Zambia: An End To Three-Year Debt Crisis?

Zambia achieved a breakthrough last month in its efforts to address the debt crisis that has plagued the country for nearly three years: a memorandum of understanding with its bilateral creditors to restructure approximately $6.3 billion of debt. The deal offers a way out for the first African country to default on its debt during the pandemic era.

The restructuring has been in motion since June, when the Finance Ministry reached preliminary agreements with its official creditors, including China and members of the Paris Club. Next, each official creditor will initiate internal processes to formalize the MoU. The terms outlined in the document will then be implemented through bilateral agreements with individual members of the Official Creditor Committee.

Key components of the agreements will include an average extension of debt maturities of more than 12 years and a structured interest rate, beginning at 1% and gradually increasing to 2.5% over the next 14 years. An additional mechanism allows for increased payments if Zambia’s economic performance exceeds expectations. Zambia will make payments of some $750 million over the next decade, drastically reduced from the nearly $6 billion it owed its official creditors before the restructuring.

The next crucial step is securing a comparable agreement with private creditors, Finance Minister Situmbeko Musokotwane noted, including international bondholders.

Zambia is currently in formal discussion with a bondholder creditor committee to restructure more than $3 billion of overseas bonds. Negotiations began last month, and since then, creditors have been restricted from trading the country’s bonds. According to Reuters, Zambia has three outstanding dollar bonds, maturing in 2022, 2024, and 2027, that are presently trading at between 52 and 58 cents on the dollar. While the exact timeframe for finalizing agreements between Zambia and individual bilateral creditors remains uncertain, the government says it is firmly committed to securing a deal with private lenders that aligns with the terms with its official creditors. Musokotwane expressed gratitude to the latter, particularly China, France, and South Africa, for their dedication to resolving Zambia’s debt challenges. Despite a brief miscommunication concerning the signing of the MoU, Zambia appears to have a path to financial recovery.