Zambia’s default – a loss-making situation

It has been almost a year since the start of the COVID-19 pandemic, and no country has been spared the brutal economic and social impact.

While we have seen G20 countries mobilize more than $ 11 billion in stimulus packages and to push extra money to combat COVID-19 in their own countries, others have struggled. Some of the poorest countries in the world do not have the liquidity available to keep their economies going, tackle the state of emergency COVID-19 and provide social safety nets for the vulnerable.

This is the case with Zambia.

Even before the pandemic, Zambia – the second largest copper producer in Africa – struggled with its finances and debt. The country owes $ 11.1 billion in private, bilateral and multilateral debt. For months, the difficult choice has been between repaying debt or maintaining its economy and investing in healthcare. While Zambia has been eligible for suspension service from some of its bilateral creditors under the G20 Debt Service Suspension Initiative, it has had a limited impact due to the composition of the country’s debt.

Zambia has asked other international creditors to follow their example, especially the private mortgagees, who own 27% of the country’s debt and to whom Zambia owes $ 120 million in interest payments, but in vain. As no agreement has been reached on his request for a six-month delay on interest payments, Zambia today becomes the first African country to default on its loans since the start of the pandemic.

The cost is high.

Failure to pay gives Zambia a reputation for financial unreliability and could also cause an economic crisis.

As a high-risk lender, Zambia’s credit rating will be downgraded, making it more expensive to raise funds unless a new agreement is reached with mortgagees. Other international creditors may also want to renegotiate their debt agreement and even make separate arrangements with Zambia. For some people, it will help to get back on track; but for others, it is a priority to ensure they maximize their debt repayment. The biggest concern is that some of it is likely to be under unfavorable conditions for the country.

Here, transparency is critical. Questions about exactly how much the country owed to China strengthened the case for the reluctance of mortgage holders to come to the negotiating table. But transparency is also critical to the responsible management of loans. In 2016, Mozambique failed its standard infamous’ tuna connection ‘ payment, which started as a secret loan. The default caused an economic crisis, currency controls and withdrawal from the IMF and support for donors.

While Zambia’s debt build-up precedes the COVID-19 pandemic, the conclusion remains: at a time when Zambia is trying to cope with the shock of COVID-19, the relentless pressure from international creditors, especially private creditors, is wrong and economically short-sighted.

This is a loss-losing situation – not only will the inability to borrow cheaply have a significant impact on Zambia’s path to recovery, but also can also take years before international creditors agree to a new debt payment plan. A prosperous country with economic growth will repay more and borrow more than a country that declares bankruptcy.

It may be too late for Zambia now, but we must ensure that other countries with a high probability that they will default on their loans next year, such as Iraq, Sri Lanka, Angola and Gabon, will not suffer the same fate as Zambia. .

Next weekend, the largest economies in the world will come together and formally endorse the common framework for debt restructuring to help avoid this loss-losing situation. To be able to work, however, all creditors – bilateral, multilateral and private – must join forces.

The COVID-19 pandemic should be seen as a ‘force majeure’ to give poorer debtor countries the opportunity to adjust their fiscal positions to meet debt obligations. The current situation is certainly worse than the 2008 financial crisis, but has been treated with less urgency and attention it deserves.

Zambia may be the first country to fail since the start of the pandemic, but if international creditors cannot cooperate, it will certainly not be the last.

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