Zambia’s Debt Deal Faces New Challenge Amid Official Sector Concerns

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Official lenders, spearheaded by the International Monetary Fund (IMF) and Beijing, have raised concerns about Zambia’s debt restructuring deal worth nearly $4 billion, dealing a significant blow to the country’s efforts to recover from its 2020 default. Zambia’s finance ministry disclosed on Friday that multilateral agencies and major creditors, including China, had “expressed reservations” about the preliminary agreement reached with private creditors in the previous month. Although specific details were not provided, the finance ministry stated that discussions with creditors would persist.

The setback follows observations by analysts who noted that the recent deal could result in substantial cash payments to private creditors in the initial years post-restructuring. President Hakainde Hichilema’s government is reliant on securing creditor agreements to resolve the payment default that originated at the end of 2020. Failure to reach an agreement may prompt the IMF to reevaluate a $1.3 billion bailout established last year.

Zambia’s challenges underscore the shortcomings of the “common framework” for sovereign debt workouts, devised by G20 nations during the early phases of the global COVID-19 pandemic. The lack of consensus among an increasingly diverse group of creditors highlights the coordination complexities involved in addressing debt crises in emerging markets.

Earlier this year, China and other bilateral creditors granted relief on their $6.3 billion debts. In October, holders of $3 billion in US dollar bonds reached an agreement to extend maturities and reduce the face value of claims accumulated during the default. This deal included bondholders directly forgoing $700 million of postdated interest, unlike official creditors who opted for reducing the cash flow or economic value of their loans without writedowns.

Both bondholders and official creditors agreed to restructure Zambia’s debts, contingent on the IMF reassessing the country’s economic health in a few years. If economic recovery occurs, repayments will increase. However, a $2 billion restructured bond not part of this potential uplift would receive $500 million in payments in 2024 and 2025, irrespective of meeting later targets. This bond has a relatively high coupon compared to official debt.

The overall reduction in cash flows for the bondholder deal, still pending approval later this year, remains undisclosed by Zambia. Official creditors consented to an approximate 40 percent reduction. Debt Justice, a UK charity, and Zambian civil society groups estimate that bondholders would incur an economic loss of about one-third if the uplift is not triggered, considering a 5 percent discount rate to account for inflation.

Analysts suggest that the plan for bondholders to recover cash earlier than the official sector may escalate tensions if official creditors perceive it is facilitated by the funds they relinquished and the IMF’s bailout loans. The steering committee for bondholders declined to comment, and the IMF did not immediately respond to requests for comment.