Zambia Reaches Landmark Debt Restructuring Deal with China

The Lede: China and other government creditors have agreed to restructure loans to debt-ridden Zambia at a recent global finance summit in Paris.

What We Know:

The Zambian government reached a landmark debt restructuring deal in Paris under the Group of 20’s Common Framework mechanism. The group convened traditional creditors of the Paris Club and newer lenders, most notably China, to negotiate debt relief. The deal involves $6.3 billion in loans, $4.1 billion of which is owed to China. The rest is owed to France, Britain, South Africa, Israel, and India.
The new debt deal will see Zambia paying interest rates of as low as 1 percent and not exceeding 2.5 percent until 2037. Creditors will also be extending the maturities on the $6.3 billion in bilateral debt to 2043. This comprises an average extension of more than 12 years. No debt writedowns are included in the deal. A loan for the Kafue Gorge Lower hydropower plant will be part of the restructuring.
Moving forward, the debt will be reorganized over 20 years with a three-year grace period. Approval by the International Monetary Fund means that Zambia will be able to receive more financing. Zambia is also looking for the same model for its $6.8 billion in loans from private creditors.

The Background: Zambia’s debt has hampered its economic development. Estimates placed Zambia’s average Chinese bilateral loan payments at an average of 3.9% previously. In November 2020, Zambia became the first sovereign debt defaulter in Africa with the onset of the COVID-19 pandemic when it failed to make a $42.5 million bond payment. This deal is the second under the Group of 20 Common Framework after a deal last year with Chad. Among other topics, the summit in Paris highlights lending practices to vulnerable countries and the role of the IMF and World Bank.

Likely Outcomes:

Given that Zambia’s deal did not include any writedowns, China likely welcomes the extension of the debt repayments given Beijing’s long time horizons. They also represent no significant change to the value of the loans as they stand. China’s influence on Zambia, and its many other debtor countries, may have a lasting effect due to the protraction of debt.
The debt relief may give hope to other countries for similar treatment, which may make borrowing enticing for leaders of developing countries. It may also have the opposite effect and deter potential borrowers from taking loans from China, developed countries, and international institutions like the IMF and World Bank because Zambia did not manage to get a debt writedown.
For Zambia, it remains to be seen whether the government will practice fiscal responsibility or drive the country further into debt with the resumption of loans from creditors returning to the country.

Quotables:

“Now we must drive forward to find a resolution with our private creditors, so we can focus on revitalising our economy and building a brighter future for all Zambians. Resolving our debt overhang will help attract investment which will create jobs and improve livelihoods.” – Hakainde Hichilema, President of Zambia

“During my trip to Zambia earlier this year, I saw firsthand how the weight of default and a stalled debt restructuring process can bring suffering to ordinary families and hold back economic growth. Debt relief for Zambia has been a top priority for me and has been something I have pushed for urgently both in public and in private with creditors. I am pleased that the international community has come together to support Zambia in its time of need. I urge all official bilateral and private sector creditors to quickly finalize the debt restructuring process that will provide relief to Zambian families and encourage the private investment that is needed to jump start the economy.” – Janet Yellen, U.S. Treasury Secretary

“This will be a relief for Zambia, making public finances for now more manageable. But the debts remain on the books, so China retains for accounting purposes the full value of the loans plus interest. There has been no ‘haircut.’ [The] deal is very welcome to Zambia but it is China who got what it wanted.” – Stephen Chan, professor of world politics and international relations at the School of Oriental and African Studies of the University of London

Good Reads:

Zambia has struck a debt deal with China and other major creditors. How will it work? (SCMP)

Zambia to Pay 1% Interest After ‘Mission Impossible’ Debt Deal (Yahoo Finance)

Statement by Secretary of the Treasury Janet L. Yellen on Zambia’s Debt Restructuring Announcement (Treasury.gov)