Development Digest: Zambia's Debt Default

On the 13th of November, Zambia became the first African country to default on its external debt payments since the pandemic started.

The Southern African country failed to pay its $42.5m (£32.3m) interest payment on $1bn worth of Eurobonds maturing in 2024. Many have alluded to the fact that the country’s failure to pay its debt is one of the inevitable costs of the COVID-19 pandemic. But it is an outcome of the government’s negligence and poor fiscal management practices over the years.

According to the Central Bank Governor, Christopher Mvunga, the country deliberately chose not to pay because it wanted to treat all creditors fairly. "It is not that we could not pay. It's just that if we pay one creditor, then we need to pay all the creditors”, he said.

Zambia External Bondholder Committee has also blamed the government for a lack of transparency and concealing the true extent of its debt to China. The Committee further expressed discontent over the fact that Zambia did not enter the IMF debt restructuring program. In September, the Zambian government requested a six-month deferral on interest payments for three commercial Eurobonds worth around $3 billion. However, it missed the $40 million interest payment due on one bond last month which led rating agency S&P to declare the country in default. The grace period which ended on Friday was for payment on a $750 million Eurobond expiring in 2022.

Started from debt relief, now we are here

Zambia is the second-largest producer of copper on the continent. However, despite its mineral endowments, the country has struggled with debt over the years. In 2019, Zambia’s external debt stock stood at $11.2bn, or 48 per cent of GDP. The IMF predicts a rise to almost 70 per cent by the end of the year.

Zambia benefited from the Heavily Indebted Poor Countries (HIPC) debt relief in 2005 and has borrowed heavily since then. Now it is in a precarious position, owing close to $12 billion to international creditors. China and Chinese entities are being owed around $3bn (although there is some ambiguity about the exact amount). However, most of Zambia’s external debt stock is owed to Western and Western allied entities such as the World Bank, hedge funds and commercial banks.

A cautionary tale

Zambia's current debt predicement is largely an outcome of poor fiscal mangement of the nation's finances by the government. In the long-term, Zambia’s default may discourage Western lending to countries where China is already a creditor.

It would also increase investor uncertainty which will weaken the already fragile Zambian Kwacha, leading to inflationary pressures and higher debt servicing costs.

But, Zambia is not alone. Other countries on the continent such as Chad, Congo, Angola are struggling with debt. If international creditors do not work together and support a comprehensive debt standstill, Zambia’s debt default may have a domino effect across the continent.

Thanks for reading,

Stephannie