Zambia’s private creditors need to cut debt payments by more than 50%

In new analysis released today, the Zambian Civil Society Debt Alliance and Debt Justice estimate that Zambia’s private creditors need to cut the relative size of debt payments by over 50% to match the debt relief agreed by governments.

In June, Zambia reached an agreement in principle to restructure $6.3 billion of debt owed to other governments. Restructuring negotiations on a further $6.5 billion of debt owed to bondholders, Western banks and Chinese private lenders are still ongoing.

The deal with governments has been reported to cut the relative size of Zambia’s debt payments by 40%. The G20 Common Framework requires private creditors to give ‘comparable treatment’ – agree at least as generous restructuring terms as government lenders. Because private lenders’ loans were on worse terms originally, reducing their debt to the same terms as government lenders would require a 50% cut in the relative size of payments. The groups estimate that this would still leave bondholders either breaking even, or making up to 50% profit, depending on when they bought the debt.

The Zambian Civil Society Debt Alliance and Debt Justice further argue because private creditors lent at higher interest rates originally, they should get repaid less than bilateral creditors. This means the reduction in the net present value of debt owed to private creditors should be more than 50%.

Heidi Chow, Executive Director of Debt Justice, said:
“The failure of private lenders to take part in debt relief has blocked progress on debt restructuring for three years. Zambia’s bondholders and bank lenders must stop free-riding on relief given by others and cancel significant amounts of debt. The UK government could make them do so by passing a law requiring private lenders to match the debt relief given by governments.” 

The deal with governments includes a clause which increases interest payments, and brings forward principal payments, if the IMF and World bank judge that Zambia’s debt-carrying capacity has increased. The analysis reveals this could happen if there are relatively minor changes to some indicators such as an increase in Zambia’s financial reserves or world economic growth. If this clause is triggered, the amount of relief from governments could be reduced to just 18%.

Isaac Mwaipopo, Executive Director of the Centre for Trade Policy and Development, a member of the Zambian Civil Society Debt Alliance, said:

“The agreement between the Zambian government and bilateral creditors gives us significant space to invest in our nation and its people. However, it hinges on private lenders agreeing to comparable relief. Moreover, even slight changes could substantially diminish the scale of relief, possibly resulting in unintended consequences. We strongly urge a reconsideration of the terms of the additional payments, ensuring they are contingent upon substantial economic outperformance, thus fostering equitable growth.”