Life After Debt:
An Analysis Of Zambia’s Debt Restructure
As a general principle, debt can significantly impact effectiveness, efficiency, and resourcefulness at both personal and national levels. Until recently, Zambia epitomised this unenviable position. The country grappled with unsustainable debt levels for years, a challenging predicament that persisted until June 2023. Following extensive and far-reaching negotiations, Zambia secured a landmark $6.3 billion debt restructuring agreement with its official creditors, marking a pivotal step toward restoring long-term sustainability and rejuvenating a struggling economy.
The Debt Agreement
The restructuring agreement entails revised payment terms from lenders, resulting in a present value markdown of approximately 40 per cent. This alleviates the nation’s financial strain, although negotiations with commercial creditors, bondholders, banks, and suppliers remain bilateral.
Zambia possesses a notably complex debt portfolio due to its substantial number of creditors across different categories. Besides bondholders holding $3.89 billion, $6.3 billion is owed to other commercial creditors. Bilateral negotiations with individual creditors in each category would result in a lengthy and complicated process. However, Zambia is the first country to achieve such a milestone in debt renegotiations under the G-20 Common Framework.
Earlier in 2024, the Zambian government announced that it had reached an Agreement in Principle with the negotiating committee representing bondholders, much to the relief of numerous stakeholders. The long-standing debt impasse had finally been resolved.
Reforms Implemented
Despite this momentous achievement, the restructuring is not a magic wand. Zambia will not overcome its economic challenges by default; more robust frameworks are required to rebuild the economy. Prolonged negotiations during Zambia’s years in default have exacerbated the adverse effects of debt on the southern African nation. These include delayed investment due to economic uncertainty, decreased access to funding for citizens and companies, increased cost of funding and capital, and volatility in fundamental economic variables.
Zambia’s arduous journey through the ‘wilderness’ culminated in an acceptable agreement with bondholders and official creditors regarding the terms of the restructuring. Achieving this success was no easy feat; it resulted from years of painstaking effort and difficult reforms that may not always seem equitable or nationalist. Recent reforms, including the introduction of legislation ensuring transparency and accountability in public borrowing, the development of financial management mechanisms for prudent spending oversight, and the removal of fuel subsidies, are meant to demonstrate to creditors and partners Zambia’s serious commitment to securing long-term debt sustainability and boosting growth while reinforcing the Bank of Zambia’s independence.
The country deserves commendation for implementing such reforms, which have been instrumental in regaining control of public finances, building a solid foundation for economic recovery, and regaining creditors’ trust. Crafting a credible, comparable agreement with private creditors has ensured that the country remains committed to its home-grown reform agenda.
Impact on the Economy
Deploying funds from cooperating partners has commenced against the backdrop of debt restructuring. This is evidenced by the disbursement of funds from the International Monetary Fund ($188 million) and the World Bank ($75 million).
Debt restructuring will have a far-reaching positive impact on developmental fundamentals. It will generate a favourable cash flow into the country instead of a deadlock without an agreement. Moreover, financial and development experts predict that support from cooperating partners will exceed the current debt servicing requirements. When analysed against debt outflows versus debt inflows, this net positive cash inflow can be channelled into developmental initiatives.
The renegotiated payment terms are significantly lower than Zambia’s historical budgeted rates, allowing for reallocating resources previously reserved for debt servicing to other economic and social sectors. The restructuring brings various advantages, benefiting both the nation and multiple stakeholders. Fiscal certainty will enable national budgeting within more stable parameters; revised resource allocation will enhance social and economic spending; and an improved international perception of the country’s creditworthiness will increase access to global capital funding for corporations operating within Zambia.
Future Outlook
Additional benefits include:
- Lower funding costs as the country’s risk premium is adjusted following an expected credit rating improvement,
- Increased inbound investments stimulating economic activity, and
- Reduced exchange rate volatility driven by diminished risk and sentiment influenced by debt renegotiation developments.
Value addition is critical to sustained growth, so SMEs (small and medium enterprises) are poised to penetrate industrialisation and expand. This is a promising development as strategies are undertaken at the governance level to increase private sector opportunities.
Undoubtedly, the Zambian economy is on the rise. As more cash circulates within the economy, the prospect of Zambia again being recognised as a middle-class economy seems within reach, presenting wealth-generating opportunities for everyday citizens.
