What is debt restructuring?
In a nutshell, debt restructuring is a mutual agreement or court judgement where the debtor is in financial difficulty and the creditor grants a concession to the debtor. The Covid-19 pandemic has led to a significant increase in global debt in 2020, driving up sovereign debt – the sum of outstanding bonds and loan obligations of a country’s central government – by as much as 14% to 102% worldwide. Recent sovereign debt crises have arisen from a dangerous mix of private capital flows and credit booms, financial engineering, and corporate and sovereign excesses.
Sovereign debt restructuring is crucial in tackling the issues that arise from unsustainable levels of debt for countries. The following points underscore the significance of sovereign debt restructuring:
Debt Sustainability: Sovereign debt restructuring allows countries to address their debt burden and achieve long-term debt sustainability. By restructuring their debt obligations, countries can establish a more manageable repayment framework that aligns with their economic capabilities, reducing the risk of default and financial instability.
Economic Stability: Excessive debt levels can hinder economic growth and stability. Debt restructuring provides an opportunity for countries to regain fiscal stability, restore investor confidence, and create a favorable environment for economic recovery. It also allows for the reallocation of resources towards productive sectors and public investment, promoting sustainable economic development.
Creditor-Debtor Relationship: Debt restructuring facilitates the negotiation and resolution of financial disputes between debtor countries and their creditors. It provides a platform for constructive dialogue, enabling both parties to reach mutually acceptable agreements. In addition, this helps to maintain and strengthen the relationship between countries and their creditors, fostering future cooperation and access to international financial markets.
Financial Market Access: Successful debt restructuring can improve a country’s access to international financial markets. By demonstrating a commitment to addressing their debt challenges, countries can rebuild investor confidence, enhance creditworthiness, and attract new investments. Improved market access enables countries to secure financing for development projects, infrastructure investments, and social programs, contributing to long-term economic growth.
Poverty Reduction and Social Development: Sovereign debt restructuring can have positive implications for poverty reduction and social development. By reducing debt burdens and freeing up fiscal space, countries can allocate resources towards social welfare programs, education, healthcare, and poverty alleviation initiatives. This can lead to improved living standards, enhanced social equality, and a more inclusive society.
International Financial Stability: The successful resolution of sovereign debt crises through restructuring contributes to global financial stability. Unresolved debt problems can have systemic repercussions, impacting international financial markets and investor confidence. By addressing debt challenges in a fair and transparent manner, sovereign debt restructuring helps mitigate potential contagion effects and maintains the stability of the international financial system.
Why is Zambia engaging in debt restructuring discussions?
Zambia’s decision to engage in debt restructuring discussions stems from its pressing need to address its substantial debt burden and restore financial stability. The country has accumulated a significant amount of debt, surpassing its capacity to service it effectively. Debt restructuring provides an avenue for Zambia to negotiate with its creditors, seeking more favorable terms, such as extended repayment periods, reduced interest rates, or partial debt forgiveness.
Furthermore, Zambia’s debt restructuring process holds significance beyond its own borders. As Zambia navigates the restructuring path, it may serve as a potential template for other countries facing similar challenges. Countries like Chad and Ethiopia, which are also burdened with high levels of debt and are awaiting debt restructuring, could learn from Zambia’s experiences and the outcomes of its negotiations. Zambia’s case could provide insights into the common framework for debt restructuring, allowing other nations to navigate the process more effectively and potentially secure improved terms with their creditors.
By engaging in debt restructuring discussions, Zambia aims to alleviate its debt burden, restore fiscal stability, and pave the way for sustainable economic growth. Simultaneously, Zambia’s experience may contribute to shaping future debt restructuring efforts for countries in similar circumstances, ensuring a more efficient and equitable approach to resolving debt challenges under the common framework.
How China reacts on Zambia’s debt restructuring?
Out of the 68 countries participating in the Debt Service Suspension Initiative (DSSI), 22 have a debt to China that exceeds 20% of their total external debt. This makes China the largest official bilateral creditor in half of the DSSI countries and positions it as a key player among other bilateral creditors in most DSSI countries. Leaders of the Group of Seven (G7) advanced economies have recently been in talks with Chinese officials regarding ways to assist developing nations struggling with debt. While China had offered to forgive 23 interest-free loans to 17 African countries at the 2021 Forum on China-Africa Cooperation, such loans account for only a small percentage of China’s lending to the continent. Therefore, other countries believe there is greater potential for China to take action. Specifically, interest-free loans represent less than 5% of the $843 billion in commitments made by China to 165 governments worldwide.
According to the Boston University Global Development Policy Center, Chinese loans recipients in African governments are led by Zambia, Ethiopia, and Angola. As of March 2023, the public debt of Zambia, one of the top recipients, is reportedly $32.8 billion. Given the unsustainable state of Zambia’s debt, debt restructuring is imperative. In addition, the IMF has identified long-term economic mismanagement as a key factor contributing to Zambia’s financial woes, mainly involving an inefficient public investment strategy. This comment could be seen as a veiled criticism of President Edgar Lungu’s regime, which ran from 2015 to 2021. Since 2020, Zambia has been struggling to restructure its obligations, and was one of the first countries to seek sovereign external debt restructuring under the Common Framework for Debt Treatment in 2021. The Group of Twenty Summit developed the framework to provide low-income countries with a way to request debt restructuring when unavoidable. Chinese state-owned and commercial lenders hold the largest amount of debt, with $6 billion owed to them alone. The classification of the debt between official bilateral and private sector lenders has been a huge issue and the Zambian Ministry of Finance has classified it as debt to the private creditors. Economists at the World Bank estimated that half of the China’s lending abroad is unreported. China is the largest creditor of Zambia, accounting for 75% of the country’s bilateral borrowings. As the largest bilateral creditor in Africa, China has been reducing lending in the region due to its deepening economic troubles. Most of China’s lending has been aimed at long-term infrastructure projects, but the debt dynamics threaten to push reluctant governments into seeking assistance from the IMF and World Bank to meet their balance of payments. Zambia, which recently became the first African country to default in the pandemic era, has faced sluggish progress in its debt restructuring efforts. Other countries involved in the process have blamed China for the delays. China also announced on April 21, 2022 that it would participate in both the G20 Common Framework for Debt Treatments and the official Creditor Committee on Zambia during the IMF spring meetings. The move by China signaled that the debt-restructuring process is progressing after broad stagnation in recent months.
In August 2022, Zambia obtained a 38-month Extended Credit Facility worth USD 1.3 billion from the IMF. Following the completion of its first review of the program on April 6, 2023, the IMF Mission acknowledged the nation’s advancements due to strong fiscal and structural reforms. Nonetheless, the ongoing postponements in debt restructuring present tangible dangers that could lead to setbacks in the country’s economic transformation goals and hinder its aspirations for an improved quality of life for its citizens. Zambia has also taken steps towards debt restructuring by sharing a first fully-formed debt restructuring plan with China and other government creditors on April, 2023. This significant step demonstrated Zambia’s commitment to address its mounting debt burden. The proposed plan aimed to alleviate the financial strain on the country and establish a sustainable framework for debt management.
However, despite the timely submission of the debt restructuring plan, the response from China and other government creditors remained elusive until May 2023. This lack of immediate feedback introduced an element of uncertainty and further prolonged the already drawn-out debt restructuring process. The delay in receiving a response from these key creditors created additional challenges for Zambia, impeding its efforts to curb the financial distress and restore economic stability.
As one of Zambia’s primary creditors, China’s response carried crucial weight in determining the success of the debt restructuring initiative. The outcome of these negotiations would have far-reaching implications for Zambia’s economic future and the country’s ability to regain financial solvency.
Moreover, the reluctance of these creditors to commit to substantial relief measures has hindered the pace of debt overhaul in Zambia, posing challenges to the country’s efforts in achieving sustainable financial stability. This impasse underscores the complexity of the debt restructuring process and highlights the critical role of key creditors, particularly China, in determining the outcome and effectiveness of debt relief initiatives for heavily indebted nations like Zambia.
China typically prefers longer debt extensions and no reduction in principle, but this approach may not always be feasible. According to Charles Robertson, the Global Chief Economist at Renaissance Capital Ltd, China’s involvement in negotiations has added complexity and both Zambia and Ethiopia have yet to reach a sustainable solution to their debt problems. Many experts believe urgent action is needed, as the situation may worsen over time.
Conclusion
As one of the countries that borrowed from China, Zambia is now in a precarious position of debt distress. China is the primary creditor, giving them significant sway over Zambia’s economic affairs.
Confidential reports indicate that critical sectors such as the state electricity company and radio news channels are already under Chinese ownership. Hidden loans that resemble investments in rival enterprises are a cause for concern. While China’s lending practices face scrutiny, it’s important to note that Zambia must also take responsibility for the misuse of funds.
The complexities and challenges of debt reliance and subsequent debt restructuring are exemplified by the situation in Zambia. This underscores the importance of responsible borrowing practices and transparency from both borrowing nations and creditors. Thus, it is imperative to address these issues to ensure sustainable debt management and avoid any adverse consequences for developing countries’ economic stability and sovereignty.
Vishaka Ponnamperma
(Vishaka Ponnamperuma is an independent researcher based in Colombo, Sri Lanka, with a primary focus on economics. Currently pursuing a Master’s degree in Financial Economics at the University of Colombo, Vishaka has a strong academic background. She holds a Bachelor of Arts degree in Social Statistics and Economics from the University of Sri Jayewardenepura. With a passion for understanding economic systems and their impact on societies, Vishaka engages in research to explore various aspects of economics and contribute to the field.)
References
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Hill, M. (2022). Zambia’s Eurobonds tumble after $8.4 billion debt-relief reuest. Bloomberg .
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