Zambia: IMF support needed to avoid Argentina-style default

By David Whitehouse
Posted on Friday, 3 July 2020 13:34

UN General Assembly Zambia
Zambia's President Edgar Chagwa Lungu addresses the 74th session of the United Nations General Assembly, Wednesday, Sept. 25, 2019. (AP Photo/Richard Drew)

An International Monetary Fund support program for Zambia is urgently needed as such an agreement would show that the government is serious about economic reform, a representative of the country’s creditors tells The Africa Report.

The government should engage with civil society to help it develop a reform programme, says Rafael Molina, managing partner at Newstate Partners in London. The committee represents pension and mutual fund creditors to Zambia. It represents about 65% of the holders of three eurobonds which are worth about $3bn. Molina declined to say who the creditors are.

Zambia is Africa’s second-largest producer of copper, the price of which is sensitive to the prospect of prolonged global recession.

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Its currency, the kwacha, has plummeted with copper, and the ratings agency Fitch said in April that a Zambian default is probable.

  • The country has asked Paris Club creditors to let it suspend principal and interest payments until the end of the year.
  • The IMF concluded a virtual consultative mission on Zambia on 1 July.

There is a danger, Molina says, in creditors not understanding what the government is trying to say. The creditors’ steering committee may make recommendations to the creditors, but has no powers of enforcement. The aim of the committee is to prevent fragmentation among creditors, coordinate their response and give the government a single point of contact.

The government’s task is harder due to COVID-19, says Molina. Remittances, trade, tourism and foreign currency flows have all collapsed. The economy has therefore entered uncharted territory, he says.  Zambia is one of 15 African countries with a score of less than one on the Fiscal Space index used by NKC African Economics in South Africa. That suggests a high risk of debt distress. At best, “capital spending is expected to be severely constrained over the next few years”.


Zambia’s government, which is being advised by Lazard Frères, could take a conciliatory approach, or something different, says Molina. It’s too early to tell which approach they will choose, he says.

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Molina points to Argentina’s long history of defaults as a scenario that needs to be avoided.  Argentina’s defaults have often been the result of a lack of negotiations and unilateral government decisions, he explains.  The result has been a massive waste of government time in litigation.

Molina’s personal view as an economist is that the Zambian case will have implications for Africa’s borrowing costs. “There is a sustainability issue,” he says. “Every stakeholder has to make a contribution.”

It won’t be possible to ask holders of commercial debt to take a hit if China is not sharing the pain, adds Molina.  His creditor group “can’t do all the heavy lifting. China will have to decide which loans are viable.”

China may not be in a strong enough position to help take the strain.

  • The amount that Zambia owes is not financially important to Beijing.
  • But a signal on debt relief to Zambia would open the doors to a flood of demands from Chinese allies in Africa and Asia which would be impossible to accommodate.
  • That means debt for equity swaps may turn out to be part of the solution.

Bottom Line

Default is a worst-case scenario for Zambia and Africa which needs to be avoided through negotiation.

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