Is China delaying Zambia Debt Restructuring Deal? An Independent Analysis

By Mwansa Chalwe Snr

The status of Zambia’s debt restructuring talks must be confusing to ordinary Zambians as they have been blowing hot and cold. And it is for this reason that it is important that the public is educated about the stage that the talks have reached, and to make a determination as to who could be responsible for the delay in the deal. It seems unclear in people’s minds at the moment.

There is no doubt that the long standing cause of the delay in Zambia debt relief deal is mainly the complex composition of creditors. According to the Financial Times of London: “Zambia’s Debt is complex, with a mix of official creditors – the largest being the Export-Import Bank of China with over $4billion owed, – another $3.85billion in Eurobond claims, and about $3.5Bn owed to Commercial Banks, including large Chinese state Banks. There is also $2.7Bn in non-resident holding of local currency bonds, excluded from the restructuring but counted as external debt by the IMF”.

However, there are two latest stumbling blocks that the public should know about as being responsible the Debt restructuring stalemate, which need to be resolved. The first is the delay in signing the Memorandum of Understanding (Mou) agreed in October,2023 by all Official Creditors. The Zambia government has stated that 98% of them have signed. The second issue is the impasse regarding the rejection by Official Creditors of the proposal by Private Creditors. There is a need to analyse these issues critically in order to establish who is possibly responsible for the delay, and how Zambia should strategise to resolve the issue.

Memorandum of Understanding not yet signed.

In October,2023, Zambia struck a debt deal with bilateral creditors to restructure US$6.3 billion in loans. Under the deal, China has the biggest burden and agreed to restructure US$4.1 billion of the total, with France, Britain, South Africa, Israel and India taking up the rest. The Ministry of Finance and Planning released a statement to that effect at the time.

“The Ministry of Finance and National Planning of the Republic of Zambia is pleased to announce that a Memorandum of Understanding (MoU) has been agreed with its Official Creditor Committee (OCC) on the comprehensive debt treatment agreed in June 2023. The MoU formalises the agreement reached in June with official creditors and represents an important milestone in Zambia achieving long-term debt sustainability. Each official creditor will now begin their internal process to sign the MoU”, The Ministry of finance and Planning statement stated.

Zambia expected that by now, each official creditor would have signed the MOU. It is now crystal clear that not all the Parties have signed that important agreement yet, as President Hakainde Hichilema recently disclosed when addressing Diplomats, and asking for their help.

“So, this year, your excellencies, we ask you to continue the journey on helping Zambia to put to bed the Zambia debt restructuring project which I mentioned earlier. Where one or two official creditors that are yet to sign. Please work with us to get those signed up. We can then focus on the private creditors”, President HH addressing Diplomats accredited to Zambia during the annual greeting of the diplomatic corps, Friday 26th January,2024.

In the past, China had been accused of delaying Zambia’s Debt deal by the United States and the World bank through its various demands. The former President of the World Bank, David Malpass, was one of the most outspoken critics of China.

“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.

On the basis of circumstantial evidence from the past, therefore, the only nation of consequence that can hold back from not signing the MOU, until it is perfectly happy, is China. This is so because it is the largest bilateral creditor of Zambia, whose signature is a must, for the G20 Common Framework to work.

Official Creditors and Bondholders at Loggerheads

Zambia’s debt restructuring deal has also been delayed by negotiations with Bondholders. At the end of October,2022, Zambia and Bondholders reached an Agreement in Principle (AIP) on restructuring $3 billion of its international bonds with a key creditor group.

But when government presented the Agreement in Principle (AIP ) to the Official Creditors Committee, they and the IMF rejected it, because it did not meet IMF parameters and failed the Comparability of Treatment test by the OCC due to a shorter extension of the duration and lower contribution to the closing of the balance of payment financing gap during the IMF program period.

Zambia went back to Bondholders for reworking the deal but again it was rejected by Official Creditors. Zambia and the IMF, however, viewed the revised deal as sustainable and compatible with the Comparability of Treatment (CoT) principle, but China and other official bilateral creditors want bondholders to take a larger haircut than what Zambia’s government or the IMF deemed necessary.

The Bondholders were livid by the rejection of the deal by Official Creditors Committee, complaining that they had no right to reject a deal that they had agreed with Zambia.

“This is an extraordinary position to take and will have significant adverse consequences, most immediately for Zambia,” said the committee. “It was not for official bilateral creditors to dictate debt terms to other creditors in circumstances where the government has confirmed comparability of treatment.”

Bondholders’ offer involved the reduction in total debt owed to Zambia (haircuts) in return for being repaid a higher proportion of the remaining debt earlier than Official Creditors. And haircuts are not part of the criteria listed in the G20 Common Framework to assess comparability. And in totality, Bondholders were to give Zambia 18% discount on the loans, whereas the Official Creditors had agreed to 40%.

According to London Financial Times: “China isn’t keen to subsidize private bondholders which it considers have gotten too sweet deals in the past (Private creditors notably did not participate in the 2020 Debt Service Suspension Initiative)”.

Critics of Bondholders have also accused them of not taking similar losses to Official Creditors. And according to the analysis done by Debt Justice and the Zambian Civil Society Debt Alliance,under the latest deal with Bondholders, they will be paid 73 Cents for every $1 they lent originally, whereas official Creditors like China and UK, will be repaid 55 cents by Zambia, when Bondholders had lent at higher interest rates.

According to the UK based Debt Justice’s, Executive Director Heidi Chow, it is this disparity of treatment between private and government creditors which highlights the fact that the deal does not meet the requirements of the G20 Common Framework.

“Bondholders lent at higher interest rates due to the risk involved, so they should take the hit when that risk materialises. Irresponsible lenders are effectively being bailed out with public money. The UK and New York urgently need to pass legislation to make private creditors take their fair share of responsibility when it comes to debt restructurings,” she said.

It is, therefore, fair to say that Private Creditors are a major contributor to the delay in concluding the restructuring deal for Zambia due their greedy terms which are not part of the G20 Framework.

The reality today is that Zambia’s debt restructuring deal has reached a stalemate. And only China can break the deadlock.

How Zambia can unlock Debt Relief deal through China

In order to unlock the debt deal, Zambia needs to pursue a two pronged and parallel strategy– technical and diplomatic. This entails continued talks with Bondholders on the technical aspects of the restructuring deal, with a view to narrow the comparability gap with Official Creditors. At the same time, Zambia should vigorously pursue the diplomatic route by engaging the Chinese government bilaterally so that they can authorize the Policy Banks to revised offers by Bondholders.

History has proved that quiet diplomacy is what produces quick results when dealing with the Chinese. There are several cases in point that proves this assertion. When China was reluctant to join the G20 Official Creditors Committee (OCC) in 2022, and resisted for over six months, because it believed that friendly bilateral cooperation is the best way to deal with debt between friends, it had to take a direct phone call from Zambian President Hakainde Hichilema on 31 May, 2022 to the Chinese President Xi Jinping to unlock the stalemate.

And when both Ghana and Sri Lanka were facing almost impossible situation with talks on debt with China, in order to qualify for the IMF programme, it had to take their Finance Ministers, Foreign Ministers and Vice President of Sri Lanka to travel to Beijing to get the deal within a very short period of time.

It is vitally important that Zambia appoints a substantive foreign Minister. He and the finance minister should take a trip to Beijing, accompanied by a seasoned senior citizen who is a diplomat of the past, to go and lobby for Zambia’s case. Physical meetings, in their backyard, is how you get important deals consummated with the Chinese.The trip should be done quietly with no publicity, as China prefers doing diplomatic negotiations quietly, as last year’s Iran-Saudi Arabia reconciliation deal, which they brokered proved. In addition, when dealing with China, seniority matter, and so sending technocrats, as was the case recently, is unlikely to produce the desired results.

Zambia has got a very good justification for the proposed diplomatic mission. It can be argued that the

engagement is meant to implement one of the agreements between President Xi and President Hichilema as per their joint statement when establishing the Comprehensive Strategic and Cooperative Partnership in September,2023.

“The two sides noted that the year 2024 marks Zambia’s 60th anniversary of independence as well as the 60th anniversary of the establishment of their diplomatic ties. The commemoration should be an opportunity to bring into full play the political leading role of the head-of-state diplomacy, keep the momentum of high-level exchanges and dialogue, enhance political mutual trust and consolidate the political foundation for the bilateral relations. The two sides stressed that mutual respect, equality and common development are important principles of China-Zambia relations,” The Joint Statement of the two Heads of State said.

In addition to the above, Zambia should also plead with the Chinese leadership about the human impact that the delay is having on the population which is even worse than the Cholera that China is helping Zambia with. China should be asked to consider the human impact the delay is having on the Population as the Zambian Daily Mail recently reported on what Faides Tembatemba said on the impact of delayed debt restructuring.

“Ms Tembatemba said most of the discussions are centred on economic fundamentals, ignoring the impact on the well-being of people. Faides Tembatemba from the Civil Society for Poverty Reduction said there is need to add a human face to the impact of Zambia’s debt burden”, The Paper reported on the occasion of the Public Forum on the implication of delayed restructuring of Zambia’s Debt.

Zambia has been negotiating with Chinese Commercial Creditors, Policy banks like Bank of China, China Development Bank and Exim Bank of China. And these same institutions have big Chinese Clients operating in Zambia who may be owed money by the Zambian Government. And if these have not been paid by Zambia to enable them to liquidate their loans with the above Chinese Financial institutions, this could have contributed to the delayed restructuring deal with Chinese Commercial and Policy banks. There may be a need to make assurances to pay those, so they are not disadvantaged by Bondholders. Zambia should not be naive as not to understand the interconnections between the Chinese Policy Banks, Chinese State-owned Enterprises, Contractors and businesses operating in Zambia and the Debt restructuring talks.

CONCLUSION

On the basis of objective analysis done on the stalemate, if Zambia follows the proposed strategy in this article, China will certainly consent to Zambia’s deal with bondholders and sign the MOU within a week or at least this month. This assertion is based on the knowledge acquired from following the debt rivalry between China one hand, and Bondholders and the West on the other from 2019, on which an entire book was written.

In general, when one analyses the Zambia’s debt Restructuring deal and G20 Framework talks, there is no doubt that China has been the major winner, as it got almost all the concessions that it demanded. This includes the fact that Debtor countries will have to engage in Bilateral talks with the Creditors even after signing the Official Creditors Committee MOU which is non-binding. So, it is not a big ask for it to agree and help Zambia conclude the deal. Diplomacy is the answer at this stage.

The Chinese Ambassador His Excellency Du Xiaohui recently wrote an article which was headlined: “ Working together in times of Crisis” based on the cholera crisis. China should not end with the cholera assistance but extend helping Zambia to conclude the Debt Restructuring Deal. The delay is a crisis which is claiming more lives than even cholera. Chinese concessions to help Zambia in the debt restructuring deal should be the first important milestone achievement in the designation of 2024 as the Year of Business Cooperation, to mark 60 years of ties, by Presidents Xi and Hichilema in their September 2023 communique.

The writer is a Chartered Accountant and Author of “China-West Battleground in Africa: Debt Ridden Zambia”, available on Amazon.com ([email protected])