Jesuit Centre for Theological Reflection (JCTR) has said the Zambian Government chose to ignore the many indicators of a debt default that have characterised Zambia’s debt discourse since the issuance of Zambia’s first Eurobond in 2013.

In a statement released to the media and attributed to Father Alex Muyebe, S.J. JCTR Executive Director, JCTR said that even the recent credit FITCH Ratings downgraded Zambia’s credit rating to ‘C’ from ‘CC’ warning of a high risk of a missed debt payment, Government chose to ignore the warning and gave the assurance that it will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached.

JCTR said that the admission to likely default is, therefore, a reversal from the Finance Minister’s assurance last month that Government had budgeted for Eurobond coupon payments next year to avoid default in the event that holders rejected the Government’s standstill request.

JCTR urged the Government to seriously reflect on the debt problems that Zambia faces and resolve to walk the talk in addressing Zambia’s debt crisis.

Below is the full statement

Less than a month since the Minister of Finance, Dr Bwalya Ng’andu presented to parliament the 2021 National Budget, Government has admitted that it will likely default on external debt service if a favourable agreement with creditors is not reached. On September 22nd 2020, Government applied to holders of its US$3 billion in Eurobonds to defer debt service payments for six months while it works on a debt-restructuring strategy. This period covers the upcoming three coupon payments due on 14 October, 2020, 30 January, 2021 and 20 March, 2021, on the respective bonds. Zambia becomes the first African country to ask for debt suspension on its Eurobond. The Government has further gone ahead to ask all creditors for similar relief, after some non-commercial creditors agreed to a payment freeze under the G20 Debt Suspension Service Initiative (DSSI). China in particular, has given a one-year grace period and suspension and rescheduling of three years of repayment amounting to US$225million, US$426.3million and US$428 million for 2020, 2021 and 2022 respectively.

The Jesuit Centre for Theological Reflection (JCTR) wishes to remind the nation that Eurobond holders are due to meet on Oct 20 to vote on the proposal to suspend Zambia’s debt service payments. Before then, about US$42.5 million payment on $1 billion of dollar bonds due in 2024 is scheduled for Oct 14 2020 which must be honoured within 30 days before it’s deemed to be in default.

JCTR is concerned that Government chose to ignore the many indicators of debt default that have characterised Zambia’s debt discourse since the issuance of Zambia’s first Eurobond in 2013. Most recently, on 25th September 2020, FITCH Ratings downgraded Zambia’s credit rating to ‘C’ from ‘CC’ warning of a high risk of a missed debt payment. Government however gave assurance that it will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. The admission to likely default is therefore a reversal from the Finance Minister’s assurance last month that Government had budgeted for Eurobond coupon payments next year to avoid default in the event that holders rejected the Government’s standstill request.

JCTR urges Government to seriously reflect on the debt problems that Zambia faces and resolve to walk the talk in addressing Zambia’s debt crisis. Under the Patriotic Front administration, Zambia’s external debt ceiling increased by 700% from K20 billion in 2011 (as guided by Statutory Instrument (SI) 53 of 1998) to K160 billion in 2016. This exponential increase was not backed by increased economic performance evidenced through growth in real Gross Domestic Product numbers. The raising of the external loan ceilings followed the issuance of Zambia’s three sovereign bonds. As far back as 2016, the Minister of Finance could not explain how the money would be paid back. Many stakeholders questioned the capacity of Government to pay back the loans and warned of an impending debt crisis if Zambia continued on the same trajectory. This was on the basis of strong indications that the country was drifting into a debt distress.

By February 2020 at an exchange rate of K14.7 to the US dollar, external debt amounted to K164 billion, K4 billion above the threshold. Today, Zambia’s total debt stock (external and domestic) is estimated at $US18.5 billion as at end of June 2020. Of this, US$11.97 billion is external. Thus, eight months later at an exchange rate of K20.13 this translates to K240billion, K80 billion above the prescribed threshold of K160 billion (the Loans and Guarantees (Maximum Amounts) Order No. 27 of 2019).
JCTR reiterates that Government must be committed to reining in on debt contraction. Government must provide evidence that it has slowed down on debt contraction. In the 2021 resource envelope, 44.9% of the budget will be financed through borrowing compared to 32.2% proposed in 2020. JCTR implores Government to ensure that debt sustainability is operationalized.

Attribute statement to Father Alex Muyebe, S.J. JCTR Executive Director

For further clarifications contact the Social and Economic Development (SED) Programme at the Jesuit Centre for Theological Reflection (JCTR) on 0955295881 and 0954755319. Email: [email protected] and [email protected]. Martin Mwamba Road, Plot 3813 Martin Mwamba Road, Olympia Park – Lusaka. P. O. Box 37774 Lusaka – Zambia

The Minister of Finance Dr. Bwalya Ng’andu has told Parliament that the recently released 2021 international debt statistics report by the World Bank,  quoting Government debt as being US$27.34 billion is not correct.

In a Ministerial Statement on Zambia’s Public Debt Management Strategy, delivered to parliament Dr. Ng’andu reaffirmed that the Zambian Government’s stock of external debt as at end of 2019 was as he reported in my 2021 budget address, which is US$11.48 billion. 

Dr. Ng’andu said that the amount stated in the World Bank report refers to the total national debt that includes private sector external debt of US$15.57 billion.

Dr. Ng’andu further said that the private sector external debt is foreign-denominated debt owed by all non-Government entities in Zambia in all sectors including mining, manufacturing, transport, energy, wholesale, and trade to mention some.

The Minister also reiterated his remarks that , should Zambia fail to reach an agreement with its commercial creditors (including holders of its Eurobonds) on the terms of the appropriate standstill, as previously stated, the Zambia with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulation of arrears.

The Finance Minister said that  Government has requested all its external creditors to agree to debt service suspension on similar terms. During the standstill period, the only foreign-denominated debt that Zambia will continue paying on a current basis is debt from multilateral agencies and debt for a few priority projects that have an immediate economic and social impact. These projects are in the health, edcuation, water and sanitation and transport sector

Below is the Full address

INTRODUCTION

Mr. Speaker allow me to start by thanking you for giving me an opportunity to apprise the honourable members of this house and the nation at large on the steps that Government continues to undertake in order to address the vulnerabilities emanating from our public debt situation and the measures taken in light of the negative impact of the COVID-19 pandemic.

Mr. Speaker, Zambia is currently in the process of implementing a liability management exercise aimed at restoring debt sustainability. As part of this process, the Government has been engaging its creditors to seek their approval for suspension of debt service payments for a period of six months in accordance with the terms of the G20 and Paris Club Debt Service Suspension Initiative (DSSI).

Sir, the DSSI initiative is a coordinated approach led by g20 and Paris club creditors which provides for the suspension of debt service payments for a period of 6 months for poor countries that request forbearance, with the aim of supporting these countries in overcoming the intertwined health and economic effects of the COVID-19 pandemic.

Mr. Speaker, the request for a 6 months standstill is part of our debt strategy development process. The standstill will give immediate relief on the budget and most importantly give the Government time to finalize its debt sustainability analysis that will provide details of the broad asset-liability management measures that are required to be implemented to deliver debt sustainability over the medium term. The debt sustainability analysis will provide the details that are required to provide for informed engagement with the different creditors, including eurobond holders, on the adjustment in order to attain debt sustainability over the medium to long term. This will be done with the full support of the IMF.

Mr. Speaker, although we have obtained some relief under the DSSI window, particularly from official creditors, engagements with commercial creditors, have not yet yielded the expected results. This is because these creditors were concerned that we were not treating all creditors equally.

We seemed to be discriminatory in the treatment of our creditors as are servicing certain categories of our debt while not servicing others. Specifically, concern was raised that the eurobond debt was not included in the DSSI request and that Zambia had continued to service all eurobond payments when they fell due, while allowing the accumulation of arrears on other portfolios. The exclusion of eurobond payments from the DSSI request also made some creditors reluctant to grant DSSI as they were concerned that the debt relief they would provide would be used to pay debt service to other creditors and not be channeled towards COVID-19 related expenditures as intended.

Sir, in order to make progress on these engagements and get the full benefits of addressing the impact of COVID-19 through the DSSI, it became necessary to request Eurobond holders for a six-month suspension of debt service so that all categories of creditors receive similar treatment.

ISSUANCE OF A CONSENT SOLICITATION MEMORANDUM

Mr. Speaker, the Government of the Republic of Zambia, working with its financial and legal advisors (Lazard and white & case respectively), initiated the bondholder engagement process through the issuance of a Consent Solicitation Memorandum (CSM) on 22nd September 2020.

A consent solicitation is a formal process for seeking approval from the bondholders to amend the terms of the bonds, either by way of written resolution or bondholder meeting. The consent solicitation memo requested that a standstill on coupon payments for a period of 6 months from 14th October 2020 to 14th April 2021 be granted.

OBJECTIVES OF THE CONSENT SOLICITATION MEMORANDUM

Sir, the objectives of the consent solicitation memorandum which we have requested the bondholders to consent to are:

1. To suspend any interest payment due in respect of each series of notes for six months from 14th October 2020 to 14th april 2021 (the “standstill period”).
2. To get an irrevocable and unconditional waiver of any breach on any obligation in respect of the bonds, that may arise in connection with, or as a result of, the deferral of interest in (1) above;
3. To get an irrevocable and unconditional waiver of any breach or alleged breach of any obligation under or in respect of the bonds, which may have occurred prior to the standstill period such as a cross-default; and,
4. To amend or modify the conditions, the deed of covenant and the agency agreement as are necessary to effect the deferral of interest and the amendments, waivers and authorisations set out in paragraphs (1), (2) and (3) above.

ENGAGEMENT WITH BONDHOLDERS

Mr. Speaker, following the issuance of the consent solicitation memorandum, I made a presentation to investors on 29th September 2020, highlighting the rationale for our request for a standstill. In the investor presentation, I highlighted the current macroeconomic and fiscal situation of our country including our current debt position and how it will be difficult to sustain external debt service going forward, if nothing is done to address the situation.

I, therefore, called upon the bondholders to support Government’s efforts by granting our request for a standstill for 6 months. The standstill will give us space to develop a long-term debt restructuring strategy.

I also emphasized the country’s strong desire to enter into a constructive, transparent and equitable dialogue with all our creditors as we undertake the debt restructuring process aimed at restoring debt sustainability. Since then, we have had engagements with the ad hoc bondholder committee through our advisors and we are currently responding to the questions that are being raised from the presentation.

NEXT STEPS REGARDING EXTERNAL DEBT SERVICE

Mr. Speaker, the debt payments to bondholders, including the payment which fell due on the 14th October 2020 to 14th April 2021 have been included in our debt service deferment request. The bondholders are to this effect expected to cast a vote on Zambia’s request for a debt standstill, after which meetings for the three series of bonds will be held to pass the resolutions that will be made.

As the ministry has stated before, should Zambia fail to reach an agreement with its commercial creditors (including holders of its Eurobonds) on the terms of the appropriate standstill, as previously stated, the Republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulation of arrears.
Sir, the Government has requested all its external creditors to agree to debt service suspension on similar terms. During the standstill period, the only foreign-denominated debt that Zambia will continue paying on a current basis is debt from multilateral agencies and debt for a few priority projects that have immediate economic and social impact. These projects are in the health, education, water and sanitation and transport sectors.

DOMESTIC DEBT MANAGEMENT

Mr. Speaker, in the area of domestic debt, Government will focus on raising financing from Government securities as well as meeting the obligations falling due.

Sir, the strategy on domestic debt management as indicated in my 2021 budget address, will be to:

1. Keep the pace in terms of payment of debt service on domestic debt maturities;
2. Lengthen maturities as we issue new debt to achieve long-term maturity profiles;
3. Reducing arrears particularly to local businesses to inject liquidity in the local economy; and,
4. Engaging and broadening investor participation in the Government securities market.
   The assurance, therefore, to the current investors and would be investors on Government securities is that Government is committed to developing the donestic markets furhter as a foundation towards economic recovery.

CONCLUSION

Mr. Speaker, as I conclude, I would like to reaffirm that our stock of external debt as at end of 2019 was as I reported in my 2021 budget address, which is US$11.48 billion. As of the end of June 2020, this figure increased to US$11.97 billion, which when we add the guaranteed debt for state-owned enterprises comes to US$13.55 billion. I have noted, regrettably, that some sections of the domestic and international society, that may not have read the recently released 2021 international debt statistics report by the World Bank, are quoting Government debt as being US$27.34 billion, as opposed to US$11.48 billion at the end 2019.

The amount stated in the World Bank report refers to the total national debt that includes private sector external debt of US$15.57 billion. Private sector external debt is foreign-denominated debt owed by all non-Government entities in Zambia in all sectors including mining, manufacturing, transport, energy, wholesale, and trade to mention some.

Sir, I will end by reaffirming that we remain committed to equal treatment of all our creditors and transparency in our engagements. We also note that this engagement is necessary and is in the best interest of the country.

Mr. Speaker I thank you.