Zambia to pay 1% interest after ‘Mission Impossible’ debt deal

(Bloomberg) — Zambia will pay interest rates as low as 1% through 2037 as part of a debt restructuring deal it struck with countries including China this week, according to people familiar with the matter.

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The South African country will pay the maturities of the $6.3 billion bilateral debt until 2043, which is an average extension of more than 12 years. The people, who asked not to be identified because details were not public, said rates would rise to a maximum of 2.5% after 14 years under the base scenario. Zambia was paying an average of 3.9% on its bilateral Chinese loans, according to estimates by Debt Justice, a British organization that campaigns to cancel loans for poor countries.

The Zambia government announced the landmark deal in Paris this week under the G20 Common Framework mechanism for the Paris Club’s traditional creditors to negotiate deep relief alongside new lenders, particularly China. The nation must now get its private creditors to agree to similar treatment.

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It is a great achievement for a process that has been mired in delays, just as an increase in the number of countries that need to be restructured. Zambia became the first country to default on sovereign debt in pandemic-era Africa in November 2020, and has been in talks with the formal creditors’ committee for about a year.

“It was an impossible task,” Zambian President Hakainde Hichilema told a crowd of hundreds at the airport on his return to Lusaka, Zambia’s capital, on Saturday. “It wasn’t a straight line. It zigzags, sideways, forward, back, down, up. But we kept our eyes on the ball.”

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While the deal does not include debt cancellation, and instead pays maturities at much lower interest rates, people including IMF Managing Director Kristalina Georgieva have welcomed what she calls “deep debt relief”. Chinese lenders resisted write-downs, favoring extended payment terms.

The Zambian Ministry of Finance could not immediately comment when asked to confirm details. A spokesman for Lazard Freres, the government’s financial advisers in London, declined to comment. The Chinese Embassy in Lusaka did not respond to requests for comment.

The deal includes a contingency if Zambia’s economy does better than expected, at which point the creditors will be paid more. Zambia said in October it was seeking to rollover loans of about $12.8 billion of its total external public liabilities, which had grown to more than $18 billion by the end of 2022.

Other key terms of the deal, reported here for the first time, include:

  • Under the base scenario, the reduction to the net present value of debt is about 40% using a discount factor of 5%.

  • If Zambia is judged to have been upgraded to ‘medium’ debt sustainability, interest rates rise to a maximum of 4%.

  • Principal repayments should start in 2026, at 0.5% or about $30 million annually, through 2035.

  • A loan for the Lower Cavo Gorge hydroelectric plant will be included in the restructuring, even after China requested that it be fenced off.

While the International Monetary Fund has estimated Zambia’s bilateral debt at $8 billion by the end of 2021, the government has said it is restructuring $6.3 billion in official loans. People said the reason for the difference is that some Chinese debt has been reclassified as commercial. These loans will still get similar treatment.

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Zambia now needs to seek at least restructuring terms from its commercial creditors, including holders of $3 billion in Eurobonds that are also behind $500 million.

In his speech on Saturday, Hichilema thanked French President Emmanuel Macron and Chinese President Xi Jinping. China and France co-chair the official creditors’ committee. Zambia’s leader said in an interview on Friday that he plans to visit China within the next three months or so, his first trip there since winning power in August 2021.

– With assistance from Taonga Mitimingi and Jennifer Zabasajja.

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