Zambia’s debt restructuring limps over the line as a painful test case

More than three-and-a-half years, or 1,300 days, after resource-rich Zambia formally declared itself bankrupt, it is about to drag itself out of default, leaving hard lessons for richer nations about how their much-vaunted debt relief plan performed.

Tuesday will see its international bondholders vote through their part of a $13.4bn (R251bn) debt restructuring and make Zambia the first to complete a full-blown rework under the G20-led “common framework” architecture.

Hakainde Hichilema, Zambia's president, has described it as a historic moment and the head of the IMF, Kristalina Georgieva, has hailed it as an important sign of multilateral co-operation.

However, for many involved in the day-to-day work, and repeated delays, it will be more of a weary cheer than a celebratory fist shake.

“It was painful for Zambia. We fully recognise that,” William Roos, co-chair of the “Paris Club” of richer Western creditor nations and of Zambia's official creditor committee that included Zambia's biggest lender China, said at a debt conference in Paris on Friday .

“We have to improve. But we delivered.”

The overall restructuring is estimated to cut about $900m (R1.6bn) from Zambia's debt and spread its future payments over a much longer time frame.

It has been its role as a common framework guinea pig though that has made it prominent.

Launched during Covid-19 in 2020, the framework was designed to bring all lenders to poorer countries under one roof, particularly China, whose lending exploded in the decade before the pandemic.

It was regarded as a breakthrough but the extraordinary length of time Zambia's restructuring has taken, as well as others ongoing in Ghana and Ethiopia, has led to criticism of delays and complexity.

Officials and creditors in all three countries have complained about a lack of transparency.

Spats emerged early on when China called for the big Western-led multilateral development banks to also swallow losses, while in November the official creditor group, led by China and France, temporarily torpedoed a government and IMF-approved agreement with private sector bondholders on the grounds it did not provide enough debt relief.

“The G20 framework, I do not think I want to recommend that to any country,” Ghana's central bank governor, Ernest Addison, said at the same Paris Club event when asked about his country's experiences.

Zambia's deal will see official sector creditors reschedule $6.3bn (R118b) worth of their loans while three of the country's main bonds, worth a combined $3bn (R56bn), will be rolled into two with new payment schedules and conditions.

A modest amount of bank and other loans remain to be restructured.

Former IMF general counsel Sean Hagan and sovereign debt specialist Brad Setser highlight how clauses inserted in the new deals mean Zambia, Africa's second largest copper producer, will make extra payments if it recovers quickly.

The additional payments, however, could push its debt back up to a level where the IMF said it is at high risk of debt distress again.

Backers of the common framework nevertheless insist its difficulties are being ironed out.

Allison Holland, who heads the IMF's debt policy division, believes lessons learnt in Zambia meant Ghana was able to get from IMF staff level agreement to programme approval far quicker.

She said official creditors have a better understanding of each other’s concerns and constraints and the setting up of a global sovereign debt round-table means the process can continually be improved.

Bondholder committee member Thys Louw at South Africa-based investment firm NinetyOne thinks, however, the struggles in Zambia were deep-rooted and the idea that restructurings have lots of “common” features is a fallacy.

“We were always optimistic in terms of engagement, but Zambia became essentially the battleground, the collateral damage in the broader themes at play,” Louw said, pointing to the West's hawkishness towards China and the concern initially that a wave of defaults was approaching.

One of Zambia's legal advisers, Melissa Butler at law firm White & Case, also pointed to how China was singled out for criticism.

“There was a lot of finger pointing (at China) in early days that was somewhat unfair because there was a learning process going on,” Butler said.

“They have demonstrated they want to engage with the rest of the international community, and in Zambia they delivered. That to me is the real win”.

China's foreign ministry spokesperson Wang Wenbin said at a regular briefing on Friday that Beijing's efforts had been “highly appreciated” by all sides and it would “continue to co-ordinate and co-operate with all parties concerned”.

Zambia was supposed to have concluded a review of its IMF-extended credit facility (ECF), but that process has been delayed by another crisis — the country's worst drought in 40 years — which means it has another $900m funding gap to cover.

However, will getting its restructuring over the line clear the path for the next common framework default wherever it crops up?

Butler said: “It think it could be easier, but do I think it will get less complex? No.”

Reuters