Zambia became the first coronavirus-era debt default African nation that has borrowed heavy loans from China in recent years to fund major infrastructure projects.
China has provided billions of dollars of loans for infrastructure projects to a host of Sub-Saharan African nations as part of its sweeping Belt & Road Initiative (BRI) in recent years, with Zambia one of its most prominent debtors. Zambia owes over USD 3 billion to Chinese entities of a total of USD 12 billion in external debts.
China’s presence is visible all over Africa. But nowhere as much as in Zambia, the African nation where it invested the most money. Today, China possesses one-third of Zambia’s national debt. It has invested in the mining, industrial sectors and agriculture. Some Zambians denounce this Chinese presence as a form of neo-colonialism.
Since last year, Southern Africa’s third-largest economy is reeling under severe pressure from its inability to pay for imports and defaulting on construction project financing and bond payments. Zambia’s debt load was considered unsustainable even before the COVID-19 pandemic. The country’s sovereign debt reached 96 per cent of GDP in 2020, while the country has started defaulting on loans in 2019 itself.
After years of strained relations, Zambia held negotiations with the International Monitory Fund (IMF) to get its debt under control following China’s reluctance to share the pain. The International Monetary Fund has twice withheld a credit facility amid warnings that Zambia’s high debt and shrinking foreign exchange reserves leave its economy vulnerable.
Zambian GDP has halved to just 2 per cent over the past three years, the currency has depreciated by almost 17 per cent against the dollar over the past year and inflation is running at almost 10 per cent.
Last year, China Exim Bank threatened that Chinese contractors would suspend work on infrastructure projects in Zambia if arrears were not paid. According to media reports, several road construction projects contracted to Chinese firms were suspended late in 2019.
Zambia is renegotiating with its Chinese project finance debt but Chinese companies are playing tough. These firms are seeking control of Zambian mining assets as collateral for potential loan defaults. Chinese companies are putting pressure on the Zambian government to avert further delayed payments or defaults on their loans. However, Chinese companies are refusing to restructure existing debts and are instead seeking fresh collateral in case of default.
A recent study by Johns Hopkins University’s China-Africa Research Initiative showed that Chinese financing to Africa fell below $9 billion for the first time in nearly a decade in 2019, with Beijing refraining or reducing the size of loans to major borrowers such as Angola and Ethiopia.
Rather than continuing to blindly dump finance into countries with debt issues, Chinese financiers have shifted away from these countries albeit belatedly in some cases, such as Zambia, says the report.
The Zambia case indicates that beyond just the size of the debt, the composition of creditors also plays a role in determining debt risk. Western bondholders are more likely to reject potential debt relief packages in countries borrowing from China, due to fears that debt relief will be used to repay Chinese loans.
There is no transparency in Chinese lending and financial flows to Zambia with little accurate data on loan conditions. The Chinese approach to finance is creating incentives for kickbacks and inflated project costs.
Zambia has now applied for debt relief under a new common framework by the Group of 20 major economies, designed to help the world’s poorest countries tackle their debt burden.
It aims to offer poorer nations a transparent level playing field through which to restructure or reduce unsustainable debt obligations such as Chinese loans. Analysts have been cautioning about the dependence on Chinese loan which is susceptible to debt distress.