Zambia’s official creditors led by China have agreed to provide debt relief to the South African nation, pave the way for an IMF bailout and set a precedent for how Beijing could work with other lenders to mitigate the threat. of a wave of defaults in emerging markets.
A committee of creditors, co-chaired by China and France, said on Saturday that they had “committed to negotiate terms with the Republic of Zambia on restructuring terms” as part of a G20 framework to coordinate debt relief.
Kristalina Georgieva, the director of the IMF, said she was “delighted” with the creditors’ commitment, which will release a $1.3 billion IMF loan to revitalize Zambia’s finances. Zambia has yet to negotiate the exact terms of the exemption and negotiate a similar deal with private creditors.
“The official creditors’ committee’s support for Zambia’s IMF-supported program, along with its commitment to negotiate the terms of debt restructuring, gives the IMF official funding guarantees,” Georgieva added.
The deal is an early sign that China is willing to coordinate with other official creditors in restructuring the debt of low-income countries, rather than tackling defaults on its own loans behind closed doors. Zambia has become a test case for countries that have also turned to Beijing for funding in recent years, such as Sri Lanka, which has already defaulted, and Pakistan.
Zambia became the first African country to default during the 2020 pandemic when it halted payments on $17 billion in external debt, including $3 billion in US dollar-denominated Eurobonds, after years of mounting indebtedness.
China has become the country’s largest creditor in the past decade, providing an estimated $6 billion in loans as Zambia embarked on ambitious infrastructure projects such as roads, dams and airports. These soured as the economy slowed.
The government of President Hakainde Hichilema voted last year to a landslide victory over Edgar Lungu, who presided over the worsening debt crisis.
But the Hichilema government had to wait for guarantees from official creditors before it could start the IMF program and work out in detail the terms of debt restructuring with both private and official creditors.
“We are confident that Zambia, together with our partners, will address the issue appropriately and with urgency to get the economy back on a sustainable growth path,” said Situmbeko Musokotwane, Zambia’s finance minister.
The Zambian Treasury Department detailed plans Friday to cancel an additional $2 billion in outstanding loans linked to projects – mainly affecting Chinese creditors.
Private creditors such as bondholders are expected to grant Zambia debt relief at least as great as what is offered by official lenders, under the so-called principle of comparability of treatment.
On Saturday, the official creditors’ committee urged other lenders to “commit without delay to negotiate with Zambia such debt treatments that are crucial to ensure the full effectiveness of debt management for Zambia within the common framework.”
“By opening negotiations with bilateral creditors, it shows that the Chinese are in agreement on the financial guarantees and are relatively comfortable with the IMF’s debt sustainability analysis and with the restructuring and the extent of any haircut,” said Kevin Daly, investment director at Abrdn and a member of a committee representing Zambia’s bondholders.
But he said bondholders were unhappy with the sequence of events in the common framework, under which commercial creditors would be told the extent of a restructuring, and the assumptions on which it is based, only after official creditors had reached an agreement. , the IMF and Zambia.
“We are still in the dark as creditors,” Daly said. “We’ve been saying all along that to speed things up, they should share [the IMF’s debt sustainability analysis] with us. Why such a veil of secrecy?”