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https://scmp.com/news/china/diplomacy/article/3103231/china-under-pressure-restructure-loans-zambia-analysts-say
China/ Diplomacy

China under pressure to restructure loans to Zambia, analysts say

  • Like many African nations, Zambia has borrowed heavily from China to finance projects under Beijing’s Belt and Road Initiative
  • Country is seeking US$1.3 billion in financial assistance from the IMF and a six-month moratorium on interest payments on US$3 billion worth of Eurobonds
Zambia’s debt problems began with a slump in the price of copper, its principal export. Photo: Getty Images

China is expected to come under pressure to restructure loans it has advanced to Zambia after the southern African nation asked bondholders for a six-month moratorium on interest payments on US$3 billion worth of Eurobonds.

The country was facing a “very challenging macroeconomic and fiscal situation” and needed “breathing space” to allow time for a restructuring plan to be agreed, the Zambian finance ministry said on Tuesday.

Lusaka was seeking US$1.3 billion in financial assistance from the International Monetary Fund and had applied to the G20 Debt Service Suspension Initiative (DSSI), of which China is a member, for a moratorium on debt repayments, and was pursuing a similar agreement with its commercial creditors, it said.

When asked for a comment, China’s foreign ministry did not specifically mention the debt restructuring issue but said the two countries were in talks.

“We are now engaged in friendly discussions with Zambia and we will do our best to assist Zambia to overcome the difficulties brought by the coronavirus,” it said.

Analysts say China, which is Zambia’s biggest single lender, is likely to come under pressure to restructure the loans.

Under the Belt and Road Initiative, Chinese President Xi Jinping’s ambitious trade and infrastructure development plan, Beijing has funded the construction of roads, hydropower plants and railways across Africa, but is now facing multiple requests for debt relief from host nations.

Simon Quijano-Evans, chief economist for emerging markets at Gemcorp Capital in London, said that given Beijing was one of the largest lenders to Sub-Saharan Africa, “it is very important for countries in the region to be able to reach an agreement with China on debt payments”.

“Financial market participants have been waiting for many years for Zambia to approach the IMF [International Monetary Fund] for a loan programme to help secure debt sustainability and increase transparency with regards to external debt exposure,” he said.

Zambian President Edgar Lungu and Chinese President Xi Jinping met in Beijing in 2018. Photo: AP
Zambian President Edgar Lungu and Chinese President Xi Jinping met in Beijing in 2018. Photo: AP

Mark Bohlund, a senior credit research analyst at Redd Intelligence in New York, said in a recent report that Zambia – like Angola, which is the recipient of nearly a third of all Chinese loans to Africa – had borrowed heavily from both Beijing and commercial lenders.

China held about half of Zambia’s US$11.2 billion worth of external debt, he said.

Zambia was approved to take part in the DSSI last month and China was likely to agree to deferring its debt repayments, he said.

Lusaka turned to Beijing for financial help after its revenue was slashed by a slump in the price of copper, which accounts for 70 per cent of the country’s exports.

According to the China Africa Research Initiative at the Johns Hopkins School of Advanced International Studies in Washington, between 2000 and 2018, Lusaka borrowed US$9.7 billion, most of which came from Beijing, to pay for infrastructure projects, including roads, bridges, power dams and airports.

Zambia has been seeking a bailout from the IMF since 2014 but the talks fell through in 2018 after the fund questioned Lusaka’s massive borrowing when it knew it did not have the revenue to repay its debts.

Zambia spent much of the US$9.7 billion it borrowed between 2000 and 2018 on infrastructure projects, like roads. Photo: AP
Zambia spent much of the US$9.7 billion it borrowed between 2000 and 2018 on infrastructure projects, like roads. Photo: AP

Charles Robertson, global chief economist at the Moscow-based investment bank Renaissance Capital, said he expected China to “take another hit on the loans it has made to Africa, after the restructuring of the money lent to Ethiopia for the railway, and the loans to Angola, which are likely to be restructured”.

Zambia’s problems started in 2011 when “the electorate voted for a president who wanted to spend the gains from higher copper prices”.

Since then the country had not only spent the money it made from selling copper but also borrowed heavily, he said.

The IMF had suggested ways to prevent a debt default in 2017-18, Robertson said, but the “crisis has come even though copper prices are near the highs of the past five years, and even though the coronavirus has so far had very little impact on the economy”.

Beijing said recently it had received more than 20 requests since the G20’s debt freeze agreement was adopted in April, and by the end of July had reached agreements with more than 10 of them, though did not say which they were.

Bohlund said Zambia had been on an unsustainable debt trajectory for several years as political imperatives had dominated economic policy.

China was unlikely to agree to a write-down of its debt unless Lusaka also cut its commercial borrowing, he said.