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November 13, 2020


ZAMBIA: Point of no return

BY Anne Frühauf

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Finance Minister Bwalya Ng’andu confirmed today, 13 November, that Zambia would “have no other alternative but to accumulate arrears” on its 2024 Eurobond, where the grace period on a USD 42.5mn coupon payment expires today. Zambia’s slide into official default became all but inevitable after bondholders rejected Zambia’s request for a six-month payment holiday earlier in the day. This means Zambia is in for a painful, protracted debt crisis and restructuring process, which will be all the more difficult to resolve because of President Edgar Lungu’s single-minded political priorities. As explained previously, progress will be undermined by concerns over transparency; equal treatment for all lenders; election-related spending; and the government’s inability to clinch a deal with the International Monetary Fund (IMF).

Zambia’s narrative around the payment holiday request had been that it would use the six-month payment holiday to work on a restructuring plan with its advisors, Lazard Freres, and on debt sustainability with the IMF. With this effort dead in the water, the going will get truly tough. That Zambia will now officially default on its Eurobond debt – somewhat disingenuously citing pari passu treatment of all creditors – makes it virtually certain that it will default on other upcoming Eurobond payments and probably many other types of loans.

Zambia’s only official debt relief comes from the G20 Debt Service Suspension Initiative (DSSI) – which will now offer bilateral debt relief until June 2021 (and likely the full year). The treatment of Zambian debt to Chinese institutions will be one of the biggest questions amid concerns that China could pressure low-income countries like Zambia into servicing Chinese-held debt ahead of other creditors. The Finance Ministry announced on 28 October that it had reached a restructuring agreement covering at least part of the country’s loans from the China Development Bank (CDB), whichZambia owes about USD 391mn. However, Zambian loans to the CDB only account for about 6% of all loans from China, according to the China Africa Research Initiative, with the vast majority owed to China’s Eximbank and other lenders.

Other than transparency concerns, one of the biggest obstacles to resolving Zambia’s debt crisis is Lungu’s single-minded focus on winning re-election in 2021. Despite successive luckless finance ministers trying to trim spending and new debt, signs of further fiscal profligacy are already evident, particularly around the Farmer Input Support Program, which cannot be seen as anything other than an attempt to secure rural votes for Lungu.

These political realities render it uncertain whether a hard default – together with growing concerns over Zambia being the first debt domino to fall in an increasingly indebted region – could expedite efforts to resolve the debt crisis. Ng’andu will continue to talk up the government’s IMF efforts but the outlook is anything but reassuring given serious concerns over transparency, election-related spending, and the growing risk of government interference with monetary policy. An IMF deal remains highly uncertain, and it is unclear whether the proposed G20 Common Framework for debt relief, to be discussed at the G20 meetings on 20-21 November, would offer a blueprint that could help to broker a speedy solution for Zambia’s crisis.

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