Mounting Debt Drives Zambia Closer to Default

ADF STAFF

After missing its October 14 payment on Eurobond debt, Zambia is preparing to default on billions of dollars it owes foreign creditors, partly because of the strain COVID-19 has put on its economy.

At the time it skipped its $42.5 million Eurobond payment, Zambia’s government was trying to arrange to delay repayments until April but failed to close the deal. It will try again on November 13, the end of the 30-day grace period to make good on the missed October 14 payment.

That follow-up meeting may not lead to a solution. After missing the Eurobond payment, the Zambian government announced it would suspend all foreign debt payments. Standard & Poor’s international credit-rating service downgraded Zambia’s debt to “selective default.”

Lusaka-based analyst Trevor Hambayi told ADF that Zambia was headed for trouble even without the pandemic’s impact.

“The debt crisis Zambia finds itself in was inevitable, as the core driver to this debt crisis has been the rate at which the country has continued to contract debt,” said Hambayi, senior managing partner of Zambia-based Development Finance Associates. “The escalation debt-service liability for the country cuts 69% into its entire domestic resources, thus any potential economic growth strategy has to be aligned to debt servicing.”

Zambia is at least $12 billion in debt, though a lack of transparency related to its Chinese debts makes the exact number hard to obtain. That uncertainty has hobbled Zambia’s ability to get the International Monetary Fund to support its proposed six-month delay in repayment.

In an October 18 interview with Bloomberg, former Zambian Finance Minister Margaret Mhango Mwanakatwe defended her nation’s history of borrowing.

“Debt, much as it looks high, we believe it is an investment for the future,” she said.

Further complicating its financial picture, Zambia borrowed money to cover its COVID-19 costs, but then used some of that money to pay down other debt. Analysts at NKC Africa Economics in Johannesburg described the approach as Zambia’s “rob Peter to pay Paul’ conundrum.”

Like many African countries, Zambia has found its health care system put under enormous strain by the COVID-19 pandemic. At the same time, the pandemic-related economic slump and higher taxes have cut into the demand for copper, its primary export.

Copper brings in 70% of Zambia’s export revenue. Prices plummeted earlier this year as COVID-19 lockdowns drove down economic activity. Prices have begun to rebound, but not enough to save Zambia.

“Even a resurgence of the copper prices on the international market and the absence of the impact of the pandemic would have done little to defer the impeding debt crisis,” Hambayi said.

Over the past decade, Zambia quadrupled its foreign debt from $3 billion to its current $12 billion as it launched a largely Chinese-fueled infrastructure-building boom. Chinese banks have shown little interest in restructuring Zambia’s repayment schedule so far.

“The platform under which the Zambian government could escalate this discussion [with China] is extremely hazy,” Hambayi said, “as the terms and conditions of the Chinese debt is an unknown quantity.”

Among Zambia’s Chinese debt is a $1.7 billion loan to Zesco, Zambia’s national power company, to build the Kafue Gorge Lower Hydro project. Zesco is in the middle of a $300 million lawsuit by the power company Maamba Collieries, seeking payment for electricity it supplies from its coal-fired power station.

Having so much Chinese debt tied to Zesco raises the specter of China foreclosing on a key component of Zambia’s sovereignty. The Chinese government pursued a similar tactic when Sri Lanka defaulted on payments related to its Hambantota Port.

That result, should it happen, would fit with China’s current strategy of expanding its global footprint, Hambayi said.

“China will enforce its economic leverage to take over any potential infrastructure projects that are attached to their financing,” he said.

Hambayi sees Zambia’s situation as unique on the continent and unlikely to inspire a run of defaults from other nations. That said, the country must get its financial house in order, he added.

“Zambia’s debt situation speaks to the core of its economic future,” Hambayi said.