As Zambia Nears Default, Analysts Examine What Went Wrong

November 24, 2020

Although Zambia missed a $42.5 million bond payment on November 14th, and effectively defaulted on that portion of its debt, it’s still technically not in default yet. It will probably officially cross that line within the next few days, making it the first African country this year to do so.

Meantime, regarding the question of who is responsible for the country’s financial mismanagement, fingers are pointing in all directions. Finance Minister Bwalya Ng’andu blames bondholders, private creditors blame the government for not being transparent and others say China is heavily responsible for loading up the country with billions in debt and then using strict non-disclosure agreements to block information about those liabilities from reaching outside investors.

Since Zambia missed the payment, analysts have been trying to work out how much of the crisis is unique to Zambia, and what lessons from this experience that can be applied elsewhere in Africa.

Four experts at the London-based Overseas Development Institute, an independent think tank, looked at the issue from varying perspectives and predicted that while the circumstances in Zambia are indeed distinctive, they are not fundamentally unique, and will likely recur elsewhere on the continent.

ODI’s 4 Views on the Financial Crisis in Zambia

CHINA’S NOT THE BIG PROBLEM HERE: “As the largest bilateral lender, China has been castigated for contributing to rising borrowing in Africa. Chinese loans constitute around 17% of African external debt, but greater problems lie elsewhere. Private sector debt, mostly driven by sovereign borrowing through Eurobonds, makes up 30% of the continent’s total debt. And while Chinese debt might make up a larger proportion of Zambia’s debt portfolio, private sector borrowing comes at a higher cost.” — Yunnan Chen, senior research officer (READ MORE)

THE DANGER OF HEIGHTENED RISK PERCEPTION: “The lack of resources for debt service will magnify investors’ risk assessment of Zambia’s structural weaknesses – a country with high risk of debt distress, copper-dependent exports, double-digit inflation, and dwindling foreign reserves. These factors will make it difficult for the government to mobilize revenues to pay its debt beyond April 2021.” — Sherillyn Raga, senior research officer (READ MORE)

BLAMING CHINA’S EASY BUT NOT ENTIRELY ACCURATE: “Many have pointed fingers at China, the lender, for many large infrastructure projects in low- and middle-income countries, but the reality is much more complex than this. Countries already on the verge of debt distress can be tipped over the edge by many factors, as the Zambia case demonstrates. Large infrastructure projects are complicated as they raise technical and political challenges, and are also very complicated to manage. Cost overruns are very common in North America and Europe too.” — Linda Calabrese, research fellow (READ MORE)

REFORM THE INTERNATIONAL FINANCIAL SYSTEM: “Given the growing risk of a COVID-19-related systemic sovereign debt crisis, the focus now needs to be on mobilizing political support for bold – yet practical – solutions that address these gaps. Laws in the United Kingdom and United States (which govern most emerging market sovereign bonds) should be amended to stop litigious creditors from filing lawsuits against countries where the International Monetary Fund certifies that debt service is onerous in light of a crisis.” — Shakira Mustapha, research fellow (READ MORE)

SUGGESTED READING:

Overseas Development Institute: Four lessons from Zambia’s emerging debt default
CNBC.com: Zambia becomes Africa’s first coronavirus-era default: What happens now? by Elliot Smith

The post As Zambia Nears Default, Analysts Examine What Went Wrong appeared first on The China Africa Project.

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Rajpriya Gautam