Earlier, in a publicly released statement, the vice president Inonge Wina declared that the Zambia would not default on any debt payments. However, more recently, the Ministry of Finance through its minister Hon Dr. Bwalya Ng’andu, released a statement announcing that the country would be defaulting on a $3 billion sovereign bond as they missed a $43.5 million coupon payment and exhausted its 30-day grace period. In the statement, the minister outlined the country’s debt management strategy and proposed a 6th month debt suspension to the bondholders that would have begun 14th October 2020 and would end 14th April 2021.
The Zambia External Bond Committee, comprising of a group of creditors holding over 40% of the total debt, came together and voted against the proposed deal by the government. This, therefore, made Zambia the first African country to default on sovereign debt post Covid-19. Their main reasons behind their decision was the lack of transparency and communication by the Zambian government in regards to their debt to some of their other creditors. It was also their worry that the government would favor some creditors, more specifically Chinese ones, over others and not treat them equally. However, prior to the vote, the worry was addressed by the Minister in his statement. “The position of government is that we have to treat all the creditors equally,” voiced Ng’andu. “We are continuing with engagement with the bondholders through our advisers, and we hope that the process of engagement will lead to some solution along the way.”
But what would a default like this mean for Zambia taking into account the current state of the economy?
The first effect the default will potentially have on the country and economy is further depreciation and devaluation of the currency. This will make it much more expensive to import products as well as to trade internationally. Businesses are bound to face high operational and transportation costs due to a currency depreciation. On the flip side, local businesses would benefit from the devaluation as their products/services become cheaper and more desirable to international investors or buyers. Also, individuals would be forced to purchase more locally due to the high exchange rate. This would increase local business demand.
Also, further depreciation in the Kwacha will make it more expensive to payback the debt which has forced them to default as well as the other external and internal debt incurred. This will mean that less money is available for investment into more developmental strategies such as health, education and infrastructure.
Another effect a default would have would be the reputation that would follow. When a country defaults on foreign debt, it makes it harder and more expensive to borrow in the future. Zambia’s credit rating is bound to drop dramatically from the already low 2020 rating of CC according to Fitch. Mozambique is a good example of this. Mozambique’s first default occurred in 2013 with a failure to pay an $850 million bond. In 2017, the country experienced a second default. Their credit rating was set at RD (Restricted Default). This meant that there was a little prospect for recovery. Following the country’s debt restructuring agreement with its bondholders, Fitch made the decision to upgrade Mozambique’s rating to CCC in 2019. This, however, still makes it difficult for them to seek any kind of financial help or investment.
There would be further impact on the standard of living. With the cost of living already significantly high, an additional increase would make it almost impossible for the poor to survive. Inflation would affect access to basic needs such as food, water, housing and electricity.
It would be in Zambia’s best interest to enter into some sort of debt restructuring agreement in order to get out of the default. For example, following default in Mozambique and Argentina, their creditors agreed to restructure their debt payments. Mozambique’s agreement was to begin payment on the defaulted 2017 debt in 2019 as well as release 5% of its tax revenue from natural gas until 2033. According to Reuters, in September 2020 Argentina closed a deal with its creditors that allowed the country to restructure $65 million of its $325 million total accumulated debt as of 2019. The agreement allows from the defaulted debt to be dropped and new bonds to be sold with interest payments ranging from 3% to 7%.
According to a committee member, Simon Quijano-Evans; as reported by Financial Times: “Zambia needs to put all its cards on the table if they want to reach a solution”.
Therefore in order for Zambia to propose any viable deals, they need to work on their transparency and communication with the IMF as well as all its creditors. They need assure the creditors that they will ensure that there will be fair treatment between them.