China-led Zambia’s official creditors have agreed to provide debt relief for the South African nation, paving the way for an International Monetary Fund bailout and setting a precedent for how Beijing can work with other lenders to counter the threat of a wave of default across emerging markets.
A panel of creditors co-chaired by China and France said Saturday that they are “committed to negotiate with the Republic of Zambia on restructuring terms” within the framework of the Group of 20 debt relief coordination.
Kristalina Georgieva, managing director of the International Monetary Fund, said she was “very pleased to welcome” the creditors’ commitment, which will open a $1.3 billion IMF loan to revive Zambia’s finances. Zambia has yet to negotiate the exact terms of the relief and reach a similar agreement with private creditors.
“The support from the Official Creditors Committee of Zambia’s IMF-backed program, along with its commitment to negotiate debt restructuring terms, provides the IMF with official financing guarantees,” Georgieva added.
The deal is an early sign that China is willing to coordinate with other official creditors on restructuring the debt of low-income countries, rather than dealing with defaults on its loans behind closed doors. Zambia has become a test case for countries that have also turned to Beijing for funding in recent years, such as Sri Lanka, which has already faltered, and Pakistan.
Zambia became the first African country to default during the pandemic in 2020 when it suspended $17 billion in external debt, including $3 billion in Eurobonds denominated in US dollars, after years of a mounting debt crisis.
China has emerged as the country’s largest creditor in the past decade, providing loans estimated at $6 billion while Zambia has embarked on ambitious infrastructure projects such as roads, dams and airports. These soured as the economy slowed.
President Hakende Hechilema’s government agreed last year to the terms of a three-year International Monetary Fund bailout within months of taking power in a landslide election victory over Edgar Longo, who oversaw a deepening debt crisis.
But the Hichilema government had to wait for confirmations from official creditors before starting the IMF program and set out the terms of debt restructuring in detail with private and official creditors.
“We are confident that Zambia will address the issue appropriately with our partners and with the urgency of helping return the economy to a sustainable growth path,” said Zambian Finance Minister Situmbiko Musukutwan.
Zambia’s Finance Ministry on Friday detailed plans to cancel another $2 billion in undisbursed loans linked to projects – mostly affecting Chinese creditors.
Private creditors, such as bondholders, are expected to give Zambia debt relief at least as large as what official lenders would offer, under the so-called principle of comparability.
On Saturday, the official creditors’ committee urged other lenders to “commit without delay to negotiate with Zambia such debt transactions that are critical to ensuring the full effectiveness of Zambia’s debt processing under the joint framework.”
said Kevin Daly, Abrdn’s chief investment officer and a member of a committee representing Zambia’s bondholders.
But he said that bondholders are not satisfied with the sequence of events in the joint framework, according to which the trade creditors will be told the size of any restructuring, and the assumptions on which it is based, only after the official creditors have reached an agreement with each other, namely the International Monetary Fund. and Zambia.
“We’re still in the dark as creditors,” Daly said. “We’ve been saying that all the time to speed things up, they should get involved [the IMF’s debt sustainability analysis] With us. Why this veil of secrecy? “