Zambia struggles to pay creditors but bondholders are showing little mercy

Before COVID-19, Zambia issued three sovereign debt instruments: the first being a $750 million debt instrument with a 5.375% interest; the second, a $1 billion debt instrument with 8.5%, and the third, $1.25 billion with 8.9% interest.

The interest payments on the debts are due on October 14 this year as well as January 30 and March 20 next year but Zambia announced last week that it has suspended the debt servicing, totaling $3 billion, due to economic challenges as a result of COVID-19.

The move effectively made Zambia the first African country to default on its loan payment due to the coronavirus pandemic. It was asking for the suspension of the payment to be in place for six months starting October 2020.

According to the government, a combination of declining revenues and increased unbudgeted costs caused by Covid-19 have affected its available resources to make timely payments on its indebtedness leading to increasing debt-servicing difficulties.

But a committee representing the country’s bondholders rejected Zambia’s offer to suspended interest payments on the debt. It said creditors “are unable to provide a positive response to the consent solicitation request at this time given the absence of clarity on a number of issues.”

The committee added that it “stands ready to engage constructively and proactively on finding ways to support Zambia.” Zambia’s creditors include 14 international financial institutions in the US and Europe who hold about 40% of Zambia’s outstanding Eurobonds.

The group believes Zambia is not being transparent. The creditors are worried that no plan has been provided on how it plans to reduce its debt burden and negotiate a debt relief from its main creditor, China, according to Bloomberg. They also express concerns that Zambia is not committed to reducing its debt portfolio. 

Kevin Daly, a portfolio manager at Aberdeen Standard Investments which holds some Zambian bonds, told the FT that Chinese debt pushed Zambia over the edge. “Bondholders want more transparency but also to know what they intend to do about Chinese loans. That’s essential to debt sustainability,” he said.

They also want Zambia to come clean on how they intend to deal with other creditors like China. They believe Lusaka hasn’t been fair to them as it has not disclosed whether it is still repaying Chinese loans.

Zambia was among several African nations to benefit from debt relief in the 2000s known as the Highly Indebted Poor Countries (HIPC) initiative. But the country has over the years accumulated more than $11 billion in foreign debt. Of the $11 billion, around $3 billion has been lent by China.

A general downturn 

Since the outbreak of COVID-19 and the imposition of restrictions on movement, African Finance Ministers have appealed for the suspension of debt interest payments to free fiscal space for critical investment in health to contain the spread of the virus.

In calls led by Ghana‘s Finance Minister, Ken Ofori-Atta, the ministers have argued for compassionate consideration from creditors in these odd times to allow African economies to get back on track.

Some Heads of State have even called for the complete forgiveness of all bilateral and multilateral debt. 

According to the Mo Ibrahim Foundation, calls for debt relief are complicated by Africa’s range of creditors. Of all Africa’s external interest payments, 55% are made to private creditors while only 17% are made to multilateral institutions, with the same figure going to China. 

The Mo Ibrahim Foundation further noted that before COVID-19, as many as 30 African countries spent more on repaying public debt than on healthcare. The Gambia, for example, spends as much as nine times its health budget on debt servicing, while Angola and Congo spend six times. 

Nigeria, damaged by the collapse in oil prices, has secured a $3.4 billion loan from the IMF, having resisted borrowing from the organization for years. It has also requested a further $3.5 billion from the World Bank. 

Egypt, hurt by a lack of tourism revenue and decreased trading through the Suez Canal, has received $2.8 billion from the IMF and is seeking a further $5 billion to account for the coronavirus-induced budget shortfall.