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PREVIEW
Lusaka's debt-restructuring brokered by France's Emmanuel Macron resonated more than his summit to redraw the global finance system
A deal to restructure US$6.3 billion of Zambia's foreign debt gives President Hakainde Hichilema much of what he was looking for – a resolution after almost two years of tortuous negotiations and a sharp cut in debt service obligations worth an estimated $5.8bn ahead of the next election in 2026. A creditor source told Africa Confidential the terms were 'unbelievably generous': they include a three-year grace period in which only $75 million a year is due in interest.
The agreement on 22 June in Paris, covers some of Zambia's debts to its official bilateral creditors which include Britain, India and Russia. The negotiations were led by the Paris Club group of lenders and France's President Emmanuel Macron. It turned out to be a highlight of Macron's ambitious 'Summit for a New Financial Pact' in Paris on 22-23 June which had brought together the leaders of Brazil, Kenya and Indonesia as well as China's new premier Li Qiang.
Macron, China (which holds over half Zambia's foreign debt) and the IMF are lauding the deal as a breakthrough, even a blueprint for future accords in the 73 countries that signed up to the G20 Debt Service Suspension Initiative in 2020. For now, much of the small print in the deal remains under wraps.
A Memorandum of Understanding outlining the terms in detail is expected to be signed in the next couple of weeks, Finance Minister Situmbeko Musokotwane told the parliament in Lusaka on 27 June.
Interest rates are extremely low, at just 1% for the next 14 years, and never exceeding 2.5% after that, Musokotwane said. This grace period lasts through the duration of the IMF programme, approved by its board last August, and clears the most serious financial obstacles faced by Hichilema (AC Vol 63 No 19, Fears of pain in prospect).
Buying time
The opposition Patriotic Front (PF) had been holding out hope that the fallout from the economic chaos created under their governance would prove so damaging to Hichilema's United Party for National Development (UPND) that it would scupper any chances of obtaining a second term, say UPND sources. Instead, the debt deal gives Hichilema time and plenty of financial space.
Between 2026 and 2035 only a tiny fraction of the principal will be paid, with the bulk paid in 2043 when the final maturity date has been set. Around $750m will be paid to official creditors over the next 10 years, says Musokotwane, as opposed to the original $6.3bn.
The deal includes China, which has agreed to the terms for debt largely due to Exim bank. Many observers question why Chinese officials agreed, having previously refused to seriously engage in restructuring talks obstructed Lusaka's efforts to resolve its debt problem.
Chinese banks are especially averse to 'haircuts' – an actual reduction of the debt, rather than just an extension of the repayment. This time they have accepted an almost 40% net present value haircut, resulting from postponed repayments and reduced interest rates.
Zambian officials say that Beijing is keen to restore its close relationship with Zambia, adding that the relationship has improved since the UPND took power in August 2021.
Better relations could give Chinese companies access to Zambian natural resources, especially in the mining sector, though officials in Lusaka say China is not asking for any special treatment.
Other creditors say that China faces huge international pressure following the Covid pandemic to relax its previously rigid stance on debt relief to poor countries. At the same time, Zambia's debt restructure has presented an opportunity for French–Chinese diplomacy (AC Vol 63 No 10, Hichilema's team steps on the gas). China wants to take advantage of a French foreign policy not aligned with the United States and Britain.
China wants France as an ally and, importantly, an ally which now owes China a favour (Dispatches 24/1/23, East-West blame game on debt heats up).
Creditors comment that Macron's pushing for radical debt relief is part of an effort to bring France closer to Anglophone African countries, such as Zambia, after seeing the erosion of its influence in a handful of former French colonies. He also wants to protect and promote the Paris Club as an institution, they say, and it is an attractive option when France has so little exposure to the debt in question.
'They get all the political credit, but are playing with other people's money,' says a creditor, adding that 'this deal is 85% political and 15% financial'.
The agreement deals only with official creditors, leaving $6.8bn of commercial debt still to be restructured, including $3.5bn of Eurobonds payments. The restructuring of the official debt is an important step, however, because crucially it unblocks disbursements from the IMF and World Bank.
The official debt is compartmentalised separately from commercial debt, so continued default to commercial creditors will not hinder the delivery of the IMF programme. The IMF had not made its planned disbursement in April, as Zambia needed to demonstrate a more credible plan to resolve its debt problems, said Ministry of Finance sources. It is now releasing $188.8m, and the World Bank will release $75m, according to Musokotwane. This is important for Zambia's image, and also means bilateral lending is technically possible again.
China had tried to classify as much as possible of its debt as commercial, in the hope of seeking better terms. $2bn that was previously deemed official debt has been reclassified as commercial, reducing the total official debt from over $8bn to just over $6bn. Under the G20 Common Framework for debt sustainability, Zambia's commercial creditors are supposed to follow the principle of comparable treatment with official creditors, which means the deal should be similar to that agreed with the bilateral lenders.
Bondholders say China wanted as much of its debt as possible to be classified as commercial precisely so it could ask for more generous terms, under a more flexible interpretation of 'comparable treatment.'
As for the bondholders, some hope for a quick resolution, even within weeks. Others say it will take longer for all to agree, as some are more willing than others to take a larger haircut. China is hostile to the bondholders, we understand, and determined that they should not get any preferential terms.
Some question why Zambia would now bother restructuring the commercial debt. It can technically remain in default for now; it is not seeking new commercial debt, and the official debt restructure puts Zambia back on track with the IMF. But government sources say that they want to avoid further penalties accruing from the Eurobond default. Restructuring the commercial debt and taking Zambia out of external debt default would be the next big win for Hichilema.
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