrastructure, which hinders their efforts to halt the outbreak of the Corona virus, and that individuals suffer from accumulated debts even before the outbreak of the virus, which imposed on them material costs Additional.

Capital Withdrawals
Foreign investors are now withdrawing their capital from emerging markets and returning them to wealthier countries, in search of a safe haven. As a result, countries such as South Africa, Kenya, and Nigeria are experiencing a significant devaluation of their currencies, which deepens the problem of repaying foreign loans, according to the authors.

The authors pointed out that the poor countries resorted to borrowing from the International Monetary Fund and the World Bank to face the risk of financial collapse. The IMF has already provided emergency loans to 40 countries by the end of March, and the World Bank has provided $ 14 billion to support relief efforts. 

However, the IMF and the World Bank recognize that these sums will not be sufficient, and for this reason, they have invited G20 countries to suspend the recovery of interest on loans to developing countries.

On April 15th, all G20 countries pledged to suspend the repayment of those loans until the end of the year, except for China, which has signed the group’s pledge but added ironic reservations, the authors describe.

China has excluded hundreds of large loans it made under the "One Belt One Way" initiative to develop infrastructure, and the pro-government Global Times newspaper announced a day after the G20 statement, that "preferential loans" - like those offered by the Export Bank And the Chinese import - will not comply with the decision of the group. 

The Export-Import Bank of China has funded more than 1,800 projects under the One Belt One Way initiative in dozens of countries. By insisting on getting loan benefits on time, China will force the economically troubled countries to choose between paying off debts or importing basic commodities, such as food and medical supplies, according to the authors.

Preferential or aggressive treatment?
The authors added that, based on reliable information from multiple sources, China loaned 67 developing countries more than $ 120 billion between 2013 and 2017, and most of these loans were part of the "One Belt One Way" initiative.

It is impossible - as the report indicates - to obtain accurate figures due to the secrecy surrounding these agreements, but the growth of the lending rate announced by Beijing in 2018 and 2019 indicates that China has provided loans worth at least $ 135 billion, and these figures put China In the list of the highest lending countries in the world.

As of 2017, Pakistan borrowed at least $ 21 billion from China, or 7% of its GDP, while South Africa borrowed about $ 14 billion, or 4% of its GDP. Both countries and many other countries are much more indebted to China than the World Bank.

The authors pointed out that other countries owe China a great deal compared to its GDP. For example, by 2017, Djibouti's debts to China amounted to about 80% of GDP, Ethiopia about 20% of its output, and Kyrgyzstan - one of the first countries to receive financial assistance from the International Monetary Fund to tackle the Corona virus - owes China more than 40% of its GDP.

Since 2013, China has provided nearly half of the new loans to countries that may default.

The authors emphasized that China imposes a high interest rate on its loans. Although Beijing describes its interest rates as “preferential”, some projects that fall under the “One Belt One Road” initiative - especially large ones - increase their interest rate to three points. A percentage above the capital cost of Chinese banks, i.e. between 4% to 6%.

In contrast, World Bank loans in dollars to poor countries have interest rates of just over 1%. 

An impossible option.
Developing countries borrowed from China depend on the dollar, the euro, and other major foreign currencies for their imports and payment of their debts. But many countries lack sufficient reserves to cover all of these expenses, and it is expected - according to the authors - that imports and debts will deplete, over the next year, all South Africa's foreign exchange reserves.

If these countries default on their debt - which seems increasingly likely - they will be excluded from international credit markets, and will not be able to manage their budget in the manner required to curb the outbreak of the Corona virus.

The authors considered that the risks of financial deficit and default are likely to spread widely to many countries. As of early April 2020, foreign investors have already withdrawn more than $ 96 billion from emerging markets. As a result, the value of the South African Rand and the Brazilian Real has declined by 25% so far.

The flight of foreign investors is likely to lead to a further collapse in the currencies of these countries, which leads to higher costs of importing essential materials.

Food crises The
authors stressed that food prices have already risen across Africa, and the United Nations expects that the continent will need to spend an additional $ 10.6 billion in the health care sector this year, to tackle the Corona pandemic.

Consequently, the continued flight of capital will lead to more food crises, a faster transmission of diseases on the continent and a growing rate of migration. And if developing countries cannot pay their debts, the global health and economic crisis will worsen.

The report concluded that China, which has received a severe economic blow due to the spread of the Corona virus, appears to be in a much better position than most lending countries, given that it has more than three trillion dollars in foreign exchange reserves.