By DARLINGTON CHILUBA
IF loans were given on the basis of collateral, countries endowed with rich natural resources such as Zambia, Angola or the Democratic Republic of Congo (DRC), and others would borrow and never default on their loans.
We would simply assign a particular copper or gold mine to a given lender on agreed conditions until the debt is repaid.
Unfortunately, in the real world, lenders do not grant loans on the basis of collateral. Natural resources like copper are important just for the lenders to know how the country utilises its assets to earn revenue. This is the principal of liquidity or cash flow. It is a way of knowing how quickly the borrower can repay the loan with minimum challenges.
Lenders – also known as creditors – need a way of predicting any challenges that might affect a country’s ability to repay their loans. This is why information is more important than collateral in high finance or in international financial markets like the Euromarkets. These markets can be brutal, as nations like Malaysia, Argentina and Mexico found that out earlier than we did.
Countries that borrow from these commercial markets must provide as accurate information as possible because misinformation can have adverse economic consequences. This is not to suggest that lenders will ignore or downplay negative information about a country if it benefits them. Afterall, creditors lend out money for profit, not charity.
For example, in November 2020 and January 2021 Zambia selectively defaulted on its Eurobonds’ debt service of about $42.5 million and $56.1 million respectively.
The word “selectively” was important because Government defaulted only on the Eurobonds which represent less than 30 percent of the total debt Zambia has. In other words, out of almost $13 billion central government’s external debt, only $3.25 billion was borrowed from Euromarkets – and it is this portion of debt that became toxic. Other creditors who were owed more money agreed to a six-month debt freeze.
Still, the perception was created that Zambia was unable to meet its debt obligations and therefore it became a risky destination for investment. That risk assessment increased how much interest we paid on these loans because the interest is tied to the risk profile of the borrower – in this case Zambia.
Government needed more Kwacha to buy foreign currency to pay the lenders’ interest. The result created a scarcity for the United Stated Dollar which depreciated the Kwacha rapidly so that the USD/ZMW exchange rate became a political issue.
Indeed, when the political landscape changed the perception of investors in the Euromarkets changed also (see
https://www.bloomberg.com/news/articles/2021-08-17/zambia-eurobond-investors-see-hichilema-secure-imf-deal-by-april and https://www.bloomberg.com/news/articles/2021-08-16/zambian-opposition-leader-hichilema-wins-presidential-election, among others).
In short, we were not too risky an investment option anymore and our interest payable on the Eurobonds dropped. In the last three months the exchange rate against the dollar dropped from highs of 24 to now 16.8 as at December 9, 2021 – a phenomenal 27 percent gain in value in three months.
Zambia has secured two International Monetary Fund (IMF) deals so far: A Staff Level Agreement for a three- year Extended Credit Facility (ECF) programme worth $1.4 billion on December 3, 2021 and another $1.3 billion in August 2021 under the Special Drawing Rights (SDR) programme.
Before these deals are finally signed off by the IMF Executive Board, Government needs to reach an agreement with the powerful 30 percent Eurobond creditors who did not agree to the initial debt freeze.
It is delicate and difficult, but it will set Zambia on a progressive trajectory for the next 10 years if done correctly. It is such and other challenges that the founding father of Zambia’s modern economy Dr Frederick Chiluba endured and overcame, dealing with creditors such as the Paris Club, the World Bank and others.
In the process, he laid the foundation for the Heavily Indebted Poor Countries (HIPC) in Geneva, Switzerland between 1996 and 2000. Zambia’s completion point in 2005 and sound economic management came long after he left office.
We should not forget and misrepresent those pivotal 10 years, 1991- 2001, they laid the foundation for responsible government under challenging conditions.
Correcting historical damage while creating opportunity for the future. Opening up the country while building local capacity and capital for the benefit of the citizen through smart policies. All the while keeping citizens informed and assuming responsibility for even the unexpected and unplanned negative outcomes.
There are pivotal moments in a country’s history that are ripe for legacy and national pride. Such moments require responsibility than blame.
These pending negotiations might be another such moment for Zambia. Caution is necessary, hope is a must, but difficulty is expected and should be managed and explained well for the nation to progress cohesively and avoid divide caused by external investor perceptions.
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