Yellen Rebukes Chinese Lending Practices in Call for Debt Relief

In an interview, the Treasury secretary also highlighted progress at the World Bank and the International Monetary Fund ahead of annual meetings this week.

Treasury Secretary Janet L. Yellen rebuked China’s “opaque” lending practices and urged global financial institutions and other creditors to accelerate debt relief to low- and middle-income countries in an interview on Monday.

Her comments came ahead of this week’s annual meetings of the International Monetary Fund and the World Bank, where global economic policymakers are gathering in Washington at a pivotal moment for the world economy. Inflation has eased, but war in the Middle East has threatened to jolt energy markets. High interest rates are dogging poorer economies, which have struggled to pursue critical development initiatives given their mounting debt burdens.

“It’s a substantial burden and can impede their investments in things that will promote sustainable development or dealing with pandemics or climate change,” Ms. Yellen said of the debt burdens of low- and middle-income countries.

The I.M.F. and the World Bank have faced backlash in recent years for moving too slowly in their efforts to help struggling economies and for pushing nations to enact economic reform measures, such as sharp spending cuts, that have brought resistance and social unrest.

The Treasury secretary hailed signs of progress at multilateral institutions like the monetary fund and the World Bank in a speech on Tuesday that highlighted an expansion of lending capacity and faster approval of new projects under the direction of the Biden administration.

Global debt continues to be a problem, however, and the United States has been pushing for a broader international relief initiative that goes beyond efforts to aid countries that are on the brink of defaulting on their loans.

The I.M.F. estimated this month that global public debt would exceed $100 trillion this year. The World Bank warned that poverty-reduction efforts had reached a standstill because of weak growth in poor countries that were hardest hit by the pandemic.

The World Bank estimates that nearly 700 million people are in extreme poverty, which is defined as living on less than $2.15 per day. That is projected to decline to 622 million by 2030, but the pace of poverty alleviation is much slower than it was during the decade before the pandemic.

Ms. Yellen pointed to a framework unveiled this year by the United States and Kenya as an example of how debt relief and economic aid could be reimagined and expanded.

In May, the Biden administration announced the “Nairobi-Washington Vision” when President William Ruto of Kenya visited the White House and called for the creation of coordinated aid packages for “high-ambition countries” that want to invest in clean energy projects.

Ms. Yellen explained that because of high interest rates, which have added to their debts, many countries have been unable to make climate investments or prepare for future pandemics.

Despite aspirations of expanding debt relief, initiatives orchestrated by the Group of 20 to help poor countries avoid default have sputtered amid resistance from China. As the world’s largest creditor, China has been accused of stalling loan restructuring talks with countries such as Zambia, Ghana and Sri Lanka.

“China’s lending tends to be opaque,” Ms. Yellen said. “When countries need to restructure their debt, it’s been extremely difficult, and China is often a barrier to making rapid progress.”

While China is the world’s largest lender, it also continues to borrow from the World Bank — a practice that Ms. Yellen said should stop. China, the world’s second-largest economy after the United States, owed the World Bank $15 billion as of August. It continues to receive loans worth hundreds of millions of dollars for clean energy projects.

“We feel very strongly that China’s in a place where it should not be getting lending from the World Bank,” Ms. Yellen said.

The United States has made bolstering international financial institutions a priority during the Biden administration, in part to counterbalance Chinese lending that many economists have described as “debt traps.”

President Biden picked Ajay Banga to lead the World Bank last year and encouraged him to increase focus on efforts to combat climate change and to find new ways to attract private money for the bank’s projects.

In the speech on Tuesday, Ms. Yellen called for policymakers to “double down” on carrying out policies intended to help countries prepare for disasters, improve infrastructure and adopt more productive agricultural technology. She also expressed optimism that the United States would provide a new financial package to replenish the World Bank fund that provides grants and low-interest loans to the poorest countries.

Global institutions have spent the last four years grappling with overlapping crises as the pandemic, Russia’s war in Ukraine and surging inflation have haunted the world economy and weighed on global output.

As policymakers convene in Washington this week, political uncertainty is a new looming headwind.

If former President Donald J. Trump wins the U.S. election next month, trade tensions around the world are expected to intensify and America’s priorities for the World Bank and the I.M.F. could shift sharply.

Officials from the Group of 7 nations are hoping to complete plans this week to provide Ukraine with a $50 billion loan backed by interest being earned from Russia’s frozen central bank assets. The loan, which the group hopes to deliver this year, is widely seen as providing Ukraine with a financial lifeline if Mr. Trump is elected and withholds U.S. economic support.

At a news conference on Tuesday, Ms. Yellen said that the major sticking points with the European Union around the mechanics of the loan have been worked out. The United States will contribute $20 billion of the $50 billion that will be provided to Ukraine this year.

Ms. Yellen said that American taxpayers would not bear any of those costs because the loan will be repaid using interest from Russia’s central bank reserves that are being held in Europe. The U.S. government is able to offer loans to countries if there is a high level of certainty that the money will be repaid. The Biden administration has been working with European officials to ensure that Russia’s central bank funds will remain frozen so that the loan is secure.

“This is a way of making Russia bear the cost and the expense of the damage that it’s inflicting on Ukraine,” Ms. Yellen said, adding that the U.S. expects to impose new sanctions as soon as next week targeting intermediaries in countries that are helping Russia supply its military.

Beyond the concerns about what a Trump administration might mean for trade and Ukraine, there are also fears that if he is re-elected, Mr. Trump could abandon international institutions such as the World Bank and the I.M.F., which were created 80 years ago to promote a more stable economy.

Project 2025, a set of policy proposals spearheaded by the Heritage Foundation and like-minded conservative groups before Mr. Trump officially entered the 2024 race, called for the United States to fully withdraw from the institutions and to provide any economic aid on a bilateral basis.

In the interview, Ms. Yellen declined to discuss election politics but warned that retreating from institutions like the World Bank and the I.M.F. would diminish America’s global influence while giving China even more clout.

“In general, the idea that we should not be part of these institutions, I think, is completely misguided, and it would be a mistake,” Ms. Yellen said. “This is a place where American leadership is critically important, and if we got out of these institutions, China would assume greater influence.”

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