Zambia Restructuring Offers Clues on China’s Willingness to Ease Debts of Poor Countries
By Gabriele Steinhauser and Alexander Saeedy, July 30, 2022, WSJ

China and other government creditors to Zambia said Saturday they will negotiate debt relief for the southern African copper producer, marking a milestone in an international effort to avoid a wave of chaotic defaults among developing countries as
interest rates rise worldwide.

Zambia’s request to restructure some $17 billion in foreign-currency debt is the first real test of a process created by the G-20 in late 2020 aimed at getting China, which in recent years has become the biggest government lender to poor countries, to
join international debt-relief efforts when these countries run into payment trouble. The so-called Common Framework for debt treatments also requires defaulting governments to negotiate debt write-downs with their private creditors—including
international banks and bondholders—in line with those offered by government creditors.

Saturday’s statement by a committee representing Zambia’s bilateral creditors didn’t say by how much they would reduce the country’s roughly $4 billion in bilateral loans or how this debt relief would be structured.

But the committee said it supported Zambia’s request for a $1.4 billion bailout from the International Monetary Fund, and that requires the country’s debt, which had ballooned to 123% of gross national product by the end of 2021, to be reduced to a
sustainable level. The World Bank, which was involved in the talks among creditors, said “significant debt relief” was needed to ensure the long-term sustainability of Zambia’s debt.

China’s foreign ministry and its embassy in Zambia didn’t respond to requests for comment Saturday on how much debt relief Beijing was prepared to offer Zambia. China’s government has consistently rejected accusations by the U.S. that it had pushed
poor countries into a debt trap and says it works out solutions with individual governments when they struggle to repay loans.

Africa’s second-largest copper producer after the Democratic Republic of Congo, Zambia over the past decade spent heavily on new infrastructure—including roads, airports and power plants—much of it financed by Chinese state-owned banks and dollar-
denominated bonds. Around a third of Zambia’s government-guaranteed foreign-currency debts are owed to Chinese institutions.

Zambia defaulted on its debts in November 2020, following several years of low copper prices and a sharp drop in its currency, the kwacha, amid the coronavirus pandemic. Its per-capita income dropped to $1,040 last year, from $1,440 in 2018, while 60% of
its population lives on less than $1.90 a day, according to the World Bank.

The World Bank and the IMF, which had long pushed for China to come to the debt-negotiation table, hailed Saturday’s statement by Zambia’s creditor committee as an important step at a time when many developed countries are struggling with rising
interest rates and skyrocketing fuel and food prices.

“This support for the G-20 Common Framework demonstrates that international partners are coming together to help countries resolve their debt issues, sending a strong signal to other countries looking to restore debt sustainability, achieve sustainable
growth and poverty reduction,” said Kristalina Georgieva, the IMF’s managing director.

The IMF said in April that about two-thirds of the 73 developing countries that can apply for a debt restructuring under the Common Framework are either in debt distress—when a country has initiated a debt restructuring—or at high risk of debt
distress.

But the slow progress on Zambia’s request for debt relief has revealed some of the shortcomings of the Common Framework. After Zambia defaulted, it took more than a year to agree on a preliminary $1.4 billion bailout deal with the IMF—a condition for
starting debt talks under the framework. It took an extra six months for the bilateral creditor committee to hold its first meeting, with U.S. and other Western officials accusing Beijing of slow-walking debt talks.

On top of that, many highly indebted developing countries—including Sri Lanka, which defaulted on its debts in May—aren’t eligible for debt relief under the Common Framework, which is reserved for the world’s poorest nations.

Zambia now has to work out the details of its restructuring with its government creditors and its private lenders, which include several state-owned Chinese banks as well as the holders of $3 billion in international bonds.

Gregory Kabwe, director for investments and debt management for Zambia’s Treasury, said in an interview Saturday that the country was looking at several options for reducing its debt load, including getting more time to pay, a reduction in interest
rates, cuts to the face value of loans and bonds or a combination of all three. China has traditionally been reluctant to write down the face value of interest-bearing loans, but has in the past extended maturities on debts.

Kevin Daly, investment director for emerging-market debt at Abrdn PLC, which holds some of Zambia’s dollar-denominated bonds, said it might take until early next year for private creditors to agree on a restructuring. He said he was optimistic that
China’s involvement in the debt talks could help keep overall losses for creditors low.

“We certainly believe that the Chinese official creditors will not accept a big haircut,” he said. “In many ways the Chinese are doing our bidding right now.”

https://www.wsj.com/articles/zambia-restructuring-offers-clues-on-chinas-willingness-to-ease-debts-of-poor-countries-11659198874

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