Zambia’s Debt Situation with Mozambique as a Case in Point
Economy, Opinion

BBC Africa recently reported Zambia as being the first African country to default on its sovereign debt during the Covid-19 era. The questions that might linger on many people’s minds would be; how did will get to this level as a country? Or what is the way forward from here as country? Perhaps Zambia need to draw some lessons from countries such Brazil or Mozambique. This article will look at the Mozambican debt situation whilst trying to relate to the Zambian situation.

In a controversial bond that come to be known as the ‘Tuna bond’ scandal, Mozambique between 2013 & 2016 managed to contract debt amounting to $2bn from lenders among them, Credit Suisse. The tuna bond was marred with lack of transparency and as a consequence led Mozambique into a debt crisis. “Mozambique’s economy has been in a crisis since 2016, the loans taken out between 2013 and 2016, were marked as investments in schemes including maritime security projects and a state tuna fishery. However, a proportion of the money has not been accounted for and allegation made include accusations of fraud and kickbacks”, reported the BBC in 2019.

The 2019 report by the BBC echoes the sentiments expressed by the Chinese and the Eurobond holders when Zambia requested for deferment of interest payments for six months. It seems lack of transparency is what most creditors have been worrying about. An article in the South China Morning Post noted a standoff between China and private creditors with regards to Zambia request to have its interest payment deferred. “There is a fear that giving relief to Zambia would only work to the benefit of the other creditors; they have doubts on what the true value of the debt is”, the article noted.

The loans that Mozambique acquired were partially concealed from the IMF and donors, until they collapsed and sparked a financial crisis. The financial times reported, “Auditors later found that $500m of the money raised by loans could not be accounted for.” Mozambique later on eventually defaulted on its debts. In January 2019, a financial times report carried a story of Russia’s VTB capital, one of Mozambique’s creditors, suing it debtor to recover a share of its defaulted debts.

To fix the tuna bond debacle, Mozambique was forced to hand over up to a billion dollars of its future offshore gas bounty to bondholders. Their finance ministry was quoted as agreeing to give up 5% of its yearly revenue from its key gas field to restructure a $726m bond linked to the tuna bond. Those are consequences of sovereign debt default and lack of prior sustainable planning.

Seeing that Zambia has already defaulted on the coupon payment which was due on 14th October, 2020 with a grace period that ended on 13th November, 2020, there is need to look at ways in which the situation can be mitigated.  Zambia was due to make its coupon payment of US$42.5M but it could not do so. The minister of finance in his 2021 national budget address to parliament, proposed a K52bn representing 43% of the total budget, to be financed through debt. It will be a daunting task for the budget to achieve its objective seeing that Zambia’s credit ratings are now in junk state; very few creditors will be willing to offer their credit. It would be wise to cut down some of the proposed expenditures as maintaining the budget in its current form will be a bit unrealistic since a big part of the country’s source of revenue seems to be constrained. Like Mozambique, it would not be a bad idea to call upon the IMF so they can come in to offer help in the restructuring of the country’s current debt.

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