China Using Paris Club Creditor Methods To Extend Debt Treatment For Belt and Road Initiative Repayment Holidays

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Op/Ed by Chris Devonshire-Ellis

  • Kenya BRI debt renegotiated for 6 year term
  • Payments immediately suspended until June 2021
  • Expected Nairobi – Naivasha rail travel revenues have dried up due to Covid
  • China following and offering better terms than Western creditors 

China has reportedly been following Paris Club creditors mechanisms to provide appropriate debt treatment for countries struggling with Belt & Road infrastructure build debt repayments. The Paris Club is a group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries.

As debtor countries undertake reforms to stabilize and restore their macroeconomic and financial situation, Paris Club creditors provide an appropriate debt treatment. This takes the form of rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).

The Paris Club was created in 1956, when the first negotiation between Argentina and its public creditors took place in Paris. Members include Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland Israel, Italy, Japan, Netherlands, Norway, Russia, South Korea, Spain, Sweden, Switzerland, United Kingdom and the United States. China is not a member.

Kenya has just rescheduled US$245 million of debt repayable to China, a week after the Paris club of creditors offered the same debt-service suspension worth USD300 million, with debts to both extended until the end of June 2021. Kenya has been struggling to meet repayments, including for the Standard Gauge Railway project, built under the Belt and Road Initiative, because the route is not currently generating enough income from pre-Covid expected travel volumes to pay for the loan. Kenya was set to make its first repayment on a USD1.48 billion loan from the Export-Import Bank of China (Exim Bank) that was used to build a railway line from the capital Nairobi to Naivasha in the Central Rift Valley.

Under the China rescheduling deal, Kenya will have the next six years to make payments on the suspended debt service costs including a one-year grace period after June 2021. The Paris Club creditors negotiated six months of debt-service suspension of USD300 million due to them, also until the end of June 2021.

The disclosure comes as China has been criticized for ‘debt-trap diplomacy’ in the past for Belt & Road projects, with these claims now having been discounted, most recently in an article in the Atlantic. China’s apparent adoption of debt restructuring models based upon those used by the Paris Club effectively further discounts such allegations as Beijing appears to be using Western debt renegotiation standards – and even improve upon them – specifically to avoid such criticism.

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Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

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