Zambia has secured a $1.3bn IMF bailout package, enabling the African nation to advance talks with creditors on exiting a default that will test how Beijing handles the souring of its loans to developing nations.
The three-year bailout “will help reestablish sustainability through fiscal adjustment and debt restructuring” through a “homegrown economic reform plan” formulated by President Hakainde Hichilema’s government, the Washington-based multilateral lender said.
The deal is a landmark for how the IMF will respond to a wave of debt distress in countries that have borrowed heavily from China. The bailout was unlocked after Beijing agreed in principle in July to restructure loans under a G20 framework to co-ordinate debt relief.
This week, the IMF also announced an agreement with Sri Lanka on a draft $2.9bn bailout that will head to the fund’s board for sign-off, and approved a $1.1bn disbursement to Pakistan. Both South Asian countries took significant loans from Beijing in recent years before becoming mired in debt crises.
In 2020, Zambia became the first African borrower to default since the start of the pandemic when it stopped making payments on $17bn of external debt under Edgar Lungu, who lost the presidency to Hichilema in an election the following year.
Before the default, China became Zambia’s biggest creditor with $6bn in loans to build airports, roads and other infrastructure, many of which became white elephants as the economy slowed and corruption mounted.
Zambia will now have to negotiate the exact terms of relief with bilateral lenders and secure a similar deal with private creditors, such as holders of $3bn in US dollar-denominated eurobonds.
Both tasks will be difficult as the Chinese debt is split between several creditors and Beijing has historically been reluctant to take outright losses. Some bondholders have complained that they have been left in the dark over calculations about how much relief is needed.
“Together with the fiscal adjustment, Zambia needs a deep and comprehensive debt treatment under the G20 Common Framework to restore debt sustainability,” said Kristalina Georgieva, IMF managing director.
Zambia’s defaulted eurobonds bonds have traded at about two-thirds of their face value, an indication of investors’ expectations of losses.
The IMF bailout is anchored by a plan from Hichilema’s government to cut the fiscal deficit to less than 7 per cent of gross domestic product this year, from double digits in 2021, and to revive growth.
The debt crisis pushed what was one of Africa’s fastest-growing economies into a long torpor, but optimism about debt relief and strong copper prices have aided a rebound this year.
The Zambian kwacha has been the world’s second best-performing currency against the US dollar this year, after being the worst-performing last year.
Inflation has fallen from double digits in recent months, bucking a trend in a region that has been hit hard by the global surge in food and fuel prices unleashed by Russia’s war in Ukraine.
The IMF has argued that the Zambia programme will protect social spending, which is projected to rise from 0.7 per cent of GDP in 2020 to 1.6 per cent in 2025.
But Hichilema’s government will be expected to eliminate a fuel subsidy and cut costs in farm subsidies and avoid a repeat of bad investments fuelled by debt.
Zambia’s finance ministry has already cut back sharply on infrastructure projects in the pipeline, cancelling $2bn in yet-to-be disbursed loans — largely from Chinese banks.
