Tuesday 11 July 2023

In Zambia's debt deal, what was the point of the Common Framework?

By Grieve Chelwa

Close to three weeks ago, the Zambian government announced that they'd finally reached an agreement with official creditors to restructure some $6.3billion of external debt. The agreement allows for much longer maturities, concessional interest rates and a moratorium on principal repayments until 2026. Further, the agreement excludes domestic debt from being subjected to restructuring, which is a big relief. Requiring the restructuring of domestic debt would have been fatal for our nascent bond and financial markets.   

The debt deal is certainly a welcome development that should provide much-needed fiscal space for government to (hopefully) undertake development-oriented projects. It is also worth pointing out that this deal only solves one part of Zambia's debt, which is debt owed to official entities (foreign governments, foreign official lenders, international financial institutions, etc...). Commercial debt, which is the other side of debt and owed to banks and bondholders, still remains unresolved (although reports suggest that a deal here too is eminent). The Ministry of Finance reported commercial debt as $5.91 billion at the end of 2022 (although this number is higher now due to the reclassification of some official debt as commercial debt).        

In reading through the multitude of coverage on Zambia's deal, it struck me that the deal was effectively a deal with China. Several sources (see here, here and here) have reported that of the $6.3billion agreed to be restructured in the deal, about two-thirds (some $4.1billion) is money owed to the state-owned Export and Import Bank of China (EXIM China). The $4.1billion number is also what you'd get if you summed up all the money owed to EXIM China as contained in the Ministry of Finance's Public Debt Summary Statistics Report from last December (link here). Further, the features of the deal (maturity extensions, low interest rates, brief moratoria on principal repayments, limited haircuts, etc...) have the classic features of China's preferred approach to debt renegotiation/restructuring (see here, here and here for some of the academic evidence). 

All this goes to show that the deal announced at the end of June was largely a deal with China. A columnist writing for Bloomberg on the deal rightly titled his article 'Zambia's Deal with China is a Landmark Moment'.  

The above begs the question: What was the point of the Common Framework in this process? 

The Common Framework, proposed by the G20, is supposed to be a mechanism to help poor countries resolve their debt problems by bringing together official creditors and borrowers. But for Zambia, which applied for debt treatment under the Common Framework over two years ago, the process was greatly slowed down as it became a sight for geopolitical shenanigans and posturing particularly by entities and countries that are no longer singularly important for the provision of credit to the global South and Zambia in particular. For example, US Treasury Secretary Janet Yellen and IMF Managing Director Kristalina Georgieva used their visits to Zambia in January to cast China as the villain in the Common Framework process. 

All the while that some folks were playing geopolitics with Zambia's debt, millions of Zambians, many of them crashingly poor, had to contend with the havoc wreaked by the uncertainties of unresolved debt. The value of the Zambian Kwacha has swung like a yo-yo in this long period of uncertainty causing a tailspin in the prices of essential commodities, many of them imported. 

This is why at different stages in the process I, among some others, urged the Zambian government to ditch the currently inadequate multilateral approaches and rather negotiate directly with our creditors. All that we got with the Common Framework was a greatly delayed debt deal whose terms, as per the scholarly evidence above, are not materially different to what we'd have gotten had we gone directly to China in the first instance. Second, going the route of the Common Framework opened us up to yet another IMF programme whose conditions, as I have argued before on this blog, are anti-poor and anti-development in their design. 

Zambia's experience shows that in this present moment of geopolitical reconfiguration, it is folly for poor countries to use the old, largely western-dominated multilateral system to resolve their economic crises. In the absence of genuinely fair and just multilateral arrangements, poor countries will need to take the initiative into their own hands to safeguard the interests of their citizens and those of future generations.