A few months after his election last year, Zambian President Hakainde Hichilema managed to negotiate a $1.4 billion bailout from the IMF for the debt-ridden southern African country. But reaching an agreement with all of its creditors, first and foremost China, could take much longer.
With Beijing now the largest bilateral lender to low-income countries, Zambia’s setbacks are a test of its willingness to take the lead in restructuring failing states’ debt obligations. Until now, Beijing has been negotiating with its borrowers behind closed doors, face-to-face.
At a time of rising economic tensions where Sri Lanka is in default and Pakistan is close to it, other countries heavily indebted to Beijing are closely monitoring the proceedings in Lusaka, as are its other creditors. The Zambian crisis also illustrates how Chinese loans come from a variety of government institutions whose interests often vary, adding further complexity to efforts to reach an agreement.
“The composition of debt from developing countries has changed dramatically over the past 10 years towards China and the private sector,” World Bank President David Malpass told the Financial Times. “China recognizes that [engaging with Zambia’s other creditors] is an important way to work with the global community. This is an important step insofar as China recognizes its role in debt restructurings.
Zambia has become the first country to default during the pandemic, missing payments on $17 billion in external debt in 2020. After negotiating the bailout package with the IMF, Zambia needs talks with creditors to act quickly so that we can relaunch growth and development.
Before the fund can release the money, it wants ‘assurances’ from other official creditors – the largest of which is China with loans estimated at $6 billion – that they will accept debt relief. . Little is known about the terms on which China has lent and how Beijing will behave.
China is not a member of the Paris Club, set up to restructure loans made by Western governments, and has expressed concerns about austerity measures the IMF is imposing on cash-strapped debtors. Different Chinese entities, from strategic banks to commercial lenders, are making loans, each with their own priorities. Deborah Bräutigam, director of the China-Africa Research Initiative (CARI) at Johns Hopkins University, said it was important to understand that “there is no one China” but rather an “authoritarianism fragmented”.
In the case of Zambia, lenders include the China International Development Cooperation Agency and others led by the Eximbank of China and the China Development Bank. According to CARI, the loans were granted under widely varying conditions.
Zambia’s likely long debt restructuring also points to a wider flaw in the global handling of sovereign defaults, which the World Bank says could soon reach levels not seen in the 1980s.
This month, Lazard, the French group advising Zambia, said a common framework, put in place during the pandemic by the G20 group of major economies to ensure debt restructurings can be carried out quickly, was too vague. The lack of advice on coordination “creates a lot of frustration for creditors – whether private or official – but also for debtor countries,” Lazard said.
Malpass, a frequent critic of China’s stubbornness, called for a rethink of the framework. He said commercial creditors should sit alongside their sovereign counterparts in debt negotiations, rather than being faced with a fait accompli later.
But with the billion-dollar Belt and Road Initiative making China the largest bilateral lender so far this century, reform seems unthinkable without Beijing’s buy-in.
“China has the power to delay or potentially prevent the common framework from continuing,” said Kevin Daly, portfolio manager for emerging market debt at abrdn and a member of a committee representing Zambian bondholders. “It is no exaggeration to say that its success or failure depends on Zambia.”
Chinese lenders have taken a different approach than other commercial creditors. They have been willing to extend deadlines and grant payment holidays to troubled debtors, but reluctant to agree to any reduction in the amount owed to them for fear, observers say, of political backlash in Beijing. This puts them at odds with commercial creditors such as bondholders.
Beijing acknowledges that it is under a lot of pressure to find new solutions. “Existing methods, led by loan extensions and debt relief [mainly of interest-free loans] are harder to prosecute,” a government adviser said.
Yet China’s finance ministry and central bank, the People’s Bank of China, disagree on possible solutions. “The Ministry of Finance is generally more cautious when it comes to granting concessions, as this would increase its budgetary burden. As a major shareholder of political lenders like China Development Bank and Exim Bank, it will bear losses from the restructuring of interest-free loans and other low-interest political loans,” the adviser said.
“In contrast, commercial lenders like ICBC, which are regulated by the PBoC, and [so] by extension, the PBoC, are open to a variety of restructuring methods that could help consolidate losses sooner, but could require lenders to write off some of the bad loans,” she said, adding that they wanted work together to minimize losses.
Others advise caution. “Is this China coming into the fold? Absolutely not,” said Douglas Rediker, a senior fellow at the Brookings Institution, adding that it would be “naive to believe that any case of cooperation in China will be transferable to any other case.”
A recent call between Hichilema and Chinese President Xi Jinping was seen as a breakthrough and led to talks, co-led by Beijing, in Paris earlier this month. French officials said the talks had gone well and talks would continue. “It’s a commitment they made,” said Emmanuel Moulin, head of the French Treasury and president of the Paris Club. “But now they have to deliver.”
These glimmers of hope mean that Zambian officials are optimistic that a deal can be reached. “Given that China is finally on board and speaking out on the need for the IMF to act quickly,” an official in Lusaka said. “Now is the time to give the process a little more patience.”