Zambia’s debt restructuring fails miserably as an excruciating prototype

Resource-rich Zambia is about to pull itself out of default more than three and a half years, or 1,300 days, after legally declaring bankruptcy. This will leave richer countries with some sobering insights into the effectiveness of their much-heralded debt relief plan.

Zambia is set to become the first country to finish a comprehensive overhaul under the G20-led ‘Common Framework’ framework on Tuesday when its foreign bondholders approve their share of a $13.4 billion debt restructure.

The president of Zambia, Hakainde Hichilema, has called it a historic occasion, and Kristalina Georgieva, the head of the International Monetary Fund (IMF), has praised it as a significant indication of international collaboration.

However, rather than a joyous fist shake, it will be more of a tired cheer for many who are involved in the daily job and frequent delays.

At a Finance for Development Lab debt conference in Paris on Friday, William Roos, the co-chair of Zambia’s Official Creditor Committee, which included China, the country’s largest lender, as well as the ‘Paris Club’ of wealthier Western creditor nations, said, “We fully recognize that it was painful for Zambia.”

Thus, we must get better. However, we succeeded.”

According to estimates, Zambia’s debt will be restructured to save over $900 million and its future payments will be spread out over a considerably longer period of time.

However, its prominence has come from its use as a Common Framework guinea pig.

The Framework was created to unify all the many lenders to developing nations under one roof, especially China, whose lending surged in the ten years prior to the pandemic. It was introduced during COVID-19 in 2020.

Although it was hailed as a breakthrough, criticism of the delays and complexity has arisen from the unusually long period Zambia’s reorganization has taken, as well as those still proceeding in Ghana and Ethiopia.

All three nations’ officials and creditors have expressed dissatisfaction with the lack of transparency.

The director of debt management at Zambia’s Ministry of Finance, Masitala Mushinga, said that while they were at first assured and at ease, they soon found themselves in a difficult situation where they were at odds with bondholders and China, the country’s largest creditor, over what constituted “comparable” debt relief.

“The two elephants were there fighting and we were right there in the middle without any real assets, so to speak, because we didn’t know how the process should play out,” she stated during the event in Paris.

A government and IMF-approved agreement with private sector bondholders was temporarily derailed in November by the official creditor group, led by China and France, on the grounds that it did not offer sufficient debt relief. Tensions had already surfaced when China demanded that the large multilateral development banks led by the West also absorb losses.

Ernest Addison, the governor of Ghana’s central bank, responded, “The G20 framework… I do not think I want to recommend that to any country,” when asked about his nation’s experiences at the same event that co-chair Roos of the Paris Club was speaking at.

ENGINE OF WAR

Under Zambia’s agreement, which opens a new tab, creditors in the official sector will renegotiate loans totaling $6.3 billion, and three of the nation’s major bonds, valued at a total of $3 billion, will be consolidated into two with modified terms and payment schedules.

There are still some small bank and other loans that need to be adjusted.
Former IMF General Counsel Sean Hagan and expert on sovereign debt Brad Setser draw attention to the terms of the new agreements that require Zambia, the continent’s second-largest producer of copper, to make additional payments in the event of a swift recovery.

But those extra payments might raise its debt to the point where the IMF declares it highly vulnerable to debt trouble once more.

Nonetheless, proponents of the Common Framework maintain that its issues are being resolved.

Head of the IMF’s Debt Policy Division Allison Holland thinks that Ghana was able to move more quickly from IMF staff level agreement to program approval because of lessons learned in Zambia.

The Global Sovereign Debt Roundtable’s establishment, she continued, has allowed official creditors to better understand one another’s worries and limitations and allows for ongoing process improvement.

However, Thys Louw, a member of the bondholder committee of the South African investment firm Ninety-one, believes that the notion that restructurings have many “common” aspects is false and that the challenges in Zambia were deeply ingrained.

Louw stated, “We were always optimistic in terms of engagement, but Zambia became essentially the battleground, the collateral damage in the broader themes at play,” alluding to the West’s early fears of an impending wave of defaults as well as its hawkish attitude toward China.

ACTUAL WIN

Melissa Butler of White & Case, one of Zambia’s legal counsel, also pointed out that China was singled out for criticism.

“There was a lot of fingers pointing (in China) in the early days that was somewhat unfair, because there was a learning process going on,” Butler stated.

“They have shown that they wish to interact with the rest of the world, and they succeeded in Zambia. I think that’s the true victory here.

At a routine briefing on Friday, Wang Wenbin, a spokeswoman for China’s foreign ministry, stated that Beijing will “continue to coordinate and cooperate with all parties concerned” and that all sides had “highly appreciated” Beijing’s efforts.

In addition to asking to increase the $1.3 billion loan program to $1.7 billion in order to better address the nation’s worst drought in forty years, Zambia also requested that the IMF wrap up its examination of the country’s Extended Credit Facility (ECF) on Tuesday.
However, will reorganizing it beyond a certain point pave the way for the next Common Framework default to appear wherever it does?

“It might be simpler, but do you think it will become less complicated? No, Butler to White and Case replied.