On 13 November 2020, Zambia became the first African country to default on its debts since the beginning of the Covid-19 pandemic. The global recession triggered by the pandemic has made creditors less likely to extend grace periods on arrears as they have in the past. Holders of US$3 billion of Zambia’s Eurobonds refused to delay interest payments on a US$46.5 million overdue coupon that expired on 13 November. Holders of the securities can now demand direct payment of the full sum, though that is unlikely. Nevertheless, going into default will limit the Zambian government’s ability to get new loans from foreign creditors and reduce foreign investment in the country. Moreover, the increased costs of servicing their debt will cause long-term damage to the Zambian economy.
Zambia’s sovereign debt crisis has plagued President Edgar Lungu’s administration. After having its colonial debts annulled by the Heavily Indebted Poor Countries Initiative (HIPC) in the early 2000s, Zambia began aggressively borrowing money. In the aftermath of the 2008 Great Recession, high commodity prices (especially for copper) incentivised Zambia to pursue high-interest, short-term loans. However, when commodity prices crashed in 2014, the value of the Zambian Kwacha (ZMW) dropped as well, and the country began to struggle to make payments. Since then, prolonged drought, government corruption and mismanagement, and the global pandemic have intensified the crisis. Zambia presently owes its creditors about US$12 billion – 50-60% of its GDP.
The government has approached the Group of 20 (G20) and the International Monetary Fund (IMF) for financial aid but the upcoming 2021 elections have delayed negotiations as most creditors want to wait to see how the results pan out. In the unlikely, but possible, event that the ruling Patriotic Front (PF) loses the election, creditors will have to restart talks with the new government. Regardless, going into default will weaken the PF’s bid to remain in power. The debt crisis occurred entirely under the party’s term in office and Lungu has repeatedly ignored advice from debt servicing bodies such as the Paris Club (PC) – a group of major creditor countries who aim to help heavily indebted nations restructure their debt. Already the leader of the opposition United Party for National Development (UPND), Hakainde Hichilema, has indicated that he plans to make the PF’s economic mismanagement a cornerstone of his party’s campaign.
Part of the problem facing Zambia is how the debt is distributed because various creditors will treat its debt differently. Zambia has accrued 79% of its sovereign debt from insecure sources. Non-PC member states such as China hold 29% of Zambia’s debt, private Eurobond holders hold 25%, foreign banks hold 19%, and other foreign investors 6%. Only 15% is held by traditional multilateral lenders and 1.3% by both PC member states and secure plurilateral lenders, respectively.
Multi/plurilateral lenders and PC member states are unlikely to force Zambia to default on its debts, nor will they increase the costs of servicing the debt too much. Instead, they will focus on restructuring Zambia’s debt and stabilising the economy. Non-PC member states like China are less predictable. While they may be more willing to grant Zambia extensions on its loans, they have a history of pushing up the costs of servicing debts, thereby increasing Zambia’s debt distress. Private investors have already shown a willingness to force Zambia to go into default and are likely to apply the greatest penalties to the country. Therefore, the cost of servicing Zambia’s debt will increase. Thus, even if the country stops borrowing money at all, the country will still be forced into expending more of its income on debt.
The increase in the costs of servicing debts and interest rates will drive up the Proper Value (PV) of Zambia’s sovereign debt. Therefore, while the current monetary value of Zambia’s debt is about 59% of the country’s GDP, the PV is likely to exceed 100%. Indeed, in 2019 the IMF and World Bank (WB) predicted that Zambia’s sovereign debt PV would peak at 95% of their GDP by 2021. Therefore, the government will have to direct more money to servicing its debts and less to developing the economy. The net result will be the devaluation of the ZMW and all holdings in the country, an increase in the poverty rate, and staggered economic growth.
Therefore, if Zambia’s GDP were to grow by the expected average of 4.5% between 2019 and 2024; its real economic growth would be closer to 1.7%. In 2020 alone, the Zambian economy has contracted by 4.5% instead of growing by that amount. The debt crisis will likely prolong a recession in Zambia and may even result in an economic depression. Unemployment will increase, and more people will be pushed into poverty. In 2019, 58.6% of Zambians lived below the international poverty line (earning less than US$1.9 per day). That number is forecast to increase to 60.7% in 2021. High levels of poverty increase political unrest, decrease overall economic productivity, exacerbate health problems, lower the quality of education, raise the level of crime and unemployment, and thus severely slow economic growth and recovery. The Zambian government’s mishandling of debt has done serious long-term damage to the macroeconomic development of the country.