June 16th 2022 • Zambia • Finance & Services
Zambian officials met with an official committee of the country’s international creditors for the first time on Thursday as Lusaka seeks to negotiate a deal to restructure its unsustainable debt load and unlock IMF funding.
The official creditor committee consists of members of the Paris Club, an informal group of creditor countries which meets monthly in the French capital to seek solutions when debtor countries have payment problems, and China. The Zambian officials joined the meeting in Paris by video link.
In 2020, Zambia suffered the first pandemic-era sovereign default. At the end of 2021 it had external debt of $17.27bn, according to government data. Approximately $6.6bn of that was held by 18 official and commercial Chinese financiers.
In December, Zambia reached a staff-level deal with the IMF for a $1.4bn three-year extended credit facility. But for the bailout package to move forward, Zambia needs assurance from creditors that its debt can be restructured.
Following meetings in Lusaka with President Hakainde Hichilema and finance minister Situmbeko Musokotwane on Wednesday, deputy managing director of the IMF Antoinette Sayeh stressed the need to reach a deal on Zambia’s debt crisis and called on all creditors to quickly find an arrangement.
“We urge creditors to provide financing assurances as soon as possible, as they are needed before staff can put forward Zambia’s program for consideration by the IMF Executive Board. This will allow Zambia to access Fund resources, and also unlock access to critical financing from other partners, to help boost its economic recovery,” said Sayeh.
Hopes of reaching a deal
Claims that that China was holding up Zambia’s debt relief because of lack of experience with tricky debt restructurings and slow coordination among its public lenders have made Chinese creditors keen not to be seen as the impediment to a potential debt deal.
“There’s an emerging consensus that some kind of deal will be reached. The Chinese are very concerned about the optics of what happens in Zambia,” says Eric Olander, editor in chief of The China-Global South Project website.
“China and other bilateral creditors do not want to be seen as the impediment to the IMF bailout,” Olander argues.
At this first meeting, Zambia will present its case for debt relief, but discussions are unlikely to be concluded before Zambia’s target date of the end of June.
“These are not going to be easy discussions,” says Olander. “The Chinese coalition alone is made up of at least a dozen different creditors so just getting them to agree with one another is not going to be easy, much less with the multilaterals, bondholders, and other bilateral lenders.”
Zambia’s long road to debt relief
President Hichilema has come a long way in mending fences with the IMF after the rocky relations experienced under his predecessor, Edgar Lungu.
Following Zambia’s sovereign default, the G20 feared a “debt tsunami” could engulf the continent’s most heavily indebted nations, so along with the Paris Club it set up a “common framework” designed to help more than 70 countries face the fallout from the pandemic with debt relief and restructuring.
However, the Paris Club needed the cooperation of China, which is not a member, given the high proportion of Zambia’s debt held by Chinese lenders, and in early May it was announced that China would co-chair the official creditor committee with France.
The Paris talks will determine whether Chinese and international lenders can work side by side to set up a concrete debt revamp plan, which could also pave the way for debt-restructuring talks between Chinese institutions and other indebted countries.
Will China’s presence be an advantage for Zambia?
Different creditors will be looking for different things in the meeting,” Hannah Ryder, CEO of China-based African consultancy Development Reimagined, tells African Business.
“Paris Club lenders will be interested in Zambia’s presentation of the IMF’s debt sustainability assessment, and therefore Zambia’s plans for cutting spending – for example via cutting subsidies or increasing privatisation, which are typical IMF policy prescriptions.
“Chinese lenders, on the other hand, will be looking to Zambia to outline its plans for growth – because many of the projects that China has lent to require a buoyant, growing economy to deliver a return or even provide tax revenue to recycle into debt repayments.”
Having China in the room when Zambia presents its case may therefore help the country to counter demands to cut its spending, says Ryder.
She argues that more spending rather than less, allowing the economy to grow, could be Zambia’s best response to its debt challenges – an approach that would be similar to the one high-income countries took in the face of Covid-19, but not one likely to win favour from the IMF.
It is unclear whether the Zambian government takes this kind of economic perspective, but this will be the key question for analysts to review coming out of this meeting, she says.
Unless Zambia has a clear plan for reviving its economy, taking account the risks of interest rates rising and a risk-ridden and uncertain global economy, it’s very unclear if any bailout today will really help in the medium-term. It’s all about the quality of how Zambia spends now – and if that spending is not growth enabling, I am not convinced of significant progress.”
Can Hichilema’s reforms succeed?
On the question of whether Hichilema’s reforms merit seeing him as a rising star for reform and democracy on the continent, Ryder remains unconvinced.
Zambia – like many African countries – has a very challenging history of colonialism and dependency that make it hard to unlock its own endogenous development, and there are many forces in and outside of Zambia that will make this kind of reform hard to pursue, she concludes.
Source: African Business