Zambia, Africa’s second-biggest copper producer, came to the eurobond debt markets in 2012 with great fanfare. Its maiden issue, a $750m 10-year bond, carried a modest coupon of 5.6 per cent. That seemed to herald a new era for African borrowers. After receiving debt relief under the Highly Indebted Poor Country initiative, a string of governments were able to tap the international debt markets and subject themselves to market discipline.
Zambia’s ultimatum to bondholders last week that it would default unless it gets a six-month moratorium casts a shadow over that generally positive development. Like Zambia, some African governments, though not all, have used their newfound access to debt markets to borrow excessively. Nor have they always spent their money wisely. Too much has been about acquiring the funds to get re-elected rather than to pay for the hard and soft infrastructure required for sustained development.
Then there is Chinese debt. Zambia is not the only country to have ramped up borrowing from China. As in Kenya and elsewhere, some of the money has gone on what look like overpriced projects with plenty of padding to allow middlemen a cut. The terms of Chinese loans are opaque and often tied to specific projects. Eurobond holders are reluctant to bail Zambia out. Not without reason they suspect Lusaka will use the money to pay back China. When probed, the Zambian government has talked about drawing down $700m from unnamed creditors — presumably Chinese — for unnamed, supposedly indispensable, projects.
One answer to this conundrum is more transparency. Chinese banks, whether state-run or quasi-commercial, should be more open about what they are lending and on what terms. Zambia’s government too needs to come clean about its borrowings and finances. The suspicion is that President Edgar Lungu’s Patriotic Front party is building a war chest for next year’s re-election campaign.
Zambia can help allay these fears by agreeing a long-talked-about IMF package. That would bring external scrutiny and comfort to lenders that it is serious about putting its finances in order. Nor need this compromise Zambia’s efforts against Covid which has so far claimed a relatively few 350 deaths. The IMF has been clear it will not force countries to axe health programmes in the interests of fiscal rectitude.
Kristalina Georgieva, managing director of the IMF, has called for a new international debt architecture. To be truly effective, any such arrangement needs to include China, which too often opts out of collective action to pursue individual negotiations. New architecture looks impossible while the US and China are at loggerheads. Under Donald Trump, Washington has insisted on painting China as a predatory lender intent on hooking borrowers on unsustainable debts and then grabbing assets into the bargain. Outside Sri Lanka, where China now has a 99-year lease on the Hambantota port, there is little concrete evidence of a sinister Chinese plot. China can allay such fears by being more open about its lending, but the US needs to accept that Chinese loans and Chinese construction projects are a new fact of life in Africa.
Finally, Zambia’s difficulties should not be used to tar all African borrowers with the same brush. Many governments have borrowed reasonably responsibly and, at least until Covid, had built up a good track record of repayment. Eurobond markets do have the virtue of being open to scrutiny. And as the Zambian debt saga shows, transparency is sometimes the rarest commodity of all.