December 31, 2018

New architectural drawings of the Bretton Woods duo

There are some potentially major changes afoot in what has grandly been called the international financial architecture. (The expression was popular with Gordon Brown, the former UK chancellor of the exchequer, and prime minister.) The driver of the changes, not for the first time, has been the Trump administration. This month David Malpass, the US undersecretary for international affairs in the Treasury, told Congress that the administration was opposed to an increase in the permanent reserves of the IMF through changes to its quotas. He argued that the Fund already had the resources to fulfil its remit, adding that it has access to other funding mechanisms such as the temporary pooling of members’ contributions.

Rather more pointedly, Malpass also told Congress that the administration was uncomfortable with the growing influence of China in the World Bank. He suggested that large scale regional infrastructure projects such as the Belt and Road Initiative (BRI) should not be backed by multilateral development banks (MDBs) because they serve a Chinese agenda. Malpass also quoted the Bank’s president, a US national, in an unfavourable light. Less subtly, the US national security advisor, John Bolton, subsequently criticized China’s “strategic use of debt” for its geopolitical ends.

The World Bank’s shareholders approved a US$13bn increase in its paid-up capital this April. In time, this will leave the US and China with 16.8 per cent and 6.1 per cent shareholdings respectively. The broader point is that the Trump administration has misgivings about multilateral bodies, notably the Bretton Woods duo of the Fund and the Bank, and strong views on Chinese influence.

Those views have strengthened but are not new. The Obama administration sought unsuccessfully to discourage its Western allies from taking up membership of the Beijing-based Asian Infrastructure Investment Bank (AIIB), which began operations in January 2016. Its focus has broadened from solely Asia and Oceania to cover Africa and Latin America. Its membership has therefore expanded to more than 90 states. Its head is Chinese and its largest shareholders are China (30.3 per cent), India and Russia.

The AIIB is not a rival to the World Bank, disbursing US$2.7bn in 2017. However, its establishment poses a challenge to the Asian Development Bank and other regional MDBs. We can say that the roles are different and that the two bodies can complement each other but then we could also ask why the earlier-formed bank could not have been reformed from within.

The AIIB has signed MoUs with the African and Inter-American development banks, and co-financed a project in Egypt with the World Bank Group’s private-sector lending and investment arm. There is therefore already a blurring of roles between “Western” and “non-Western” development institutions for the Trump administration to confront. For most users (borrowers), the agenda will surely be to extract the maximum benefit from both. We do not see that they will have to choose between the two.

Not all the Chinese-built infrastructural mega-projects that drew the criticism of Malpass in Congress serve a narrow Chinese gameplan. Chinese business has invested heavily in the industrial free zones in Ethiopia and in Kenya but this did not warrant the building of the Mombasa-Nairobi and Djibouti-Addis railways, completed last year by Chinese companies last year at a joint cost of US$8bn.

The international media has reported that the patronage of the two lines has not gathered momentum as rapidly as expected, leading to a 20-year extension of the repayment period by the Ethiopian government on the loan for the Djibouti-Addis line. White elephants can eventually become viable projects.

We should point out that China has sometimes “got the job done” where Western interests have talked at length, a fine example being the Benguela railway constructed in the colonial era from the Angolan coast across the Congolese border. The line was destroyed in places during the Angolan civil war. Its rebuilding was discussed at many development fora over two decades, and carried out by the Chinese in about two years.

Within the international financial architecture, there is another area of actual and potential tension between Western and Chinese interests. Unlike Russia, China is not a member of the Paris Club of sovereign lenders. It is not included  in the club’s debt reschedulings and reaches its own private agreements with struggling borrowers. Because these agreements are private, media coverage can be highly critical. Talk of opacity is common. The Chinese embassy in the UK wrote to the Financial Times in October to complain of the newspaper’s coverage of its lending in Ghana and Zambia.

Because they are private, we obviously do not have access to them. We can, however, extract data on external borrowing costs from Nigeria’s Debt Management Office. We have excluded principal repayments but included all fees as well as interest for the 12 months to June 2018. Taking end-2017 as the mid-point, we find that these costs represent 2.9 per cent of the FGN’s external debt stock, 2.6 per cent of its loans from China and 0.9 per cent of its obligations to the World Bank Group.

 

 

Gregory Kronsten

Head, Macroeconomic & Fixed Income Research

FBNQuest