Zambia reached an agreement in principle to restructure $6.3 billion of debt with bilateral lenders and will announce a deal Thursday, according to a French official, setting a precedent for countries struggling to service their liabilities.
The accord marks the first major relief won by a developing country under the Group of 20 nations’ Common Framework that brings the traditional creditor nations of the Paris Club around the same negotiating table as China and India. Details are still unclear, beyond that the creditors led by China and France agreed to extend the maturities on their loans over some 20 years, with a three-year grace period.
The parties will sign the memorandum of understanding in the coming weeks, the official said.
This could lead the way for other nations — including Ghana, Sri Lanka, and Ethiopia — to lock in negotiations with creditors from China, the Paris Club, and bondholders. More than 70 low-income nations face a collective $326 billion burden, with more than half of them already in or near debt distress, according to the International Monetary Fund.
Zambia’s currency has rallied 12% this month in anticipation of the agreement, the biggest gain among 150 currencies tracked by Bloomberg. Zambia’s eurobonds have delivered a performance only exceeded by El Salvador and Argentina.
A meeting to mark the agreement will be attended by French leader Emmanuel Macron, Zambian President Hakainde Hichilema, and Chinese Premier Li Qiang on the sidelines of the Summit for a New Global Financing Pact in Paris, the French official said. It’s a major step in the process of ending the default of the first African nation to do so in the pandemic era.
“Today we will talk about Zambia, which I think is a great case of celebration because it makes debt restructuring agile and effective,” Kristalina Georgieva, IMF’s managing director, said earlier on Thursday.
Zambia in October said it was seeking to revamp $12.8 billion in external debt, and it’s unclear if this amount has changed following negotiations in which China called for more relief from lenders such as the World Bank, and for some of its own debts to be excluded. Zambia owed about $6 billion to Chinese lenders, around one-third of its total foreign liabilities.
Years of waiting.
While the MoU is a major milestone, it is not legally binding and Zambia still needs to sign bilateral deals with each creditor. The nation is also yet to conclude restructuring talks with holders of $3 billion in Eurobonds, which had accrued more than $500 million in arrears by the end of last year. Other commercial creditors are likewise yet to strike a deal.
The MoU with the official creditors includes a clause requiring comparability of treatment for Zambia’s commercial debts, the French official said.
It gives Macron a concrete breakthrough at a summit he has convened in Paris to overhaul financing for the poorest countries that face the greatest funding risks. His administration was also a key proponent of the creation of the Common Framework to expand the Paris Club creditor group to include China in debt restructuring.
For Zambia, the accord ends years of waiting and unlocks a $188 million disbursement from the IMF. A stronger currency could help tame inflation in the country that imports everything from fuel to fertilizers, reducing pressure on the central bank after it raised rates by 25 basis points to 9.5% in May.
While the pact may rekindle tepid international appetite for the government’s local currency bonds, a move by the Bank of Zambia to cap offshore participation at 5% of the total will limit the impact. Foreign investors had for months shunned the securities for fear they’d be restructured alongside foreign currency debt.
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