On the 17th of November 2020, the Minister of Finance Hon. Dr Bwalya Ng’andu presented a statement announcing that Zambia was going to default on a Eurobond after failing to produce a $42.5 million coupon payment on. In the same statement, He requested a 6-month suspension of the payment from the bondholders to which the Zambia External Bondholder Committee did not accept.
Not too long ago, on the 22nd of May 2020(end of the grace- period), in a much similar bond position as Zambia’s current one, Argentina failed to produce a coupon payment of $500 million on $66 billion worth of Eurobonds thus forcing them to default for the 7th time. The Argentine government had been going through extensive talks with its bondholder’s committee before and as they defaulted.
During the negotiations, the bondholder group and the government agreed to extend the payment deadline to June 2nd 2020 in order to give more time for the on-going negotiations and debt- restructuring talks. By the end of August, after a second deadline extension and clashes between parties, the country’s government managed to propose an offer to which 99% of their creditors accepted. The agreement allowed creditors to trade in their old bonds for new ones with a significantly lower coupon rate. The bond maturity extension and lower interest rate allows for more time for the economic environment in Argentina to grow and eventually put them in a better debt position.
The biggest similarity between Zambia and Argentina’s debt default is the build-up to their debt positions. To avoid defaulting in 2018, the Argentine government secured the largest loan in their history from the IMF. The country is also experiencing rapid depreciation of their currency, -19.1% growth rate, high levels of inflation and economic contraction. Their economy was further stressed by the Covid-19 pandemic pushing them in a corner financially thus the default.
Zambia, likewise, has accumulated unnecessary debt of about $27 billion since 2016. The economy has been going through a downward spiral as well with the GDP growth rate below 2%, constant depreciation of the kwacha, and a 16% inflation all accelerated by the Covid-19 pandemic. Taking all these into consideration as well as the initial mismanagement and misuse of the acquired debt, the government, also in a financial corner, made the decision to default but not making the required payment.
Both countries real debt and economic crisis are largely due to financial and economic mismanagement, corruption and a lack of accountability within their governments. Both governments made avoidable mistakes. Argentina, to this day, is suffering the consequences of years of corruption from governments before their 2019 elected government. Zambia seems to be following in the same footsteps. The careless spending and inflated costs of certain projects and assets put Zambia on the path to default. The 2020 Auditor General’s report revealed upsetting irregularities and mismanaged figures. In the report for the utilization of Covid-19 funds, the total amount of mismanaged funds was over ZMW 1.3 billion. This included suspicious cash transfers and withdrawals, awarding of questionable contracts, and large amount of money committed to/budgeted for certain projects.
A key difference between the two governments can be seen through their attitudes towards the talks and negotiations with their creditors. Argentina appear to be coming from a humble place, working tirelessly with their bondholder’s committee in order to come to a common agreement. Prior to their default, the government was already implementing economic reforms and entered debt restructuring negotiations with the committee. Their determination to come to an agreement that benefited both parties was at the forefront on their talks. The Argentine government was also transparent with their entire debt, state of their economy and dealings with their creditors.
On the other hand, the Zambian government come across as proud, almost ignorant to the situation that they have put not only them but the entire country into. It is as though they do not understand the repercussions of their actions. It is not that they were not aware that they had a pending payment, they have had months and a grace period to prepare for the due date and still fell short. Their lack of transparency about the amount of debt and communication amongst themselves, with their creditors and with the rest of the country has been a major issue. We can recall that hours before the announcement of the default to parliament, the Vice President, herself, publicly announced that they would not default. The Zambia External Bondholder Committee seem to have also observed this, and have clearly stated that the negotiations cannot move forward without adjustments in attitude as well as in actions.
Another observation is the Zambian government’s lack of focus and interest in the crisis at hand. Their nonchalance attitude towards the ongoing economic crisis is worry-some. With the August 2021 elections coming up soon, the government is more focused on winning them rather than dealing with the debt crisis. “The focus of everything, even the request for relief, has been aligned to the election” said Trevor Simumba, a Zambian financial analyst. Some of the money meant for development and funding relief could most likely be used a campaign funds instead to secure the win.
Taking all of this into account, the government needs to be able to prioritize. They need to realize the importance of the situation and understand that they are not the only ones that will be affected by this. Working towards a sustainable debt restructuring strategy and economic and financial improvement should be the main goal. To follow Argentina’s footsteps is to go down a rabbit hole so deep, the only way out is to be handed a lifeline by creditors; which does not seem likely with the government’s current attitude.
