Why Zambia’s Debt Restructuring Deal is delayed: Here is how to fast track it.

 

By Mwansa Chalwe Snr

Zambia’s economic recovery program is based on an IMF deal and the restructuring of the country’s $17.3 billion debt. There is no question that Zambia’s debt restructuring talks are not going on as well as was expected. The deal has been delayed, and the target of 2022 year end for the signing of the non-legally binding Memorandum of Understanding (MOU) between Zambia and the Official Creditor Committee (OCC) members, has been missed. And already, the delay is affecting the country’s currency. The Kwacha has been depreciating against the dollar almost every day for two months now. And it is at its weakest in nearly a year as talks drag on with no end in sight.

There is already some finger pointing between the West and China. Their rivalry is on public display, which is not beneficial to Zambia at all. Both the US Secretary of Treasury and the World Bank President have blamed China for the delay in the talks.

 

During her recent visit to Zambia, the US Treasury Secretary Janet Yellen urged Zambia’s creditors to work quickly to restructure the country’s debts, and accused China of obstructing the deal.

“It’s critically important to address it right away,” Yellen told the Press in Lusaka. “It’s taken far too long already to resolve this matter. I am encouraged that progress may become possible shortly. I know that the Chinese have been a barrier to concluding the negotiations.”

The Head of the World Bank, David Malpass, was in agreement with Janet Yellen. He also accused China of delaying Zambia’s restructuring, and asked them to stop making unfeasible demands.

“China is asking lots of questions in the Creditors’ Committees, and that causes delays, that strings out the process,” He said in an interview with Bloomberg News. “It’s important for them to be focused on getting to an actual debt restructuring where the burden can be lightened for Zambia.”

The Chinese Embassy in Lusaka, Zambia, on the other hand, has accused Washington of meddling in the restructuring talks of a Sovereign State and in the process risking the success of the talks.

“The biggest contribution that the U.S. can make to the debt issues outside the country is to act on responsible monetary policies, cope with its own debt problem, and stop sabotaging other sovereign countries’ active efforts to solve their debt issues ,” The Embassy Statement said. “For Zambia’s debt related to China, China has been active in co-chairing Zambia’s Official Creditor’s Committee under the G20 Common Framework and working hard with other parties to seek a sustainable solution in line with the principle of common actions and fair burden-sharing. China’s efforts have made some positive progress. We look forward to U.S.’s constructive role in the process.”

The reality on the ground is that Zambia’s debt restructuring talks with creditors are very complex. In order to understand why there are delays, one requires some knowledge of the variables at play.

WHAT ZAMBIA DEBT RESTRUCTURING ENTAILS

The Covid -19 pandemic increased the risks of emerging economies defaulting on their debt, and so the G20 devised the “Common Framework for Debt Treatment” in 2020 which included China so that it could participate in international debt-relief negotiations. Zambia was the first country to apply for the Common Framework Program in February, 2021.And after clinching $1.3billion deal with IMF in December, 2021, the IMF asked bilateral and private lenders of Zambia to restructure its debt.

In simple terms, as part of the debt restructuring process, Zambia is asking bi-lateral and commercial lenders to consider the following: cancel US$8.4 billion between 2022 and 2025 as per IMF recommendation, extend repayment periods, get rid of penalties on arrears and reduce in interest.

WHY IS ZAMBIA’S DEBT RESTRUCTRURING DEAL DELAYED?

Zambia’s first Official Creditors Committee (OCC) meeting was in June, 2022 with China and France as Co-Chairs, but progress of the talks since then, has been very slow, and the end of year (2022) target for signing an MOU was missed.

The number one factor which has contributed to the delay of the deal, is that Zambia borrowed from a multiplicity of lenders which makes the deal complex and difficult to come to some agreement. The portfolio of lenders according to the Ministry of finance include the following: official bilateral creditors (15 percent), multilateral (11.5 percent), Eurobond investors (11.7 percent), non-bonded commercial lenders (11.4 percent) and Chinese commercial and state-owned lenders (about 30%). In the 5 years from 2012 to 2016, Zambia contracted 72 loans worth $9.6 billion, with $3 billion Euro-bonds. The others were with the World Bank, Africa Development Bank, Banks in India, South Africa, the Arab World, Bank of China, Chinese Exim bank, Chinese development bank.

The second factor is that China is new to international debt restructuring, and so it has been on a learning curve, whereas the Paris Club of Official bilateral creditors has taken years to develop their debt relief processes. Zambia’s debt restructuring negotiations have challenged the Chinese lending model. China is not in the habit of cancelling concession or commercial loans but prefers lengthening repayment periods and varying interest rates but the G20 Common Framework demands haircuts.

The third factor for the delay is the fact that Zambia’s debt restructuring negotiations have far reaching implications for the many players involved, and to be affected. Zambia is the first applicant to the Common Framework, which means that it could be used as a template for future debt restructuring. The consequences of whatever comes out of the Zambia restructuring talks, makes it bigger than just a single country deal. China in particular, is concerned that after lending an estimated hundreds of billions to African countries – $125 Billion between 2006 to 2016- in the last two decades, she does not want to set a precedent where it will face numerous demands to cancel debts.

There is another important factor that is being underplayed in the debate and analysis of the reasons for the delay in concluding the deal. The delay in the negotiations is mainly influenced by the stealth economic and diplomatic “war” that is going on between China and the West, which this Author wrote about two years ago. It is only the naïve, who don’t understand 21^st Century geo-politics, who can think that China’s current behaviour at the OCC restructuring talks is not influenced by Zambia’s perceived change of foreign policy. The overarching reason for the delay of the deal, is the geo-political and economic rivalry between the West and China, with China flexing its muscles to delay.

As for the nature of the deal, what has clearly come out from observing the restructuring talks from a distance, is that, the deal that is likely to emerge is not what the IMF, World Bank and the Parish Club originally envisaged, nor what Zambia and the public expected. The expectation was a deal on similar lines like the 2000s Highly Indebted Poor Countries (HIPC) and the Multilateral Debt Relief (MDR) programmes from which Zambia benefited. It is very apparent from the available information that China has had its way in the Zambian restructuring talks with other OCC members. China has always insisted on bilateral negotiations with debtor countries instead of participating in multilateral restructuring efforts. Zambia will, therefore, have to bilaterally negotiate with China for any binding restructuring deal, rather than the one imposed by the Bretton Woods institutions and the Paris Club. The current talks will not result in any binding agreement. The process that has been agreed upon in principle, is that Zambia and the Official Creditor Committee (OCC) will sign a legally non-binding Memorandum of Understanding (MOU), which will set out the key parameters of Zambia’s debt restructuring terms. Thereafter, Zambia will start bilateral negotiations with each of the official creditors for restructuring deals, while concurrently negotiating with private sector creditors as well.

HOW ZAMBIA CAN FAST TRACK DEBT DEAL

At the moment, the signing of the MOU is pending due to some seemingly inexplicable delaying tactics and changing of goal posts by China, through some unfeasible demands. And if the MOU is to be signed before the end of March, 2023 (first quarter), when the next review of Zambia’s IMF programme is due, then Zambia would need to immediately directly engage China at the highest level.

The majority of experts on Zambia-China relations argue that the most effective strategy to speed up Zambia’s debt restructuring deal is an urgent face to face meeting between President Hakainde Hichilema and President Xi Jin Ping. The Zambian President’s State Visit to China and a meeting with President Xi, is the single most important act that can unlock Zambia’s debt restructuring deal. The visit will remove the current wrong perception that Zambia has abandoned our forefathers’ tried and tested foreign policy of non-alignment. Zambians should not be naïve to think that the IMF, World Bank and the USA will deliver the debt restructuring deal on their own in good time.

The purpose of the visit should be anchored and couched in the recalibration of Zambia and China’s relationship following the change of leadership in Zambia. The suggested meeting should be about the pursuit of common interests which can help Zambia solve its economic problems and accelerate its economic growth through better utilization of the huge Chinese market and Zambia’s huge agriculture and natural resource potential. As part of the recalibration process, China could be asked to help Zambia with its fight against corruption and strategies to mitigate adverse effects of climate change. China could then be asked for help with the elephant in the room – the Common Framework and Debt Restructuring deal. READ MORE:https://www.lusakatimes.com/2021/07/27/zambia-china-economic-ties-need-recalibration/

 

It is very apparent that some of the demands that China has been making at the debt restructuring talks are part of the West – China rivalry, in which Zambia is a mere pawn. Among the key demands that China is making are the following: One, Beijing wants multilateral development banks like IMF and World Bank to take losses in the restructuring process ; two, China is requesting Zambia’s local currency debt held by foreigners to be included in the deal, but experts say reworking the local debt is not feasible. Zambia has to lobby China to drop these impossible demands.

The recent experience of Australia in dealing with China, has demonstrated the power of face to face meetings. Zambia can learn from it. The meeting between the new Australian Prime Minister, Anthony Albanese and Chinese President Xi Jinping on the side-lines of the G20 meeting in Indonesia, resulted in the start of the process of unlocking the $20 billion Chinese trade sanctions. China imposed export sanctions on Australian exports of coal, wine, beef, seafood, barley which cost Australia $13 billion a year and loss of jobs and tax revenue. Bilateral relations soured after Australian’s former Prime Minister Scott Morrison demanded an independent investigations on origins of covid-19 in 2020; and the same year, China imposed crippling sanctions on Australia.

US COOPERATION AND NOT CONFRONTATION

The second strategy that should be used to ensure the restructuring deal is sped up, involves the United States of America. If indeed the USA wants to help Zambia, they should adopt a strategy of cooperation with China and not confrontation. China under President Xi Jinping, is now a more assertive and coercive country. China is now an economic super power, who cannot easily be bullied and pushed around. It demands respect commensurate with its economic, diplomatic, political, technological and military power in international affairs. It is, therefore, in the best interests of the Zambian restructuring deal, if the USA adopted a non-confrontation and diplomatic approach in dealing with China.

There has been some disquiet in some Zambian circles about the apparent impression and perception that has been created, that Zambia has impliedly outsourced lobbying for the debt deal with China to USA and Institutions like IMF and World Bank. The Zambia China Friendship Association in a rare statement, expressed its concern about the USA’s apparent meddling in Zambia – China relationship.
“Zambia is a sovereign state which does not need another government to speak for it, particularly where China is concerned. In case, some people have forgotten, the relationship between China and Zambia has a long history of mutual solidarity which successive Zambian leaders, including the New Dawn Administration of President Hakainde Hichilema, have acknowledged. If it is felt that there is a glitch in resolving the debt restructuring issue, there is nothing stopping the Zambian authorities to engage their Chinese counterparts at the highest level to smoothen the path. We are confident that the Zambian government is well aware of this option and we would be surprised if they are not utilizing it,” The Zambia China Friendship Association (ZCFA) said in a Statement by Dr. Fredrick Mutesa.

CHINA’S ECONOMIC POWER

In order to put Chinese economic power in context, it is important to note that China has billions worth of trade and investment relationship with countries in Asia, Africa, South America and Europe. China, for example, is Australia’s biggest trading Partner. It accounts for 32 per cent of Australian exports which amounts to $153.2 billion; Japan with $296.9 billion; India with $77.7 billion, Brazil with $67.7 billion; German with $256.7 billion trade volume. In terms of its financial muscle, China’s two major policy banks: China Development Bank (CDB) and the China Exim Bank (China Exim) are among the major development finance institutions in the world, and have made China become the largest source of official development finance in the World. The China Development Bank has a balance sheet of more than US$2.4 trillion as at the end of 2017. China has lent the World USD2.2 trillion which is 14 per cent of its GDP. These numbers gives China huge leverage on most countries in their decision making process and creates a certain level of dependence due to the volumes that China generates. The U.S cannot compete with the aforementioned numbers.

CONCLUSION

There is empirical evidence to support the assertion that Zambia’s relationship with the USA and China is not an either or situation. Zambia needs both countries.

“Zambia’s economic relationship with both China and the U.S. is not zero-sum, as both countries make meaningful contributions to Zambia’s economic growth. Zambia has to leverage its relations with the two economic powers in order to achieve synergy,” Major Mubita Oliver Mubita wrote in his Masters of Military Art and Science degree thesis, for the Faculty of the US Army Command and General Staff College.

The Zambia -USA relationship is anchored on improvement of health, education, economic development and democratic governance for the people of Zambia, whereas that with China’s has been based on trade partnership, source of investments and development finance for infrastructure development.

The consequences of failure of the debt restructuring deal, are too ghastly to contemplate. The economic recovery and the Presidency of HH largely depend on its success. If the talks fail, Zambia will struggle to pay its debt, unable to free up resources for social spending (health, education and poverty programs); and unable to attract investors, finance to help improve the economy. There will be higher youth unemployment, increased poverty levels and a higher risk of political instability.

The Zambian government needs to act now, by taking necessary steps that are required to consummate the deal. The time for depending on the West for this deal to is long gone. The answer to finalizing the restructuring of Zambia’s debt lies in the East. Timing and urgency is of essence.

The writer is a Chartered Accountant, Author and an independent financial commentator and analyst. He is also an Op-Ed Contributor to the Hong Kong based, South China Morning Post (SCMP) and Author of: “China-West Battleground in Africa: Debt Ridden Zambia”, which is available on Amazon.com (Contact: [email protected]).