Zambia seals debt restructuring deal with official creditors

Event

On 22 June, the Zambian government confirmed that its official creditors decided on a deal to restructure USD 6.3 billion in loans. It was agreed to introduce a three-year grace period during which only interest payments are due and to lengthen maturities to over 20 years. However, debt relief will be reduced in case the Zambian economy performs better than expected over the coming years. Also, the Zambian government still needs to settle the exact terms with each bilateral creditor, while a separate restructuring deal on its USD 6.8 billion in private debts remains to be found (including Eurobond debt). In order to prevent the destabilisation of the domestic financial market, local currency bonds were excluded from the restructuring deal.

Impact

In November 2020, Zambia defaulted on its Eurobond debt and in February 2021, the country applied for debt relief under the G20 Common Framework for Debt Treatment. The restructuring was stalled for more than two years due to tensions between China – Zambia’s largest official creditor – and other creditor countries (India, Saudi Arabia and Paris Club member countries). The recent deal enables the USD 1.3 billion IMF Extended Credit Facility (ECF) arrangement (August 2022-October 2025) to continue as it is consistent with the programme’s debt sustainability objectives. As a result, a first review under the ECF arrangement is close at hand and should open up a tranche of USD 188 million in financial support. The debt restructuring will ease Zambia’s debt service burden, yet the nominal government debt stock and overall public debt-to-GDP ratio (110.8% in 2022) will remain unchanged. Although the debt treatment process was too slow and no actual debt cancellation or forgiveness was granted, the approaching resolution of the debt crisis could significantly enhance the country’s monetary and fiscal stability and help revive capital inflows. As a result, Credendo’s outlook for Zambia could turn to the upside.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com