Last week, Zambia’s official creditor committee, co-chaired by China and France, provided “financing assurances” that pave the way for the much-needed US$1.4 billion bailout by the International Monetary Fund (IMF). Analysts at the London-based investment research firm Tellimer say China’s move could “indirectly set a precedent for how China could work with other lenders to tackle the threat of a wave of defaults across emerging markets”. “China is a significant lender to Africa and, as such, has massive exposure to debt in Africa and wouldn’t want to risk a broad-based fiscal crisis. Therefore, the Zambian debt restructuring will be watched closely as it will set an example for many highly indebted African countries,” Tellimer said. Last week, Zambia cancelled US$1.6 billion worth of undisbursed loans from Chinese lenders out of a total US$2 billion from external creditors. It also suspended related projects as part of measures undertaken by Lusaka to stabilise the country’s macroeconomic situation and to comply with IMF conditions. Tim Zajontz, a research fellow at the Centre for International and Comparative Politics at Stellenbosch University, South Africa, said that non-disbursement of Chinese loans was not unique to Zambia but had become an increasingly common practice by Chinese lenders in debt-distressed countries.
Zajontz said Chinese banks had over the past few years adjusted their risk assessments in African markets, which had resulted in more restrictive lending practices in countries such as Ethiopia, Kenya and even Nigeria.
Zambia had accumulated an unsustainable debt burden in recent years, due in large part to excessive spending on infrastructure projects funded by China and other official creditors
In 2020, Zambia became the first African country to default during the pandemic when it failed to make payments on US$17 billion of external debt, including US$3 billion dollar-denominated bonds. Lusaka owes Chinese lenders about US$6 billion, which went into building mega projects including airports, highways and power dams.
Patrick Curran, senior economist at Tellimer Research, said Zambia’s decision to cancel US$2 billion worth of undisbursed project loans was an important signal of its intention to rein in excessive borrowing. The decision, he said, would help assure external creditors that the debt relief they offered would not be offset by fresh borrowing, and would help Zambia put its public debt on a sustainable path. “Other countries that are overburdened with debt may also consider postponing or cancelling non-priority projects to prevent an unsustainable debt spiral and refocus government spending on the items most likely to promote growth and alleviate poverty,” Curran said.
Agreeing to provide debt relief was a precondition set by the IMF before its board could provide the bailout. Still, Lusaka has to seek comparable relief from private creditors over the US$3 billion it owes Eurobond holders.
China is Zambia’s largest bilateral lender, and debt restructuring negotiations are heavily dependent on Beijing. A document released on Thursday by Zambia’s ministry of finance shows that as of December 2021, China controlled 74.6 per cent or US$6 billion of the country’s debt, which stood at US$7.95 billion. Besides China, the other non-Paris Club members include India, which is owed US$325 million by Zambia, and South Africa at US$262.9 million. Paris Club members, as of December 2021, had advanced 16.8 per cent of bilateral debt, with the largest lender in that category being Israel with US$457.7 million or 5.8 per cent, which went into financing military aircraft and equipment. Some undisbursed loans from Israel Discount Bank are planned for cancellation in the debt restructuring plan.
Other creditors include Britain, France, Switzerland, Sweden, Russia and Italy – but they control only a small fraction of Zambia’s debt.
China holds the biggest sway in the debt negotiations, and has invited private creditors for talks later this month, according to China’s ambassador to Zambia, Du Xiaohui. At a public discussion on Thursday, Du said that if the official creditors from China such as China Exim Bank agreed with the restructuring process, “then the private sector from China will follow comparable terms to deal the debt issue for Zambia”.
“There is an invitation from co-chair China to other private creditors to have a friendly conversation on the Zambian debt issue this month,” he said. Zambia had sought debt relief from the Group of 20 wealthiest nations and its top private creditors under the G20’s new Common Framework. The process allows creditors to jointly renegotiate its foreign debt, even though China usually prefers bilateral negotiations. Curran of Tellimer Research said a staff-level agreement on an IMF programme was reached in December, but the fund had been awaiting “financing assurances” from Zambia’s official creditors before granting board approval. In turn, this had prevented negotiations with Zambia’s private creditors from starting in earnest, Curran said.
“After months of delays, the provision of financing assurances by Zambia’s official creditor committee is a major milestone in Zambia’s restructuring and sets the stage for negotiations with Zambia’s private creditors,” he said. For Zambia, the focus now shifts to private bondholders, who will be asked to provide comparable relief in present-value terms.
“Bondholders surely hope to play a constructive role in the restructuring and will likely accept a deal that is seen as being sufficient to restore longer-term debt sustainability and shares the burden equitably across stakeholders,” Curran said.
However, Curran said there was a risk of further delays as bondholders had been made to wait on the sidelines and would need time to digest the IMF’s Debt Sustainability Analysis and associated relief offered by creditors.
“If the terms of the restructuring are not seen as restoring debt sustainability or are seen as overly punitive for bondholders … then bondholders could reject the terms of the restructuring and push for a voice in the process rather than being presented with the restructuring as a fait accompli,” Curran said.
Mark Bohlund, a senior credit research analyst at REDD Intelligence, said project cancellation was expected so should not create any problem in the relations with the creditors. However, he said that the timeline looked ambitious and that some private creditors were likely to object to the Debt Sustainability Analysis and proposed restructuring.
“I think a likely bone of contention is how to treat the domestic debt, especially the borrowing taken on in 2021 in the run-up to the August elections at very high yields and sometimes private placements rather than auctions,” Bohlund said.
Zajontz, who is also a lecturer in international relations at the University of Freiburg, Germany, said Zambia was “a test case for Beijing, which is currently experiencing a steep learning curve as the world’s largest bilateral creditor in multilateral debt negotiations”.
He said the dilemma Chinese lenders were facing was to comply with political directives from Beijing to maintain China’s image as a benevolent lender, while at the same time safeguarding their commercial interest in future repayments.
“The Chinese government wants to avoid being too closely associated with the IMF and its loan conditionalities, which are notoriously unpopular across Africa for historical reasons,” Zajontz said.
Nevertheless, he said there was keen interest in Beijing to avoid situations similar to the one in Zambia by easing debt pressures in Africa before the IMF – as the lender of last resort – needed to be called in. But, he added, “Beijing will have to come to terms with the fact that multilateral negotiations with governments, the IMF and other creditors are now an essential part of the country’s increasingly sensitive debt diplomacy in Africa.”