Zambia’s foreign debt tragedy

Three years after defaulting on its foreign debt, Zambia is still trying to reach agreement with all its creditors on how to manage this situation.

This has left the southern African country in a state of development finance limbo.

The country’s president, Hakainde Hichilema, has warned that the situation threatens to undermine its democracy.

Zambia’s inability to reach a definitive agreement with all its creditors is not for lack of trying.

But it has had bad luck.

It is the test case for the Common Framework that the G20 international forum established in November 2020 to deal with the debts of low-income countries.

The framework was expected to result in all creditors making comparable contributions to help a defaulting country resolve its debt crisis.

Zambia’s experience demonstrates that the Common Framework has failed to deliver.

The International Monetary Fund lacks the resources and the bargaining power needed to push other creditors to reach a sustainable debt deal with Zambia.

It could only contribute US$1,3 billion over three years to Zambia’s financing gap of US$8,4 billion.

Zambia’s official creditors have been organised into a committee chaired by China and France.

The official creditors moved slowly and appear to have been more focused on reaching agreements that serve their geo-strategic interests, than on what is best for Zambia.

In June 2023, they finally agreed on a common template for all official creditors.

Each individual creditor is now expected to reach its own binding agreement with Zambia.

In October Zambia announced it had reached an agreement with the holders of its US$3 billion worth of Eurobonds.

This month, the deal was rejected by Zambia’s official creditors and some independent experts.

They argued that commercial creditors were receiving more favourable treatment than official creditors.

While both agreed to take a haircut on their debts, they argued that commercial creditors would receive approximately 20c more for each dollar of debt outstanding than official creditors.

The result is that Zambia and its bondholders will now have to renegotiate their deal.

The current approach to sovereign debt restructuring is failing Zambia and its people.

WHAT SHOULD ZAMBIA DO?

Firstly, Zambia should state that its goal is to reach an optimal outcome to its debt crisis.

This is one that takes into account the circumstances in which the parties are negotiating and their rights, obligations and responsibilities.

It should also require that the parties monitor the implementation of this outcome.

Zambia will call the creditors’ bluff.

Official creditors have all expressed their support for the sustainable development goals (SDGs) and for all countries meeting their nationally determined contributions under climate agreements.

However, they do not test whether the debt-restructuring terms they offer Zambia are consistent with these objectives.

Zambia should publicly state that, while it is serious about fulfilling all its contractual obligations, it is also serious about meeting its SDG commitments and its nationally determined contributions.

Zambia could also point out that many of its commercial creditors have posted human rights policies or statements on their websites in which they state their support for human rights and their respect for various international instruments.

It could ask these creditors to demonstrate that they have applied these principles in their transactions with Zambia.

Secondly, civil society organisations in Zambia and their international allies could take advantage of the fact that in each state that adheres to the OECD guidelines, which include many of Zambia’s official creditors, there is an official designated as the national contact point.

This official is responsible for providing guidance to companies based in that country.

If all parties agree, the officer could help facilitate dialogue between the complainants and the relevant corporations.

Thus, these civil society organisations could propose to the relevant national contact points that they encourage the creditors to engage in discussions with civil society and with the Zambian government.

Thirdly, Zambia should propose that all its creditors agree to meet with it in one forum and make one agreement dealing with all its debt obligations.

This would open the space for Zambia to demand that the creditors consider its other legal obligations as well as their contractual rights.

– The Conversation

• Danny Bradlow is a professor/senior research fellow at the Centre for the Advancement of Scholarships at the University of Pretoria.