Cash-strapped Zambia clashes with China as it seeks debt relief

The African country is struggling to convince lenders that it cannot pay its debt, preferring to divert money to save lives at home.

After battling powerful private creditors, the small African country of Zambia is now the loggerheads with Chinese lenders over the issue of postponing debt repayments that have crippled its economy.

Zambia is in the midst of a debt crisis exacerbated by the onslaught of the coronavirus pandemic. Its attempt to negotiate a debt repayment plan with lenders is seen as a test for other indebted countries.

Over the years, Zambia has racked up around $11.9 billion in external debt, a third of which is with Chinese creditors, most of whom are state-owned entities.

Last month, Zambia noted it was suspending interest payments on foreign bonds, also known as eurobonds, as it diverted resources to deal with Covid-19, which has infected more than 15,000 people and killed 345.

Private creditors, such as UK-based hedge funds, have invested in these bonds.

Zambia has secured debt relief from G20 member states under the Debt Service Suspension Initiative (DSSI), which spreads interest payments over four years.

In 2020 alone, Zambia has to pay hundreds of millions of dollars in interest payments to various creditors. If the debt negotiations go as planned, Zambia will be exempted from paying $979 million in debt service payments, according to to his Ministry of Finance.

But private creditors are slow to join the DSSI. They fear that the payments they forgo will end up going to Chinese creditors, who have still not agreed to the debt relief plan.

Chinese creditors have shown a willingness to help only if Zambia agrees to pay past interest payments, which come at about 200 million dollars. The cash-strapped government of President Edgar Lungu wants the amount to also be part of the relief package.

A country of 17 million inhabitants, Zambia is Africa’s second largest copper producer. Its income is highly dependent on the export economy. The country’s finances were under pressure even before the pandemic led to border closures and hit commodity prices.

The export of copper, which is the main source of foreign currency, has not been sufficient to offset the US dollars needed to pay foreign creditors.

Zambia’s currency, the kwancha, depreciated last year, making debt repayments expensive – more local currency was needed to buy US dollars.

Lusaka says up to 87% of its income can be used to pay interest, leaving little for hospitals and schools.

Zambia’s economy is expected to contract by 4.2% compared to 3.2% growth forecast before the pandemic. Inflation could reach 14.3% compared to the pre-pandemic estimate of 6 to 8%, according to the government.

A lesson for others

When the effects of the coronavirus on low-income countries became evident, rich countries that were part of the G20 announced debt write-offs for this year. However, the private sector refused to participate in the initiative.

This is all the more worrying now that over the years many indebted countries have come to rely on private lenders instead of government-to-government loans.

Of the total debt held by African countries, about 32% is owed to private investors – that’s about $132 billion, according to a study carried out two years ago. Ten years ago, loans from private lenders were negligible.

Lobby groups calling for debt relief, such as the Jubilee Debt Campaign UK, have long suggested that low-income countries stop paying creditors, including those in the private sector.

Argentina recently negotiated a deferral plan $65 billion of its debt.

But private creditors, supported by rating agencies, often use scare tactics to prevent governments from withholding interest payments.

After Ecuador reached an agreement in April with bondholders to delay $800 million in payments to fight the coronavirus, the S&P Global Ratings demoted its sovereign ratings.

Compared to official loans, which are generally subscribed at concessional interest rates, the yield of private bonds is higher.

Source: World TRT

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