Zambia cancels US$1.6 billion Chinese loans and halts infrastructure projects in move to avoid debt crisis

Loans are agreed on but not yet distributed and form part of the US$2 billion in undisbursed lending cancelled by Lusaka
Bilateral lenders also agreed to give debt relief, showing the ‘potential of the G20 Common Framework for debt treatment’, says IMF

China-Africa relations

Jevans Nyabiage

Published: 8:30pm, 1 Aug, 2022

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Zambia has cancelled US$1.6 billion in agreed upon but not-disbursed Chinese loans, mostly from China Exim Bank and the Industrial Commercial Bank of China, to help manage its debt woes.

It is a portion of the US$2 billion that Lusaka has cancelled in undisbursed loans from its external creditors, coming shortly before its official bilateral lenders agreed on Saturday to provide debt relief to the Southern African nation.

Lusaka announced that it ceased the construction and rehabilitation of several roads, highways and information and technology projects, most funded by China Exim Bank, after it faced challenges in making loan payments.

“Measures have been taken by the government of the Republic of Zambia to address the current debt challenges – beyond the debt restructuring process. Cabinet, at its sitting on Thursday … took measures to discontinue some loan-financed projects,” Zambia’s Ministry of Finance and National Planning announced on Saturday.

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Further, it said a few critical projects would be re-scoped to allow critical components to be finished using budget resources allocated over the medium term.

The ministry said it had started talks with creditors and contractors to formalise the cancellation of works contracts.

Among the projects cancelled are the rehabilitation of a major highway – the US$1.2 billion Lusaka-Ndola dual carriageway funded by China Jiangxi Corporation – which was to link the capital to the country’s Copperbelt Province. Lusaka has engaged China Jiangxi to cancel US$157 million in undisbursed loans.

Digital projects, such as Smart Zambia phase II and digital terrestrial television broadcasting systems in Zambia phases II and III, have also been stopped as the country moves to avert a debt crisis.

Zambia said it had notified Chinese lenders and contractors about plans to cancel undisbursed loan balances for 14 projects.

It will move to stop the disbursement of US$333.2 million for Smart Zambia phase II, which was being implemented by Huawei Technologies and funded by China Exim Bank.

The initial phase of the project involved building a national data centre and an ICT talent training centre. Huawei was to develop Zambia’s national broadband system to bolster public service delivery in subsequent phases.

The country has also asked China Exim Bank to cancel US$159 million earmarked to fund the building of Chalala army barracks in Lusaka.

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Besides Chinese loans, Zambia also plans to cancel loans advanced by the British Standard Chartered Bank for the building of Kafulafuta Dam for US$381.7 million, of which US$224.6 million had already been disbursed. The other is a multimillion-dollar deal involving Israel Discount Bank to fund military aircraft and equipment.

In 2020, Zambia became the first African country to default during the pandemic when it failed to make payments on US$17 billion of external debt, including US$3 billion dollar-denominated bonds. Lusaka owes Chinese lenders about US$6 billion, which went into building mega projects, including airports, highways and power dams.

In addition to cancelling contracts and stopping the disbursement of loans, Lusaka has received a reprieve after official creditors led by China and France agreed to provide debt relief. The decision paves the way for the country to access a US$1.4 billion bailout from the International Monetary Fund. Still, Lusaka has to seek similar relief from private creditors over the US$3 billion it owes Eurobond holders.

It had sought debt relief from the Group of 20 wealthiest nations and its top private creditors under the G20’s new Common Framework to help more than 70 developing countries with post-Covid debt restructuring and relief. The process allows creditors to jointly renegotiate its foreign debt – even though China usually prefers bilateral negotiations.

The official creditor committee for Zambia – co-chaired by China and France with South Africa acting as a vice-chair and including IMF and World Bank staff – met on July 18 where they committed to offering Zambia debt relief.

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IMF managing director Kristalina Georgieva welcomed the official creditors’ move to provide financial assurances, clearing the way for a fund programme, saying it showed the “potential of the G20 Common Framework for debt treatment to deliver for countries committed to dealing with their debt problems”.

“The delivery of these financing assurances will enable the IMF executive board to consider approval of a fund-supported programme for Zambia and unlock much needed financing from Zambia’s development partners,” Georgieva said.

“Amid elevated debt levels and tightening financial conditions, I look forward to the Common Framework working for other countries facing debt problems.”

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Zambia’s Minister of Finance Situmbeko Musokotwane said the country would “continue to work with both official and private creditors to agree on the terms of the debt restructuring in line with the comparability of treatment principle”.

The Common Framework aims to help countries weather the Covid-19 storm with debt relief and restructuring, but besides Zambia, only Ethiopia and Chad have applied to join the plan, with most countries fearing that by seeking relief their credit rating will be downgraded by rating agencies.