March 24, 2023

Zambia has secured a $1.3 billion IMF bailout package allowing the African nation to advance negotiations with creditors to end a bankruptcy that will test how Beijing is dealing with souring its loans to developing countries.

The three-year bailout “will help restore sustainability through fiscal adjustment and debt restructuring” through a “homegrown economic reform plan” drafted by President Hakainde Hichilema’s administration, according to the Washington-based multilateral lender.

The deal is a milestone for how the IMF will respond to a wave of debt 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 coordinate debt relief.

This week, the IMF also announced an agreement with Sri Lanka on a $2.9 billion bailout that will go to the fund’s board of directors for approval, and approved a $1.1 billion payout to Pakistan. Both South Asian countries took significant loans from Beijing in recent years before getting caught up in debt crises.

In 2020, Zambia became the first African borrower to default since the start of the pandemic when it stopped paying $17 billion in foreign debt under Edgar Lungu, who lost Hichilema’s presidency in an election the following year.

Before the default, China became Zambia’s largest creditor with $6 billion 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 the exemption with bilateral lenders and negotiate a similar deal with private creditors, such as holders of $3 billion in US dollar-denominated Eurobonds.

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Both tasks will be difficult, as China’s debt is divided among several creditors and Beijing has traditionally been reluctant to take direct losses. Some bondholders have complained of being left in the dark about calculations about how much relief is needed.

“Along with the fiscal adjustment, Zambia needs in-depth and comprehensive debt treatment under the G20 Common Framework to restore debt sustainability,” said IMF director Kristalina Georgieva.

Zambia’s defaulted Eurobonds have traded at about two-thirds of their face value, an indication of investor expectations of losses.

The IMF bailout is anchored in a plan by the Hichilema government to reduce the budget deficit to less than 7 percent of gross domestic product this year, from double digits in 2021, and revive growth.

The debt crisis pushed what was one of Africa’s fastest growing economies into a long state of calm, but optimism about debt relief and strong copper prices have helped a rebound this year.

The Zambian kwacha was the second best performing currency in the world against the US dollar this year, after the worst performing last year.

Inflation has fallen from double digits in recent months, contrary to a trend in a region hard hit by the global rise in food and fuel prices caused by Russia’s war in Ukraine.

The IMF has argued that the Zambia program will protect social spending, which is expected to rise from 0.7 percent of GDP in 2020 to 1.6 percent in 2025.

But the Hichilema government is expected to abolish a fuel subsidy and cut the cost of agricultural subsidies and avoid a repeat of bad investments fueled by debt.

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Zambia’s Treasury Department has already slashed infrastructure projects in the pipeline and canceled $2 billion in outstanding loans – largely from Chinese banks.