ZAMBIA made global news again recently when it met conditions for debt restructuring under the auspices of the International Monetary Fund (IMF).
The announcement made on June 23, 2023, comes nearly three years after the country selectively defaulted on its debt repayments in late 2020. Analysts and experts, then and now, have made their predictions on the exchange rate, inflation, direct investments, and prospects for the country, as expected. The tightrope and backroom discussions by the Zambian government cannot be underplayed.
However, one of the most important and overlooked statements, by far, from this successful undertaking was the acknowledgment and appreciation of China’s role as co-chair of the Official Credit Committee by the Zambian President.
The statement released through the Ministry of Finance and National Planning shows a return to Zambia’s historical position in international relations – being neither east nor west, but cautiously and firmly centered.
One has to recall that financially, Zambia owes more money to China than any other country, with over 60 percent of the total debt stock. This debt is also foreign currency-based and susceptible to movements in the exchange rate.
In fact, between 2014 to 2016 when China completed most of its infrastructure projects ahead of schedule, Zambia was called upon to make the loan payments in full.
This immediately forced the depreciation of the Kwacha because scheduled loan repayments which relied on the periodic conversion of local currency to foreign currency were disturbed.
The government needed to buy more foreign currency to pay debt ahead of schedule thus creating a scarcity of foreign currency, especially the United States Dollar, which typically resulted in the depreciation of the Kwacha.
This trend, left unabated, could have become catastrophic affecting inflation and reserves. Instead, China restrained its call on debt ahead of schedule, and in 2018, President Xi Jinping pledged US$60 billion in financing for African countries.
So, while granting relief on active debt, China went ahead and increased its available loans to African countries.
It must be explained here that Chinese debt is not commercial, meaning that it is largely shielded from open markets and their ruthless application of the demand, supply, and perceptive economics or finance.
The Eurobonds, on the other hand, represent commercial private debt which is very susceptible to market influences that ultimately respond to the profit motive of private lenders.
Zambia, Ghana, and other nations that borrowed on the Eurobond markets found out the hard way that when a nation is perceived negatively by these private creditors, whether true or false, interest on loan repayments increases and of course, the opposite is true as well.
Zambia has three Eurobonds amounting to US$3.25 billion and the immoderate increase in interest repayments on these loans alone forced the country to selectively default on the Eurobonds. Again, when the country proposed a freeze on interest repayments on all debt to enable it to reprofile its repayment schedule, China was among the first creditors to accept the proposal.
Even so, China’s acceptance was insufficient as long as the private creditors – Eurobond holders – did not trust or have confidence in Zambia’s capacity to repay loans.
This is where and why the IMF umbrella becomes important so that misperception of policy and national data is managed by an internationally respected body.
It is also why the Government must be applauded at the very least for walking the tightrope to this phase. It is not the first time Zambia has walked this road of debt restructuring through to debt relief.
In fact, even the approach of the IMF has been different from lessons learned in the 1990s when most indebted countries lamented the one-size fits all approach of the IMF which culminated in Structural Adjustment Programmes (SAPs).
From these experiences, Zambia effectively wrote the template for debt relief in 2000 under the 1996 Highly Indebted Poor Countries (HIPC) initiative.
Zambia also led the go-east vision which shifted the Sino-Africa partnership from social-political to economic in the 1990s and led to the first Bank of China in Africa being opened here in Zambia.
While the current negotiations were underway, it appeared for a while that the Government leaned more to the West than toward China. It is safe to state, in conclusion, that this triumph for debt restructuring – and it is a triumph – is a shared victory with China in more ways than one.
The private lenders will come and go, but the historic relationship between the second-biggest economy in the world and the IMF will remain essential in the future.
This outcome, in addition to economic and social interpretations, could singularly be a lesson in economic diplomacy under crisis. Needless to mention that Zambia was the tipping point in the global power play between East and West during these negotiations.
Today, as it was in the 1990s, we have become exemplary for other nations in relation to international economic negotiations.
