Zambia reached an agreement in principle to restructure $6.3 billion of debt with bilateral lenders, setting a precedent for a growing list of countries struggling to service their liabilities.
On Twitter, Zambian President Hakainde Hichilema called the agreement “a significant milestone in our journey towards economic recovery and growth.”
The accord marks the first major relief won by a developing country under the Group of 20 nations’ Common Framework that brings the traditional creditor nations of the Paris Club around the same negotiating table with China and India.
Details remain unclear, beyond that the creditors led by China and France agreed to extend the maturities on their loans over some 20 years, with a three-year grace period, according to a French official, who announced the deal on Thursday.
Calling the pact a “significant milestone” for the Common Framework, IMF Managing Director Kristalina Georgieva said creditors agreed “deep debt relief for Zambia.”
It specifies both a baseline and a contingent treatment that would be automatically triggered if the assessment of Zambia’s economic performance and policies improves, she said in a statement, without providing more detail.
Urge Conclusion
US Treasury Secretary Janet Yellen, who has long sought solutions on the debt issues plaguing Zambia and other emerging nations, welcomed the consensus.
“During my trip to Zambia earlier this year, I saw firsthand how the weight of default and a stalled debt-restructuring process can bring suffering to ordinary families and hold back economic growth,” she said in a statement. She urged creditors to finish restructuring the debt quickly.
The parties are expected in coming weeks to sign a memorandum of understanding for the debt treatment that Zambia’s finance ministry said included “significant maturity extensions and reduction in interest rates.”
This could lead the way for other nations — including Ghana, Sri Lanka and Ethiopia — locked in negotiations with creditors from China, the Paris Club and bondholders. More than 70 low-income nations face a collective $326 billion burden, with more than half of them already in or near debt distress, according to the IMF.
“This agreement marks a crucial milestone in Zambia’s ongoing efforts to strengthen its economy and improve the quality of life for its citizens,” Finance Minister Situmbeko Musokotwane said in a statement. “We will now work to achieve a swift resolution with our private creditors and deliver opportunity and economic stability to the Zambian people.”
Zambia’s currency has rallied 12% this month in anticipation of the agreement, the biggest gain among 150 currencies tracked by Bloomberg. Its eurobonds have delivered a performance only exceeded by El Salvador and Argentina.
A meeting to mark the agreement will be attended by French President Emmanuel Macron, Hichilema and Chinese Premier Li Qiang on the sidelines of the Summit for a New Global Financing Pact in Paris, the French official added. It’s a major step in the process of ending the default of the first African nation to do so in the pandemic era, and will unlock a $188 million disbursement from the IMF.
Zambia’s private creditors “need to urgently agree significant debt cancellation,” says Tim Jones, head of policy at UK-based Debt Justice, previously known as the Jubilee Debt Campaign, which lobbies for poor countries’ loans to be written off.
The organization is calling external private and government lenders to cancel two-thirds of Zambia’s debt to place its finances on a more sustainable path.
Zambia in October said it was seeking to revamp $12.8 billion in external debt, and it’s unclear if this amount has changed following negotiations in which China called for more relief from lenders such as the World Bank, and for some of its own debts to be excluded. Zambia owed about $6 billion to Chinese lenders, around one-third of its total foreign liabilities.
Years of Waiting
While the memorandum marks a major milestone, it is not legally binding and Zambia still must sign bilateral agreements with each creditor. It has also yet to conclude restructuring talks with holders of $3 billion in eurobonds, which had accrued more than $500 million in arrears by the end of last year. Other commercial creditors are likewise yet to strike a deal.
The memorandum with the official creditors includes a clause requiring comparability of treatment for Zambia’s commercial debts, the French official said.
It gives Macron a concrete breakthrough at the summit he has convened in Paris to overhaul financing for the poorest countries that face the greatest funding risks. His administration was also a key proponent of the creation of the Common Framework to expand the Paris Club creditor group to include China in debt restructuring.
Key Details in Finance Ministry Statement:
- Official creditors will provide a debt treatment contingent on Zambia’s debt-carrying capacity at the end of the 38-month IMF-supported program approved in August
- The relief will be adjusted if conditions have improved enough to justify an upgrade from “weak” to “medium” debt-carrying capacity, in which case principal reimbursements would be accelerated and interest payments increased
--With assistance from Alan Katz and William Horobin.
(Updates with comment from Debt Justice from the fifteenth paragraph)
Author: Ania Nussbaum, Taonga Mitimingi and Matthew Hill
