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China and other creditors have reached an agreement to restructure billions of dollars in loans to Zambia, ending a long deadlock over the African country’s default in 2020 that has exposed a rift between Beijing and Western lenders over how to solve a wave of debt crises in the developing world. .
Zambia’s President Hakainde Hichilema praised Chinese President Xi Jinping on Friday for “helping us reach this important milestone” after lenders led by China agreed to rearrange $6.3 billion in loans, in a deal the government of French President Emmanuel Macron helped seal in Global Finance and Climate Summit In Paris.
“We are fully aware that there is still a significant amount of work ahead of us,” Hichilema added, reflecting that Zambia still has to normalize terms with each bilateral lender and strike a separate deal to restructure another $6.8 billion of private debt.
Africa’s second-largest copper producer has been left in financial limbo and unable to continue accessing a $1.3 billion International Monetary Fund bailout, while China, the country’s largest creditor, and other lenders have battled for months over a proposal to write down nearly half the value of Almost $13 billion. of the total external debt.
Under the milestone, bilateral lenders led by China agreed to a three-year grace period on interest payments and extended maturities, paving the way for Zambia to resume financing from the International Monetary Fund and start private creditor talks.
Unusually among debt restructuring deals with official creditors, the agreement will also provide lower debt relief in the event that Zambia’s economy does better than expected in the next few years.
“This unique and innovative agreement sets out both a baseline and emergency treatment that will be triggered automatically if the assessment of Zambia’s economic performance and policies improve,” said Kristalina Georgieva, Managing Director of the IMF.
Analysts said more details are needed on how much debt relief Zambia will actually receive if its economy improves.
The deal was a diplomatic boon for Macron at the Paris summit that brought world leaders together to discuss reforms to the lending system between rich and poor countries.
The Zambian deal will raise the hopes of other countries such as Ghana and Ethiopia, which are in similar debt restructuring talks dominated by loans from China. Beijing has become the single largest lender to the developing world in the past decade.
China has been reluctant to accept direct write-downs of foreign loans from its banks and, in the case of Zambia, has suggested that multilateral development lenders such as the World Bank take the unprecedented step of joining the restructuring.
A debt investor involved in the talks said development banks were likely to offer soft loans rather than write-downs as a way to open a deal.
Because of concerns about domestic financial stability, Zambia has excluded its local currency bonds from restructuring, and even foreign holdings of that debt. The Finance Ministry said on Thursday that official creditors had agreed to accept the position.
The investor said that foreign buyers of local public debt in Lusaka appear to have reduced their holdings from $3.2 billion to less than $2 billion since the end of last year, amid fears that domestic borrowing could be included in restructuring, as is the case in Ghana and Sri Lanka.
And the Ministry of Finance said last October that servicing those holdings would absorb about 80 percent of the funds available to pay off foreign debts.
“For China, the endgame appears to be a decision to limit its financial losses while spreading the blame more widely for the sad and unsustainable situation in which many heavily indebted economies find themselves,” said Eswar Prasad, professor of economics at Cornell University.
Investment firm Lazard advised Zambia in its negotiations with creditors.
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