Zambia has said it will resist pressure from Chinese creditors to make paying arrears a condition of pursuing debt relief talks, as the southern African nation battles to restructure $11bn of external debts.
Africa’s second-biggest copper producer has become a test case for the ability of poor and indebted nations to find debt relief as they grapple with the health and economic consequences of the coronavirus pandemic. Its negotiations illustrate the limitations of a G20 agreement to halt payments this year by these countries to official bilateral creditors.
Zambia has obtained relief from some of its bilateral creditors under the G20 debt service suspension initiative (DSSI), which includes up to four years to repay and the deferral of arrears.
But it is struggling to strike a deal with Chinese creditors that together own around a third of its debt, potentially imperilling talks with other lenders who want equal treatment for all creditors.
The Chinese government is taking part in the debt relief on official DSSI terms, but some official Chinese lenders have said they will only agree to participate if their share of some $200m of arrears has been cleared first, Zambia’s ministry of finance told the Financial Times. It disclosed the Chinese arrears to international bondholders last week.
“While some official institutions have asked Zambia to pay arrears as a precondition to granting DSSI treatment, Zambia is insisting that Chinese official creditors apply the same DSSI treatment of arrears as is granted by all Paris Club [western] creditors,” according to the Zambian finance ministry.
“There are multiple Chinese creditors, some being considered official creditors and others being considered as commercial, that have taken different views” on arrears, it added.
Zambia borrowed heavily from China over the past decade to fund an infrastructure boom, but was struggling even before the pandemic as copper prices and the economy tanked.
“Of course we are concerned. This is the first case when insolvency is knocking on the door,” Kristalina Georgieva, managing director of the IMF, told the FT’s Africa Summit. “Some now are being somewhat helped by the improvement in commodity prices. [Zambia] is a country that does need to very seriously address the high level of debt. We have been encouraging Zambia to proactively work with its creditors.”
The country’s negotiations echo tensions elsewhere on the continent.
Ken Ofori-Atta, Ghana’s finance minister, wrote in the FT on Monday that China’s approach to debt negotiations was making “western creditors reluctant to offer concessions for fear that released resources will simply be transferred to Beijing”.
Both the IMF, which has received a bailout request from Zambia, and bondholders are likely to be reluctant to hand over or forgo money if it is then used to pay arrears to Chinese creditors, analysts say.
“We want equal treatment for all different types of creditors to Zambia,” said Sergey Goncharov, a portfolio manager at Vontobel Asset Management.
Last month, President Edgar Lungu’s government asked holders of its $3bn US dollar-denominated bonds to suspend payments worth just under $200m while it negotiates the IMF loan and prepares a complete restructuring of its debt. Investors owning enough bonds to block the suspension request asked for more information about the size of Zambia’s Chinese debts first.
In addition to seeking deals to defer payment of the arrears, Zambia wants Chinese lenders to suspend or reschedule another $225m in payments, out of a total of $426m due this year, according to the answers it gave the bondholders last week.
“China never presses for repayment of debts, and in line with the international community, seeks appropriate solutions through friendly discussions,” China’s foreign ministry said in response to questions from the FT. “We support the Zambian government to negotiate and resolve debt issues with creditors, in accordance with the ‘equal treatment of creditors’ principle,” it said.
Trevor Simumba, a Zambian analyst of the country’s debt, said it would be difficult for the government to convince Chinese creditors to defer arrears because of the precedent the move would set elsewhere in Africa.
China Export-Import Bank, one of Zambia’s biggest lenders, has backed infrastructure projects across the continent. “There is no way China ExIm Bank is going to do any favours to Zambia . . . I don’t see an easy debt restructuring,” Mr Simumba said.
Additional reporting by Thomas Hale in Hong Kong, Wang Xueqiao in Shanghai and Andres Schipani in London