With the support of the IMF and the World Bank, Zambia managed to lead successful negotiations with key lenders, including private creditors. But slow progress on debt restructuring is sparking concern in Lusaka that the situation could spiral out of control and undo recent economic gains.
According to official statistics, Zambia’s external debt arrears grew by 42.1% to $3.8bn by end September 2022, from $2.67bn last June. The principal arrears are estimated at $2.8m while interest arrears are $990.55m.
Treasury officials report that the increase in the external debt arrears between June and September 2022 is “driven by the on-going debt service standstill on non-multilateral debt.”
IMF programme gets ball rolling
Zambia, Africa’s second top copper producer has not been servicing or paying most of its external debt after it became the first African sovereign default in 2020 and its subsequent entry into to the debt service suspension initiative.
Since 2016, Zambia has been battling to rein in its huge external debt to restore macroeconomic stability and provide opportunities for growth and increase its social spending.
After winning IMF board approval last September for a 38-month $1.4bn programme – seen as a key step in the country’s quest to restructure its debts and rebuild an economy battered by mismanagement – Zambia was expected to leverage the opportunity to restructure its over $14.8bn foreign debt.
Zambia employed a dual process: meeting the official creditor committee while in parallel engaging private creditors. Both tracks were boosted by a backdrop of financing assurances in support of the IMF programme.
While the official creditors have agreed to provide support to Zambia’s debt restructuring effort, the “bigger obstacle”, according to Finance Ministry staff remains the agreement on debt treatment, in essence, the size of the write-down creditors will take, and the signing of a Memorandum of Understanding (MoU).
Neither have been achieved by year end as planned.
I am not sure whether China or the other [bondholders] would accept to take 49 cents for every $1 they leant to Zambia – we shall wait and see.
According to the IMF’s Debt Sustainability Analysis (DSA), the country needs $8.4bn of debt relief from 2022 to 2025 under a new restructuring framework backed by the Group of 20 major economies.
Zambia, according to DSA, also needs additional debt relief over 2026 to 2031 to bring down the risk of debt distress to “moderate” over the medium term. This will help future fundraising.
To achieve debt sustainable levels, Zambia wants to reduce its external debt level to about 48% of the present value, plus put an immediate freeze on interest accumulation, to cap the total debt stock from growing.
China remains the biggest bilateral lender to Zambia while several Western lenders such as JP Morgan, Abrdn, Amundi, and BlackRock among others hold significant stakes in the country’s $3bn in Eurobonds.
“I am not sure whether China or the other [bondholders] would accept to take 49 cents for every $1 they leant to Zambia – we shall wait and see,” says a source close to the negotiations.
“When the Chinese say they ‘are seeking more clarity’ on the IMF supported restructuring of Zambia’s debt, it is those numbers they are referring to,” the source adds.
Will delay reverse gains?
While creditors edge towards agreement on Zambia’s debt, there are fears delay will push the country into further distress and reverse economic gains of the last one year.
As part of the economic reforms of the last 15 months under President Hakainde Hichilema’s United Party for National Development (UPND), progress has been made.
Zambia has returned to growth after recession, reined in inflation and stabilised the foreign exchange market. Domestic lending rates are also declining.
Restoring economic normality has come with its own consequences. The removal of energy subsidies at the time of global increase in oil prices is putting pressure on the local economy. Reduced spending has deprived Zambians of disposable income, hurting households.
Zambia’s debt overhang is disturbing our macroeconomic environment.
World Bank president David Malpass, in a statement on 21 December, said he remains “deeply concerned by the slow pace of the creditors’ committee and the impact of the delays on growth and poverty.”
The World Bank has this year made concessional disbursements to Zambia of about $740m to provide strong support to the country to reduce the fiscal deficit and implement difficult reforms as delay to agree on debt restructuring delays.
READ MORE Lessons from Zambia’s debt restructuring
Zambia’s reformist President Hakainde Hichilema fears prolonged delays to debt restructuring under the G20’s Common Framework is posing fresh challenges as its debt burden continues to rise, with interest arrears, late interest charges, and penalty charges accumulating.
“Zambia’s debt overhang is disturbing our macroeconomic environment,” Hichilema told journalists in Lusaka on 20 December.
“We need to freeze interest because this debt is not being serviced but interest is accumulating and it is going beyond the numbers. To our creditors, we say thank you for your support to give us relief for a while (but) let’s close the MoU contents and hopefully we can conclude by the end of March next year – that’s our target.”
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