African debt: China to ‘co-chair’ debt restructuring talks with Zambia

During the latest IMF/World Bank Spring meetings in April this year, People’s Bank of China governor Yi Gang announced that the country was willing to join the IMF’s Common Framework to help restructure Zambia’s debt by June this year.

Sources within the Zambian Treasury who attended the Spring Meetings said that Yi had indicated that China plans to co-chair the committee to have more influence on proceedings. They also said that Western lenders did not publicly state any opposition to China’s request.

The announcement may also bring Zambia’s infrastructure development back online, which has been largely put on hold following debt repayments delays and a default in November 2020, following the outbreak of the global pandemic.

In 2019, the Export-Import Bank of China and the Industrial and Commercial Bank of China Limited froze funding to 750MW Kafue Gorge Lower Hydro Power Project (KGL), putting further delay on the completion of the flagship project, which planned to turn Zambia into a net power exporter.

The project was initially planned for completion in December 2020 but a combination of the outbreak of the Covid-19 and financing challenges delayed the project, which is estimated to cost $2.3bn.

First major hydropower station

The power project is expected to be the first major hydropower station to be constructed in Zambia in nearly 50 years despite water-generated electricity being the backbone of the country’s power infrastructure.

KGL is a jointly owned special purpose vehicle by Zambia’s state power utility ZESCO and China’s Sinohydro. Chinese Sinohydro is responsible for all construction works.

While ZESCO’s obligations are guaranteed by the Zambian Treasury, without clarity on the debt restructuring programme, coupled with concerns about both Zambia and ZESCO’s heavy indebtedness, Sinohydro became unwilling to handover the project in full to Zambia by 2021 as both EximBank and ICBC requested “greater security” around payments owed to them.

But the successful restructuring of Zambia’s debt, under the latest IMF programme, along with China’s commitment to the plan, is expected to put start development of the KGL again. Completion for the project now set for December this year.

The debt restructure may also unlock funding for infrastructure projects, which have been put on hold due to funding issues in number road projects across the country, especially in the Northern part of Zambia, as well as bolster ongoing efforts to strengthen the fiscus.

IMF credit facility

In December 2021, the International Monetary Fund (IMF) and Zambia reached a staff-level agreement on a $1.4bn, three-year extended credit facility, which was expected to bring the heavily indebted country one step closer to a comprehensive debt overhaul by June this year.

The country’s debt burden is approximately 131% of the GDP and considered unsustainable after years of chronic borrowing by the former ruling Patriotic Front government. Added pressure due to the collapse of the local currency threw the country’s economy into disarray.

Chinese lenders account for about 33% of the country’s foreign debt portfolio, estimated at around $14bn. Approximately $3bn is held in international bonds.  Zambia’s debt is held by approximately 44 international creditors with diverse interests.

The staff-level agreement is subject to IMF management and executive board approval and requires commitment from key lenders to restructure Zambia’s debt through the Common Framework agreed in 2020 by China, other G20 members and the Paris Club.

But while the G20 and the Paris Club have shown willingness to help restructure the country’s external debt, China, had, until recently, been reluctant to commit to the Common Framework.

Zambia had defaulted on some obligations to Chinese lenders in recent years, but had remained largely consistent on servicing almost all dollar debt until October 2020. Zambia became Africa’s first pandemic-era sovereign defaulter in November 2020, however.

To illustrate resolve around fiscal consolidation, and to get backing for the debt facility, Zambia’s government has introduced a number of unpopular policies – such as selling fuel closer to market prices and proposing to increase electricity tariffs by state power ZESCO. Nevertheless, this was not enough to get China on board at the time, putting a potential agreement for June in jeopardy.

With renewed talks at the Spring Meetings, however, and with China on side, the June deadline may now be achievable once more.

Weak relationship

The election of Hakainde Hichilema in August 2021 also sent signals of a weakened relationship between Zambia and China. Hichilema, who is UK-educated, is seen to be closer to the West than to China – a move that publicly signalled a sharp shift in Zambia’s traditional economic and political engagement – may have also delayed Chinese involvement in restructuring plans.

“They have accused that ‘you’ve ignored China; you’re ill-treating China…we’re working, and I am proud to announce that we have engaged China and other creditors to negotiate a debt restructuring resolution. I myself as President engaged China and we want to thank you China for joining the Common Framework to resolve the debt crisis,” said Hichilema during a press briefing on 25 April 2022.

“We ask for your support to conclude the debt restructuring by June, God willing. All work is done and we should be talking about specific numbers,” he said.