Zambia-China debt deal ‘worsens crisis’

The lack of transparency in a deal reached between Zambia’s debt-laden government and the China Development Bank (CDB) is making Zambia’s debt crisis worse, says the head of a China-Africa think-tank.

Zambia reached a deal with the CDB, the biggest of three state-owned policy banks, to defer debt repayments on a loan that were due this month, Zambia’s government announced on Thursday.

Under the deal interest payments were postponed for six months until 25 April 2021, the secretary to the Treasury Fredson Yamba said in the statement.

The deal shows rare flexibility on behalf of a Chinese lender, but the secretive nature of negotiations – with the size of the loan and the amount of the debt repayments due remaining undisclosed – is adding to Zambia’s problems by blocking the country’s access to international capital says Eric Olander, co-founder and managing editor of the China Africa Project. 

“The lack of transparency related to China’s negotiations with borrowers, an accurate accounting of the true amount of Chinese debt and the terms of those loans, sends a signal to the market that directly contributes to the exceptionally high risk premium that African sovereigns encounter when they need to borrow money.

 “Without access to capital, the liquidity crisis in Africa worsens, contributing to inflation that pushes up prices and eats away at what’s left of consumers’ disposable income.”

Like the G20’s six-month extension of its Debt Service Suspension Initiative (DSSI) for the world’s poorest countries, the CDB’s deal with Zambia doesn’t go far enough, Olander says.

“The CDB’s deal with Zambia is nothing more than the bare minimum. We’re talking about a single loan where the Chinese creditor is still going to get repaid in full, just a few months later than what was expected. That’s not exactly momentous.”

Zambia owed CBD around $311m in June 2019, according to the latest Zambian finance ministry figures.

The Zambian government missed a $42.5m coupon payment on one of its Eurobonds that was due on October 14 but has a 30-day grace period before it goes into default.

The deal is also unlikely to pressure Zambia’s bondholders to take a haircut and accept similar terms on their returns, Olander says.

“The bondholders want the Chinese to be far more assertive in terms of laying out the details of their loan portfolio in Zambia so they can better assess the risk. This CDB deal does not do that.

Meanwhile as the Chinese government continues discussions with other debt-ridden countries, debt deferrals are likely to be on the agenda in Kenya, Ethiopia and Dijbouti, he adds.

S&P Global Ratings Services downgraded its assessment of Zambia’s debt to “selective default” after the southern African nation couldn’t meet repayments and missed a coupon payment on its Eurobonds.