Cash-strapped Zambia takes on China as it seeks debt relief

After facing off powerful private creditors, the small African country of Zambia is now at loggerheads with Chinese lenders on the matter of deferring debt repayments which 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 being seen as a test case for other debt-burdened countries. 

Over the years, Zambia has accumulated around $11.9 billion in foreign debt, a third of it owed to Chinese creditors, most of whom are state-run entities. 

Last month, Zambia said 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 hedge funds based in the United Kingdom, have invested in these bonds. 

Zambia has obtained debt relief from the G20 member states under the debt service suspension initiative (DSSI), which spreads the 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 according to plan, Zambia will be let off having to pay $979 million in debt service payments, according to its finance ministry. 

But private creditors have dragged their feet on becoming part of the DSSI. They fear that the payments they forgo can 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 to around $200 million. The cash-strapped government of President Edgar Lungu wants this amount to be part of the relief programme as well. 

A country of 17 million people, Zambia is Africa's second largest copper producer. Its revenue relies heavily on the export economy. The country’s finances were under stress even before the pandemic led to the closure of the borders and hit the price of commodities. 

Copper export, which is the biggest foreign currency earner, has not been enough to make up for the US dollars needed to pay foreign creditors. 

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

Lusaka says up to 87 percent of its revenue can be used up in making interest payments, leaving little for hospitals and schools.

Zambia’s economy is expected to shrink by 4.2 percent compared to a growth of 3.2 percent forecast before the pandemic. Inflation could rise to a 14.3 percent compared to pre-pandemic estimate of 6 to 8 percent, says the government. 

A lesson for others

When the effects of the coronavirus on low-income countries became obvious, the wealthy nations that were part of the G20, announced debt waivers for this year. However, the private sector refused to participate in the initiative. 

It is of greater concern now because over the years, many indebted countries have come to rely on private lenders instead of government-to-government loans. 

Out of the total debt that African countries own, around 32 percent is owed to private investors - this comes to approximately $132 billion, according to one study done two years back. A decade ago, loans coming from private lenders were negligible.

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

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

But private creditors, backed by rating agencies, often use fear-mongering tactics to stop governments from withholding the interest payments. 

After Ecuador reached a deal in April with bondholders to delay $800 million in payments to fight the coronavirus, the S&P Global Ratings downgraded its sovereign credit ratings.

Compared to official loans, which are generally taken on concessional interest rates, the return on private bonds is higher.