Key Points: 

• In 2020, Zambia became the first African country to default on its sovereign debt during the Covid-19 pandemic.
• Around 30 per cent of Zambia’s total loans are owed to China, the same percentage as owed to the private sector via “Eurobonds”. 
• Zambia is viewed as a test case for a debt restructuring framework backed by the Group of 20 (G20) wealthy nations intended to streamline relief for countries caught in a developing world debt crisis.

In an exciting development in the global capital markets, Zambia has brokered a deal to restructure $6.3bn in debt owed to other governments, including China, marking a long-awaited breakthrough for indebted nations that have faced lengthy negotiations with creditors.

Zambia’s Hichilema was one of about 40 leaders attending a summit in France on Thursday and Friday aimed at easing the debt burden on some of the world’s most vulnerable countries while freeing up billions of dollars in new funds for climate finance.

According to AP News, the agreement covers loans from several countries, including France, the UK, South Africa, Israel, India, and China, which is Zambia’s largest creditor with $4.1 billion of the total debt. The International Monetary Fund (IMF) approved deal may serve as a model for China’s approach to restructuring agreements with other nations facing debt distress.

In 2020, Zambia became the first African country to default on its sovereign debt during the Covid-19 pandemic and has struggled in protracted discussions to agree on a deal since then. The debt conundrum has been affecting the people of Zambia, stifling economic development and inhibiting the country’s efforts to eradicate poverty. 

Finally, Zambia’s debt restructuring gets approved. 

Around 30 per cent of Zambia’s total loans are owed to China, the same percentage as owed to the private sector via “Eurobonds,” versus approximately 19 per cent owed to development banks – primarily the World Bank and African Development Bank. According to the China Africa Research Initiative, Zambia has used Chinese loans for more than 69 projects from 2000-2018, mainly in the transport and power sectors.

Zambia’s debt dialogue has been a subject of intense debate among the key lenders, especially how China was dragging its commitment to the restructuring. China (which is Zambia’s largest creditor) did not seem open to meeting with others as a full creditor committee, which was viewed as a problem, given China’s prominence as a lender to Zambia. 

It was only in 2022 that a significant breakthrough was finally achieved at the April IMF and World Bank meetings, where China, amidst public lobbying, agreed to join the committee. The latest development is a product of the 2022 meeting. It represents a glimmer of hope for fellow African countries languishing in the debt dungeon.  

The significance of the debt relief to Zambia’s economy. 

The agreement calls for Zambia’s debt to be rescheduled over more than 20 years with a three-year grace period during which only interest payments are due. China is the largest official creditor to Zambia. The debt earmarked for restructuring includes $1.3bn in arrears, and private sector creditors are expected to do the same on the $6.8bn owed to them.

Zambia is viewed as a test case for a debt restructuring framework backed by the Group of 20 (G20) wealthy nations intended to streamline relief for countries caught in a developing world debt crisis sparked in part by the pandemic. Since the process has been achingly slow for Zambia, a handful of other struggling governments were discouraged from seeking help under the mechanism.

The restructuring agreement with official creditors paves the way for Zambia to receive another $188m tranche of money from the International Monetary Fund, part of a $1.3bn package approved in August 2022.

“This agreement paves the way for the completion of the first review of Zambia’s three-year Extended Credit Facility Arrangement, which is helping put Zambia on a path towards sustainable economic growth and poverty reduction,” Kristalina Georgieva, MD of the International Monetary Fund, said in a written statement.

Of the $6.3bn in debt owed to government bodies, $4.1bn was explicitly owed to the Export-Import Bank of China — which according to analysts, underlined the significance of China’s support to the debt relief deal.

Will fellow developing African countries will benefit from debt relief?

Approximately one-third of African debt is owed to multilateral creditors, with the World Bank and the African Development Bank currently being the most prominent multilateral financiers. Low-income African countries such as Ethiopia (at least, countries that are not already in arrears to the World Bank or IMF) have been able to draw highly concessional loans from various Multilateral Development Bank Funds. For instance, loans for low-income countries from the IMF’s Extended Credit Facility have a zero-interest rate and a grace period of 5.5 years but mature in 10 years.

Other highly indebted countries like Zimbabwe will likely fail to unlock credit facilities due to their debt-defaulting reputation. Because of its World Bank arrears, Zimbabwe is currently ineligible to apply for debt relief under the Common Framework. They will only be eligible when they settle any outstanding debts to the World Bank and after achieving the requirements for international re-engagement, which include adherence to international human rights standards.

Sources: The Financial Times; The Diplomat