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Zambia: Test case for debt restructuring

THIS forum has been keenly following the issue of the debt restructuring exercise for Zambia since inception somewhere in 2021.
This issue which goes in tandem with the current International Monetary Fund (IMF) financial support programme has occupied media spaces including that of this column for a long time now.
Therefore, the striking of the restructuring deal between Zambia and its official creditors last week is an embodiment of consistency, resilience and foresight.
To those lacking these attributes, the debt restructuring exercise looked far-fetched and, therefore, a pipe dream!
To foresighted leaders like President Hakainde Hichilema it was just a matter of time and Zambia would bag it.
And it did!
To followers of the country’s economic developments and citizens in general, the night of June 22-23 this year will forever be a memorable one which marked the start of a new economic epoch for the southern African country.
This is also considering what was at stake had the negotiations for the debt restructuring exercise completely failed.
Therefore, the reaction from the Zambians from all walks of life and members of the international community like the IMF and the World Bank Group (WBG) officials as well as those of other countries should be understood in that light.
As information about the deal started filtering and trickling into the country through social media platforms like twitter and facebook it triggers anxieties mixed with suppressed excitement.
The few hours of waiting that followed before the official announcement seemed like a lifetime due to these anxieties.
In officially announcing the feat, the Ministry of Finance stated that the Government of the Republic of Zambia was pleased to announce that it had reached an agreement on a comprehensive debt treatment with its Official Creditors under the Group of 20 (G20) Common Framework.
The landmark achievement was a significant step towards restoring Zambia’s long-term debt sustainability.
The ministry states the exercise complements the strong commitments from Zambia’s Multilateral Development Partners to support the country’s economic recovery through substantial concessional financing.
According to the later information, the agreement reached at a summit in Paris calls for Zambia’s debt to be rescheduled over more than 20 years with a three-year grace period during which only payments on interest will be required.
The move demonstrates a mutual commitment to restoring debt sustainability in line with the IMF programme targets.
According to official information, under the agreed terms, the official creditors will provide a debt treatment contingent on Zambia’s debt-carrying capacity at the end of the fund-supported programme.
This will be assessed under the IMF and World Bank Debt Sustainability Framework for Low Income Countries and will take account of the country’s economic performance and progress in strengthening economic policymaking.
According to the government the agreed debt treatment will be adjusted if conditions improve enough to justify an upgrade from “weak” to “medium” debt carrying capacity, in which case principal reimbursements would be accelerated and interest payments increased.
This ensures that Zambia achieves debt sustainability in all cases.
Official creditors also agreed with the Government that local currency denominated debt will be excluded from any treatment.
The agreement is expected to pave the way for the approval by the IMF Executive Board of the first review of the Fund-supported programme in the coming weeks, allowing for the next tranche of IMF financing of about US$188 million to be disbursed.
“Today is a big day for Zambia as we reach an agreement with our official creditors on a debt treatment plan. We are grateful for the support from our official creditors in resolving Zambia’s debt overhang that has been choking our economy,” Finance Minister Situmbeko Musokotwane blissfully stated.
IMF managing director, Kristalina Georgieva who has personally campaigned for the exercise describes it as a unique and innovative agreement.
According to her it specifies both a baseline and a contingent treatment that would be automatically triggered if the assessment of Zambia’s economic performance and policies improves.
The WBG states that it remains committed to accelerate the implementation of the G20 Common Framework.
WBG president Ajay Banga states that the decision and final completion of the agreement will help unlock private sector investment, restore growth and accelerate job creation in Zambia, According to Reuters and other international media the deal involves the restructuring of $6.3 billion in debt Zambia owes other governments including that of China.
China is the largest official creditor to Zambia, with $4.1 billion owed to the Export-Import Bank of China alone.
This underscores the position of China’s support for the deal.
The background is that Zambia in 2020, under the Patriotic Front regime, became the first African country to default on its sovereign debt during the COVID-19 pandemic and struggled since then in protracted discussions to agree on a deal.
The debt earmarked for restructuring includes $1.3 billion in arrears, and private sector creditors are expected to do the same on the $6.8 billion owed to them.
Reuters says Zambia is viewed as a test case for a debt restructuring framework backed by the G20 nations and intended to streamline relief for countries caught in a developing world debt crisis.
This process has been painfully slow for Zambia, with some people especially the leaders of the opposition predicting that it would not materialise.
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