Zambia’s debt crisis is not easy to solve

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Debt restructuring deals are never easy to negotiate. But in Zambia’s case, the excitement that accompanied President Hakainde Hichilema’s electoral victory in August 2021 came with confidence that the country’s economic woes would soon be behind it.

The kwacha surged to become the best-performing currency in sub-Saharan Africa in 2022, and mining firms tentatively re-engaged, having distanced themselves from the Edgar Lungu administration, from 2015 to 2021.

The International Monetary Fund even disbursed $1.3 billion in special drawing rights and opened an office in the capital Lusaka. This is after repeatedly denying support to the previous administration — even during the coronavirus pandemic, when almost all low-income countries received debt relief.

But now it has been more than two years since the Zambian government defaulted on its debt repayments. And only in recent weeks have murmurings that creditors will agree to make a deal carried weight — which, it should be emphasised, is different from an actual deal. That may only materialise in the second half of this year.

In early 2021, Zambia agreed to be a guinea pig for a new approach to tackle sovereign debt — the G20 Common Framework for Debt Treatment, introduced at the end of 2020. 

The framework, in coordinating responses to sovereign debt problems, seeks to bring together members of the Paris Club — a group of established donor governments and Brazil, its only emerging-market member — with creditors outside of it. 

This includes governments like China, Kuwait, Turkey and Saudi Arabia, which have increased their lending to low-income countries, and private creditors, which often make up a significant portion of loans provided.

The plan is for the framework to be followed by an IMF-supported reform programme. 

Countries that have defaulted are at high risk of doing so again, with restructuring deals providing only short-term relief and failing to consider how a country will recover to later service that same debt. IMF programmes help, so the logic goes, because not only do they provide emergency funding, but encourage responsible spending.

It’s a nice idea, but getting private creditors to participate is tricky, because they lack the inclination to negotiate under the same terms as bilateral lenders. Typically, repayment of government loans can be deferred without too much fuss, but private creditors prefer to recoup their loans sooner, even at a loss (known as a haircut). 

Unfortunately, the framework lacks a mechanism to force reluctant parties to the table.

And this is the problem Zambia is facing. A chunk of its debt is owed to private creditors, and not all parties will cooperate. Without a deal, it cannot unlock the promised IMF-support reform programme of $1.4 billion. It also cannot untangle itself from the framework.

Given that most of Zambia’s private creditors are Chinese, a way out is for China to assume responsibility for their loans and then to negotiate those alongside its own debt with bilateral creditors. This is likely what the IMF is putting pressure on China to do.

It is easy to criticise Hichilema’s handling of the debt crisis. In fairness, he is dealing with a problem he did not create. His pivot towards the US may seem odd at this juncture, but his administration maintains positive relations with China. 

It received Chinese telecommunications giant Huawei at State House in March, and a Chinese consortium will spend $650 million to upgrade a road.

Meanwhile, participating in the framework was not his doing. And while austerity measures mean less government support for struggling Zambians, it is the quickest way to clinch further IMF support, itself the quickest way to relieve cash flow problems.

This article first appeared in The Continent, the pan-African weekly newspaper produced in partnership with the Mail & Guardian. It’s designed to be read and shared on WhatsApp. Download your free copy here.