Daily Management Review

Zambia Reveals China's Inexperience With Debt Relief - Reports


Zambia Reveals China's Inexperience With Debt Relief - Reports
China's lack of expertise with difficult debt restructurings, as well as delayed coordination among its state lenders, is delaying debt relief for Zambia, a test case for the top emerging market creditor, according to reports quoting sources with knowledge of the matter.
Zambia became the first country to fail in the COVID-19 pandemic era in 2020, with a debt burden equal to 120 per cent of GDP. According to Zambian government data, its external debt surpassed $17 billion at the end of 2021, with China owing a third.
China agreed last month to co-chair Zambia's official creditor committee with France, a step welcomed by Zambia's government, which has prioritised debt reduction since taking power last year.
Emerging market investors and other debtor countries are eagerly watching Zambia's case for clues about how lenient Beijing will be with overextended debtors in the future.
According to Boston University analysts, China has been the largest public lender to African countries over the previous decade, issuing $160 billion in credit since 2000.
"There is a learning curve for China and that is something we need to recognise," said a French official, who declined to be named due to the sensitivities of the issue.
The official also mentioned "delays in China's internal processes," adding, "we also need greater coordination within China itself, because there are a lot of loan agencies."
With the creditor committee yet to meet, G7 finance ministers urged China to "contribute constructively" to the debt relief process following a meeting in Germany this month.
In an email to Reuters, China's foreign ministry stated that the country places "great weight on Zambian debt worries and supports multilateral efforts to settle its debt situation."
Another source familiar with the situation stated that while China's central bank was eager to move forward, the finance ministry was concerned about "creating an expensive precedent" elsewhere if it accepted large losses on loans to Zambia.
According to reports, the finance ministry was particularly concerned about China's development banks, through which majority of China's credit is given.
According to sources familiar with the situation, China has been reticent to participate in the Group of 20 major nations' multilateral debt procedure, preferring bilateral conversations where it can also focus on the country's broader strategic interests.
China's foreign ministry did not react precisely to concerns about whether the delays were caused in part by internal coordination challenges and a refusal to accept loan losses.
Other countries are likely to keep a close eye on Zambia's situation. Sri Lanka, for example, made its first debt default this month and owes money to a variety of creditors, including China, India, Japan, and Eurobond holders.
Zambia secured a staff-level agreement with the International Monetary Fund in December on a $1.4 billion extended credit facility, but the money cannot flow until Lusaka and its creditors reach an agreement on debt reduction to sustainable levels.
"China is ready to work with the international community and continue to provide within its capability Zambia with the necessary support to address its current practical difficulties," the Chinese foreign ministry's statement said.
Zambia's finance minister has stated repeatedly that he thinks the negotiations would be completed by the end of June, a schedule that observers believe is optimistic.
"Our debt burden is choking our country's growth potential and the debt restructuring exercise is becoming more urgent day by day," Zambia's finance ministry said in an emailed statement in response to questions about China's role in the debt process.