During a facilitated discussion before an audience at the University of Zambia in late January, International Monetary Fund (IMF) managing director Kristalina Georgieva praised the host country’s leaders for their attempts to reform the economy following a debt default in 2020.
“Zambia is doing everything right,” Georgieva said. “Now is the time for the creditors of Zambia to do their part and complete that restructuring, to give more space for Zambia to grow.”
This comment was a not-too-subtle dig at China, to which Zambia owes more than a third of its debt. Beijing has been widely criticised by international financial organisations and Western governments for allegedly blocking Zambia’s efforts to restructure its debt.
US treasury secretary Janet Yellen, who visited Zambia as part of a recent tour of Africa, has also accused China of being a “barrier” to ending Zambia’s debt crisis, and said the situation had “taken far too long” to resolve.
What caused Zambia’s debt crisis?
The situation stretches back to November 2020, when, amid the economic turbulence of the coronavirus pandemic, Zambia missed a $42.5m Eurobond payment and stopped making payments on around $17bn of external debt. As Africa’s second largest exporter of copper, after the Democratic Republic of the Congo, Zambia was badly hit by the sharp depreciation in the price of the commodity at the start of the pandemic.
The almost total collapse of international travel and tourism sparked by the pandemic also had a severe impact. It is estimated that in 2019 travel and tourism contributed over 7% to Zambia’s GDP, but the sector was practically non-existent over the two years of the pandemic.
In this context, Zambia’s debt levels were a particular problem, given not only the amount that the country had accumulated, but how the money had been spent. M’khuzo Mwachande, an investment banker with Pangaea Securities in Lusaka, tells African Business that “there is nothing wrong with debt,” if it is used to stimulate economic growth, but that Zambia’s “misappropriation of funds has led us to where we are”.
“We should have invested funds better in crucial sectors such as manufacturing, energy, and agriculture,” Mwachande says. “Governments have lacked foresight in terms of how the funds should be used.”
The IMF has similarly noted that “Zambia is dealing with the legacy of years of economic mismanagement, with an especially inefficient public investment drive” – an indirectly damning verdict on the administration of President Edgar Lungu, who led the country from 2015 to 2021.
While a “new dawn” government led by President Hakainde Hichilema was elected in 2021 to move past this legacy, a recent Afrobarometer survey suggests that around half of Zambians are still concerned about the country’s direction of travel and economic management.
Emerging markets such as Zambia have also suffered under a stronger US dollar since 2020, which has made it more expensive to service dollar-denominated debt. Higher interest rates in the US and globally, in response to elevated levels of inflation, have pushed up debt repayments further.
Alastair Newton, co-founder and director of Alavan Business Advisory in Livingstone, believes that the international community has failed to address the debt situation in emerging markets.
“At the most recent summit in Bali, the G20 was far too preoccupied with other issues to work on the requisite detail for its Common Framework for Debt Restructuring,” Newton says.
As Georgieva’s comments at the University of Zambia indicate, China is central to this issue, both in Zambia and several other African countries. Lenders in Beijing now account for almost $700bn in private and public debt across the continent. China accounts for around a third of Zambia’s $17bn debt pile.
While China has agreed to restructure the debt of other countries in economic difficulties, such as Chad, Western policymakers have suggested that Beijing is deliberately holding up Zambia’s attempts to do the same. In some cases, the implication is that China is engaging in “debt trap diplomacy.”
Others suggest the holdup may have more practical causes. The Financial Times has reported that the Zambia government has heard little from Beijing on specific terms for reducing the loans, while some analysts have blamed a lack of experience and coordination among the Chinese state and development banks who have lent to the country. China has appointed the Export-Import Bank of China, one of the government’s three “policy banks”, to represent Chinese lenders in talks on restructuring the debt.
Changing nature of debt
Carl Mbao, managing partner at Frontier Capital Partners in Lusaka, believes China’s intentions are unlikely to be malevolent. “We have to be careful to isolate this situation from the geopolitics of the question,” Mbao tells African Business. “I do think that some of the narrative around Zambia’s borrowing from China is in part fuelled by geopolitical ‘surprise’ that Zambia has swung from being mostly reliant on Western economies, to being bankrolled more by China.”
Mbao suggests that many of the difficulties that have impeded progress on Zambia’s restructuring come not from China, but “a change in the nature of sovereign debt”.
“Back in the 1990s, you were mostly talking about bilateral debt,” Mbao notes. “Largely speaking, the counterparties were finite, known entities that could be easily negotiated with.
“But when you’re talking about new instruments, such as Eurobonds, there are often several holders of the underlying security that are not necessarily easily identifiable. Negotiation become a much more complicated proposition. We now have a bilateral dance with China. We’ve got to find a way to bridge this gap – renegotiation between this diffused commercial security on one side, and this bilateral entity on the other side, who’s also sitting with their own balance sheet of assets and liabilities.”
Both Mwachande and Newton believe that China is prepared to try and find a way through these legal complexities.
“Everybody I’ve spoken to has underlined how constructive China has been in the Zambia process… everything I hear is that China is trying to come up with new and imaginative ways of moving everybody towards an acceptable outcome,” says Newton.
In January, Yellen said that she held “constructive talks” on Zambia’s debt problems with Chinese vice-premier Liu He, a senior economic policymaker.
A crisis that should not have been
The great paradox of Zambia’s case is that the fundamentals of its economy are relatively strong. While the country inevitably suffered throughout the pandemic, and the global economic difficulties that have followed, many believe that Zambia need not have ended up in this situation.
Newton recalls that he was “not particularly surprised” by the $42.5m default in 2020 but “would have difficulty in explaining why a relatively small sum of money was not available to pay at that time.”
Mbao adds that “numerically speaking, it’s almost as if this shouldn’t be a crisis.”
Indeed, if and when the debt restructuring is completed, there are many signs that suggest Zambia’s economy is well-poised to strengthen considerably. The price of copper is rising, not least because it is an essential material for energy transition plans as the world seeks a greener future. International tourism is picking up again, with 1.5m people expected to visit Zambia in 2023. Inflation is still substantial, at just under 10%, but is well down from the 22% rate Zambia experienced in 2021.
The current president, who Newton describes as “very business friendly”, has introduced several initiatives aimed at encouraging innovation and private sector enterprise. A peaceful transfer of power in 2021 demonstrated to foreign investors that Zambia has strong institutions and a commitment to the rule of law.
Zambia still has the debt issue to resolve, but otherwise seems to have a bright economic outlook. Given this, Newton believes that “we don’t need to be panicking about Zambia at this time… Zambia’s debt negotiations are well advanced, there is goodwill on behalf of all parties concerned, and there’s a reasonable possibility of agreement being reached in the not-too-distant future.”
“Zambia is in a good space, sentiment wise,” Mbao says. “There are some tricky themes to manage, but largely speaking, we’re in a good place.”