Zambia, until recently considered one of Africa’s success stories, is on the brink of a sovereign default. The heavily indebted government is facing long-term fiscal challenges, yet exacerbated by the global pandemic, has failed to pay $42.5 million of interest on one of its Eurobonds due last month.
It has asked the creditors for a six-month extension of the payment deadline. However, they have been reluctant to approve the request, expressing concerns about Zambia’s lack of progress in talks with the IMF and poor transparency regarding its debt obligations to China. Unless Zambia manages to change their mind by 13 November when the grace period on the payment expires, it will become the first African economy to go bankrupt in more than a decade.
Zambia has been rather unlucky in recent years. As a major copper producer, it enjoyed an economic boom at the beginning of the century, driven by favourable copper prices and earlier macroeconomic reforms. However, the boom ended in 2013 when copper prices started to fall. The country has also been hit by a series of severe droughts, crippling agricultural production and leading to power outages, causing further damage to the economy. The global pandemic has inflicted yet another blow: Zambia’s GDP is projected to contract by 4.1% this year.
That said, although these factors exacerbated Zambia’s crisis, the current debt distress is primarily a consequence of the government’s borrowing policy and mismanagement of the economy. When Michael Sata from the Patriotic Front became president in 2011, ending the 20-year rule of the Movement for Multi-Party Democracy, the country’s debt stood at mere 18% of GDP, owing to the 2005 IMF debt relief and cautious macroeconomic management of previous governments.
The new government, having won the election on a promise of more inclusive growth, has, however, reversed the trend. It ramped up public spending and started a massive investment into new infrastructure projects, financed through increased borrowing. In 2012, Zambia entered a Eurobond market, raising $3 billion over the next three years, with a 10-year maturity period at a staggering average interest rate of 7.4%. It has also borrowed heavily from China and other lenders, with its external debt jumping from around $2 billion in 2011 to $11 billion in 2018.
In theory, borrowing to finance a country’s infrastructure development might be a viable economic strategy, as long as long-term economic benefits of the investment exceed borrowing costs. This, however, does not seem to apply to Zambia. Not only was the borrowing very costly, but the projects also tended to be overpriced, sometimes even appearing to lack substantial practical value, such as in the case of the extension of the Lusaka Airport, designed to accommodate an unlikely 10-fold increase in traffic.
Moreover, some of the borrowed credit was not even used for investment, but to cover increasing budget deficits blown up by the government’s reckless spending – stretched, for example, by questionable purchases of new military equipment. In 2019, when Zambia was already severely debt-distressed, the government bought a new presidential Gulfstream jet, costing, according to some estimates, $400 million.
End of the road
There seems to be no easy way out of the current crisis. Even if Zambia was granted the requested extension of the payment deadline, it will have to submit another series of interest payments next year, repay a $750 million Eurobond in 2022, $2.25 billion for the remaining Eurobonds in 2024 and 2025, and presumably also some of its remaining debt obligations, whose conditions are not always very transparent, making estimates about their impact on the state of Zambia’s debt management difficult to make.
Zambia was struggling to repay its debt even before the global pandemic hit the economy. The contraction of GDP, shrinking government revenue, has yet added to the pressure. Furthermore, as a consequence of a fall in investor confidence, Kwacha has continued depreciating, weakening 36% against the dollar this year, thus making debt servicing even more costly. The payment extension would, therefore, probably just postpone the inevitable: Zambia’s economy is set to default.
At this stage, signing up for an IMF debt restructuring program seems like the best option. This would allow Zambia to repay existing debt obligations with credit lent at concessional terms, thus providing the government with critically needed fiscal space and time to implement reforms before having to pay the borrowed funds back.
Edgar Lungu, the current president, has, however, been rather unwilling to apply for the IMF assistance – the IMF package would require radical spending cuts and a tight fiscal discipline, which could threaten Mr Lungu’s plans for reelection next year, especially in a country with a vivid memory of the pain associated with the IMF structural adjustment program implemented in the 1990s.
Photo source: Reuters