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China and other creditors have reached a deal to restructure billions of dollars of loans to Zambia.
The agreement ends a long impasse over the southern African nation’s 2020 default that exposed a rift between Beijing and western lenders over how to resolve a wave of debt crises in the developing world.
Zambia’s President Hakainde Hichilema, Emmanuel Macron, president of France, and China’s premier Li Qiang were due to meet to mark the agreement on Thursday at the global finance and climate summit in Paris, almost three years after Zambia defaulted.
Africa’s second-biggest copper producer had been left in financial limbo and unable to continue accessing a $1.3bn IMF bailout while China, the country’s biggest creditor, and other lenders clashed for months over a proposal to reduce by about half the value of almost $13bn of overall external debts.
Under the breakthrough, bilateral lenders led by China have agreed to rearrange payments and extend the maturities of $6.3bn in loans, paving the way for Zambia to resume funding from the IMF and to restructure another $6.8bn of private debts.
“Today we can say there is an agreement on the outlines of a debt restructuring,” a French official said. “We have arrived at the end of the negotiation that began months ago.”
The agreement is a diplomatic win for Macron at the high-profile summit that has brought world leaders together to discuss reforms to the lending system between richer and poorer countries.
The Zambian deal will also raise hopes for other countries such as Ghana and Ethiopia. They are in similar talks to restructure debts dominated by loans from China, which has become the single biggest lender to the developing world in the last decade.
China has been reluctant to accept direct writedowns of foreign loans by its banks, and in Zambia’s case it had proposed multilateral development lenders such as the World Bank take the unprecedented step of joining the restructuring.
Under the Zambian agreement, bilateral creditors will commit to extend their loans by more than 20 years and provide a three-year grace period on interest payments.
A banker close to the negotiations said an agreement among official creditors would be “real progress”, although the full restructuring of Zambia’s external debt would still require agreement among private creditors, such as holders of the country’s $3bn eurobonds.
A debt investor involved in the talks said development banks were likely to provide concessional lending rather than debt writedowns as a way of unlocking an agreement.
Out of concerns for domestic financial stability, Zambia has excluded its local currency bonds from the restructuring, even foreign holdings of this debt. Some creditors say the latter should be included. Others have said that current targets to enable debt relief, such as a ratio of debt to exports, are too pessimistic.
The investor said foreign buyers of Zambia’s domestic public debt appeared to have reduced their holdings from $3.2bn to less than $2bn since the end of last year, on fears that domestic borrowing could be included in the restructuring, as in Ghana and Sri Lanka.
The Lusaka finance ministry last October said servicing those holdings would absorb about 80 per cent of the money available to repay external debts. A steep reduction in foreign holdings of domestic debt would free more money for other creditors including China, the investor said.
Eswar Prasad, professor of economics at Cornell University, said: “For China, the endgame seems to be a resolution that limits its financial losses while spreading more broadly the blame for the distressing and untenable situation that many highly indebted economies find themselves in.”
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