Zambia’s Debt Saga and the lesson for other African Nations

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The debt crisis in Zambia is a cautionary tale, not just for the country itself but for many African nations grappling with similar challenges. Zambia’s journey into indebtedness and its subsequent struggle to manage its debt burden offers several crucial lessons that other African countries would be wise to heed.

Zambia’s economy has long been heavily reliant on copper exports, contributing a significant portion to its GDP. However, this dependence on a single commodity made the country vulnerable to fluctuations in global copper prices. When copper prices fell, as they did in recent years, Zambia’s revenue stream suffered, exacerbating its debt woes. This proves the importance of diversifying economies away from over-reliance on a few key commodities, a lesson that many African countries with similar resource-dependent economies should take seriously.

The country’s debt accumulation was fueled by extensive borrowing, both domestically and internationally, often for infrastructure projects. However, many of these projects failed to yield the expected returns, leaving the country saddled with debt without the means to repay it. This highlights the importance of prudent borrowing practices and rigorous evaluation of the feasibility and sustainability of infrastructure projects before undertaking them. African nations must exercise fiscal discipline and prioritize investments that offer long-term economic benefits without overburdening future generations with debt.

The lack of transparency and accountability in Zambia’s borrowing and spending processes exacerbated its debt crisis. Loans were contracted without adequate public scrutiny, and there were allegations of corruption and mismanagement in the use of borrowed funds. To prevent similar crises, African countries need to enhance transparency and accountability mechanisms in their public financial management systems. This includes ensuring that borrowing decisions are made transparently, with robust oversight from the legislature and civil society, and that borrowed funds are used efficiently and effectively for their intended purposes.

Zambia’s debt distress was compounded by its inability to effectively manage its debt obligations. Debt servicing costs consumed a significant portion of government revenue, leaving little room for essential public services and social spending. African nations must prioritize debt sustainability and develop comprehensive debt management strategies to avoid falling into a debt trap. This includes conducting regular debt sustainability analyses, renegotiating unsustainable debt terms, and exploring debt restructuring options where necessary.

Weak domestic revenue mobilization capacity has been a common challenge across many African countries, including Zambia. Overreliance on external financing leaves countries vulnerable to external shocks and limits their policy autonomy. African nations need to prioritize efforts to strengthen their tax systems, broaden their tax bases, combat tax evasion and illicit financial flows, and reduce dependency on external financing sources.

It was exacerbated by external factors such as global economic downturns and commodity price fluctuations. African nations need to build resilience to such external shocks by diversifying their economies, promoting value addition and industrialization, and investing in sectors less susceptible to global market volatility. Moreover, building robust social safety nets can help cushion the impact of economic downturns on vulnerable populations, reducing the need for excessive borrowing to fund emergency relief efforts.

According to an official statement from the World Bank regarding the agreement reached between the Government of the Republic of Zambia and bondholders on the terms for restructuring Zambia’s Eurobonds, a huge step has been taken towards the country’s prolonged debt restructuring efforts, which have spanned over three years and faced numerous challenges. Here’s a condensed timeline of key events:

In 2019-2020, Zambia encountered difficulties in servicing its debts, including its “Eurobonds.”

In May 2020, President Edgar Lungu’s administration enlisted French firm Lazard to advise on restructuring the nation’s foreign debts, estimated at $11 billion.

June 2020 saw Zambia’s request to freeze debt payments under the G20-led Debt Service Suspension Initiative (DSSI) due to the COVID-19 pandemic.

November 2020 marked Africa’s first pandemic-era sovereign default when Zambia missed a $42.5 million payment on one of its international bonds.

In February 2021, Lungu’s government sought debt restructuring under the G20’s Common Framework in response to COVID-19.

August 2021 witnessed opposition leader Hakainde Hichilema’s landslide victory over Lungu in the presidential election.

By October 2021, Zambia’s finance ministry disclosed its external debt to be nearly $17 billion, with debts to Chinese lenders nearly doubles the previous official figure.

June 2022 saw the formation of an “official sector” creditor committee (OCC) to commence restructuring loans to Zambia.

In July 2022, Zambia’s OCC, co-chaired by China and France, committed to granting debt relief, facilitating the IMF’s approval of a $1.3 billion rescue loan.

By June 2023, the OCC had agreed to restructure combined loans worth $6.3 billion to Zambia, with a significant portion owed to China’s Export-Import Bank.

October 2023 witnessed an “agreement in principle” with international investment and pension funds holding $3 billion worth of sovereign bonds, proposing debt consolidation with improved terms.

November 2023 saw setbacks when bilateral “OCC” creditors vetoed a revised deal with bondholders, citing inadequate debt relief.

In January 2024, Zambian officials engaged in debt talks with Chinese creditors.

By February 2024, restructuring agreements were signed with India and China, the last two bilateral creditors.

March 2024 marked the government’s resumption of formal talks with the international bondholder group on a new debt restructuring proposal.

Addressing Africa’s debt challenges requires a concerted effort from both domestic and international stakeholders. International financial institutions, bilateral donors, and creditor nations need to support African countries in their efforts to achieve debt sustainability through concessional financing, debt relief initiatives, and technical assistance for capacity building in debt management and fiscal governance.

Zambia’s debt saga serves as a stark reminder of the perils of unsustainable borrowing and fiscal mismanagement. African nations must learn from Zambia’s experience and take proactive measures to strengthen their fiscal resilience, enhance transparency and accountability, and prioritize investments that promote sustainable and inclusive economic growth. By doing so, they can avoid falling into the debt trap and pave the way for a more prosperous and resilient future.

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