Zambia: IMF staff agreement puts heat on Chinese to improve transparency

By David Whitehouse
Posted on Wednesday, 5 January 2022 09:57

Zambian President Hakainde Hichilema in Washington DC, US on 27 September 2021. Twitter/@HHichilema

Agreement between Zambia and the IMF on an extended credit facility will put pressure on China to be more open about the terms of its loans, economists say.

Zambia reached a staff-level agreement with the IMF in early December. Approval of that agreement by the IMF’s executive board depends on a debt restructuring deal with creditors. Finance Minister Situmbeko Musokotwane said on December 21 that the government expects to conclude talks with creditors on debt restructuring by June.

Musokotwane’s timeline is “realistic”, but the balance of risks is tilted towards a longer time period, says Irmgard Erasmus, senior financial economist at Oxford Economics in Cape Town. The “asymmetric credit information framework” among creditors due to China’s confidentiality clauses in infrastructure-related loans is likely to be a challenge, she says.

Caesar Cheelo, associate executive director at the Southern African Institute for Policy and Research in Lusaka, is confident that challenge can be overcome. “It’s in China’s best interests to lift the veil and negotiate like other creditors,” he says.

  • Zambia has “rebuilt its international credibility” under President Hakainde Hichilema and won the confidence of the IMF and private creditors, Cheelo says.
  • So China needs to avoid the risk of being seen as the cause of a stalemate and further Zambian defaults, he argues.
  • Stalling the negotiation processes could also stall loan repayments to China. “I think China will negotiate with Zambia under the G20 framework.”

But US-based academic Deborah Brautigam points to a complication — the fact that there is no single Chinese actor. “With at least 18 Chinese lenders in Zambia, reaching consensus on burden-sharing under the G20/Paris Club Common Framework is likely to prove exceptionally difficult”, she writes in a paper entitled How Zambia and China Co-Created a Debt “Tragedy of the Commons”.

Copper Caution

The early signs are positive. The IMF staff-level agreement was welcomed by the Zambia External Bondholder Committee, which said the authorities have made “positive progress” and laid a “foundation for further economic recovery.”

The committee is made up of 16 international financial institutions in the US and Europe. It holds about 45% of Zambia’s outstanding eurobonds. The committee says that information on the macro-economic assumptions and projections underlying the agreement “will be required for bondholders to consider the terms of any debt relief.”

Zambia has made “rapid strides” towards restoring debt sustainability under Hichilema, Oxford Economics says. Steps include moves towards debt transparency and stronger public financial management. The Debt Management Operations Procedures Manual was released on December 16, giving information on the legal framework, responsibilities, and operations of state-owned enterprises.

Still, Zambia’s expensive domestic debt has continued to mount under the new president. The share of external debt in the public debt was 56.2% in the third quarter, down from an average of about 70% from 2016 to the first quarter of 2021. Much of the $6.4b in domestic debt drawn last year has been at interest rates of between 25% and 35%, says Mark Bohlund, senior analyst at REDD Intelligence in London. That will make it challenging to service as inflation falls, he adds.

There is also a danger that creditors could overplay their hand amid strong copper prices.

  • Fitch points to the fact that copper receipts have historically averaged only around 10%-15% of Zambia’s fiscal revenue.
  • So, despite the fact that Zambia is Africa’s second-largest producer of the metal, the impact of higher prices on its ability to pay is limited.
  • The most likely scenario is that the Zambian government and the IMF will work towards a “nominal haircut and/or coupon reductions,” as well as maturity extensions on bilateral and commercial debt, Bohlund says.
  • That is likely to be combined with steps such as coupon reductions on domestic debt, he adds.

Bottom Line

China has too much to lose if Chinese creditors are seen as an obstacle to Zambia’s debt restructuring.

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