September 8, 2022
Zambia: A template for debt restructuring?
Zambia’s public debt totaled $31.7 billion at the end of 2021. On August 31, 2022, Zambia won approval by the International Monetary Fund (IMF) Board for a $1.3 billion assistance package. IMF approval came after official bilateral creditors to Zambia pledged, as requested by the IMF, to negotiate a debt restructuring deal with Zambia. Debt restructuring is needed as Zambia’s debt has become unsustainable, causing the country to default on its external debt in 2020.
The public sector external debt to be restructured amounts to $17.3 billion, more than half of the total Zambian public debt. According to the Zambian Ministry of Finance (MOF), official bilateral creditors account for 15 percent of public debt, multilateral and plurilateral financial institutions for 11.5 percent, Eurobond investors for 11.7 percent, and non-bonded commercial lenders for 11.4 percent. About $6 billion is owed to Chinese commercial and state-owned lenders alone—constituting the largest creditor group by nationality and giving China significant leverage in Zambia’s ability to restructure its debt. The classification of this amount of debt between official bilateral and private sector lenders has been a contentious issue, contributing to the uncertainty in restructuring process. For example, there had been contention about how to classify debt owed to China Development Bank, as bilateral or private sector debt. Now the Zambian MOF has classified it as debt to private creditors.
Zambia was one of the first countries to apply to restructure its sovereign external debt under the Common Framework for Debt Treatment in early 2021. The Common Framework (CF) was launched by the Group of Twenty (G20) Summit in November 2020, to provide a mechanism for low income countries to seek debt restructuring when unavoidable. Under the CF, an Official Creditor Committee for Zambia was formed, co-chaired by China and France. The Zambian OCC pledged to negotiate with Zambia to restructure its public external debt. Its commitment cleared the way for the IMF Board to consider and approve the assistance package for Zambia. These steps taken to restructure Zambia’s debt could form a template for future instances of sovereign debt restructuring under the Common Framework.
In addition to the progress made so far, according to the IMF, Zambia and the OCC aim to sign a legally non-binding memorandum of understanding (MOU) by the end of 2022. The MOU will set out the key parameters of Zambia’s debt restructuring terms regarding: the changes in nominal debt service over the IMF program period, the debt reduction in net present value (NPV) terms, and the extension of the duration of Zambia’s debt.
Zambia will then negotiate bilaterally with each official creditor for a restructuring deal, consistent with the key parameters set out in the MOU. Concurrently, Zambia will negotiate with private sector creditors, seeking comparable treatment as mandated under the Common Framework. The Zambia External Bondholder Committee has been formed, representing 45 percent of the outstanding value of Zambia Eurobonds, and presumably will engage in the negotiations.
The progress so far suggests that the OCC has found a compromise which is acceptable to China—which until now has insisted on bilateral negotiations with debtor countries instead of participating in multilateral restructuring efforts. The MOU will be legally non-binding, and the key parameters on NPV reduction and duration extension are consistent with many solutions containing various scenarios of interest rate cuts and maturity extensions that do not require a nominal reduction of the face value of the debt. Nominal haircut is something China has avoided in its previous bilateral debt restructuring agreements with debtor countries. As well, the actual restructuring deal will be negotiated bilaterally with each official creditor—something China has long insisted on. These features will presumably allow China to move forward with the other two cases under the Common Framework, Chad and Ethiopia. The Zambian case may therefore serve as the template for debt restructuring under the Common Framework.
However, even with such a promising , the current approach to sovereign debt restructuring is still plagued with many deficiencies. The process remains time-consuming and inefficient for the following reasons.
Firstly, the Common Framework is only open to 73 low-income countries. Middle-income countries also in debt distress, such as Sri Lanka, are excluded. Sri Lanka has reached staff-level agreement with the IMF for a $2.9 billion package, not yet approved by the Board. Aporoval of the package is contingent on progress in debt restructuring negotiations with Sri Lanka’s creditors. With more than $50 billion of external debt, about 47 percent with private sector creditors and bondholders, and 10 percent each with bilateral creditor China and Japan, Sri Lanka can benefit from the steps set out in the Common Framework to better manage its debt restructuring task. Therefore, the G20 should extend the Common Framework to middle-income emerging countries in debt distress.
Secondly, a way needs to be found to encourage countries in debt difficulties to use the Common Framework. Currently, countries fear being downgraded by credit rating agencies and losing capital market access if they take advantage of it. If the stigma around the Common Framework remains, many countries will avoid it; only three have applied so far (Zambia, Chad, and Ethiopia).
Thirdly, convincing private creditors to participate in debt restructuring on comparable terms with official bilateral creditors will remain difficult. Private creditors complain that the restructuring terms are reached in the OCC without their inputs, and their concerns are not taken into consideration. They do not receive the IMF and World Bank Debt Sustainability Analysis, which is the basis for restructuring negotiations in the OCC until it is too late to contribute to the assessment. These concerns must be addressed before one can hope for more participation by private creditors in the debt restructuring process under the Common Framework.
Zambia shows that progress can be made to render the Common Framework more workable to restructure low-income countries’ sovereign debt. However, more needs to be done to refine a comprehensive, efficient, and effective sovereign debt restructuring procedure. The international community needs change now, with many low income and emerging market countries close to or already in distress, especially following the Covid-19 pandemic and the war in Ukraine.
Hung Tran is a nonresident senior fellow at the Atlantic Council, former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.
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