How Zambia ran into debt distress

Zambia formally ran into debt distress this week after lenders rejected a revised repayment plan that would have seen Lusaka's grace period increase by several months.

Only China announced it will delay interest and loan repayments on its loans from May to December 31, technically granting just some four weeks of respite.

So how did it begin?

After a protracted opposition campaign for a decade, Zambia’s governing and socialist oriented Patriotic Front wrestled power from the liberal leaning Movement for Multiparty Democracy.

The outfit was led by the late gruff nationalist Michael Sata who rode on the slogan of “more money in your pockets, more jobs and lower taxes.”

He promised infrastructure development and to rid the country of the graft highly associated with the 20-year MMD rule by 2011.

The PF’s victory came with the inescapable need to fulfil huge campaign promises.The administration had to look for money even from countries it “demonised”, like China. Some of the monies were grants, most were loans.

There were always warning signs.

The outbreak of the Covid-19 pandemic has disadvantaged several countries in Africa but it appears Zambia’s debt position will be muddied for a long time to come.The country has made headlines as the first to default in the post-Covid-19 era.

What was the money actually used for?

On ascending to power in 2011, the current Zambian administration embarked on a massive infrastructure drive.

It built schools, hospitals and upgraded its road network sometimes in places where that infrastructure never existed since Independence from Britain in 1964. That money was also spent on civil service pay.

To sustain that ambition, it borrowed and issued two Eurobonds that performed “exceptionally well”.

As incumbent President Lungu assumed power in 2015, in an election necessitated by the death of party founder Sata after three years in power, that borrowing continued.

How much does the country actually owe?

Zambia’s debt owed to foreigners tripled between 2014 and 2018 relative to the gross domestic product (GDP).

Of an estimated $12 billion (51 per cent of GDP) of external debt on Zambia’s books at the end of 2018, about 30 per cent was owed to China, 25 per cent to bondholders and 19 per cent to foreign banks. The World Bank, the International Monetary Fund and western governments hold a relatively small share.

According to analysis by the IMF and the World Bank there are some loans that have been authorised but do not yet show up in official figures. These got to about $10bn in April 2019.

Zambia’s stock of external debt at the end of 2019 was $11.97 billion but the guaranteed debt for state-owned enterprises totalled $13.55 billion.

Out of the huge sums borrowed, the country has seen infrastructure spring up in all places where none existed. Most key roads have been tarred, making travelling relatively smooth.

That was enough to deduce that a plan for expanding the money borrowed was clear but the question of whether a payment scheme was put in place still looms large.

Weren’t’ there warnings?

Zambia’s debt chokehold was tightened when bondholders rejected a request for some relief during a meeting recently.

The southern Africa nation had until November 13 to convince holders of its $3 billion in Eurobonds to accept a six-month interest-payment holiday.

In responding to incessant criticism by the opposition and civil society during commissioning of a flyover bridge in the capital Lusaka, President  Lungu frustratingly remarked, “the country will continue borrowing if necessary".

But to borrow is different from being eligible to borrow. So who will loan Lusaka in these conditions?

A statement by the country’s Finance minister Bwalya Ng’andu said, "While the government regrets that the bondholders did not approve the requests made by Zambia in good faith, we remain committed to finding a consensual and collaborative resolution to debt sustainability issues.”

Last week, the minister announced the country was defaulting on the principle of pari passu.

He said the country was hoping to treat lenders equally based on their complaint that Zambia was biased in servicing only a certain class, leaving out the others.

What lies ahead?

As the country heads to the 2021 general election, two bigger things are an albatross in the governing party’s neck; the massive debt and the controversial eligibility of President Lungu.

This far, the opposition is running to town with a theme that has become commonplace even for ordinary folk, who seem to be already feeling the pinch.

There are also repeat opposition allegations that the country’s economy has been mismanaged.

Can Zambia get out of this hole?

Zambia received a shot in the arm after another Chinese Bank suspended interest and principal payments on sovereign loans to that country amounting to $110 million due between May 1 and December 31.

The move by the Export Import Bank of China-Exim China was aimed at helping Zambia ease debt and liquidity pressures as the country mobilised necessary resources to fight the Covid-19 pandemic, a Finance ministry official said.

This is in line with the G20 Debt Service Suspension Initiative Framework.

In mid-October, Zambia got some debt relief from the China Development Bank, which was expected to put more pressure on private bondholders, but by the weekend there was no fresh wind in the sails.

The Chinese state-owned lender agreed to defer interest due October 25 for six months and reschedule the principal due by the same date over the life of the facility.

That will hopefully provide breathing room for Zambian policy makers to think of a way out of the hole.

Who is managing Zambia’s debt?

The government has contracted French firm Lazard Freres to advise on restructuring Zambia’s $11.48 billion foreign debts, a move that has been opposed by civil society and opposition.

Several local economists and fund managers have cautioned on government’s borrowing.

So, what happens from here?

At this stage it is unclear how much Zambia has in default.

The Finance minister told State TV that the country is reengaging bondholders for some relief despite their initial position.

"We are still scouting for ways to settle what we owe," he told insurance executives over the weekend.

Several economists have urged the government to get on an IMF programme as it seeks ways to emerge from the crisis