According to three sources familiar with the situation, China’s lack of expertise with difficult debt restructurings and delayed coordination among its state lenders is delaying debt relief for Zambia, a test case for the biggest emerging market creditor.
Zambia became the first country in the COVID-19 pandemic era to default in 2020, with a debt burden of 120 percent of GDP. According to Zambian government figures, the country’s external debt reached $17 billion by the end of 2021, with China owning a third of it.
Last month, China and France agreed to co-chair Zambia’s formal creditor committee, a step welcomed by Zambia’s government, which has made debt relief a top goal since taking office last year.
Zambia’s issue is being closely watched by emerging market investors and other debtor countries for clues as to how lenient Beijing would be with overextended debtors in the future.
According to Boston University analysts, China has been the largest public lender to African countries over the previous decade, issuing $160 billion in credit since 2000.
“China is on a learning curve, and we need to recognize that,” said a French official who did not want to be identified owing to the sensitivity of the subject.
“We also need to have greater coordination within China itself, because there are a lot of agencies that have been lending,” the official said, citing “delays in China’s internal processes.”
After a conference in Germany last month, G7 finance ministers called on China to “contribute constructively” to the debt relief process, even though the creditor committee has yet to meet.
According to a statement emailed to reporters by China’s foreign ministry, the country places “great weight on Zambian debt worries and supports multilateral efforts to settle its debt situation.”
‘COSTLY PRECEDENT’ is a phrase that means ‘expensive in advance.’ According to another source familiar with the matter, while China’s central bank is eager to move forward, the finance ministry is afraid of “creating an expensive precedent” elsewhere if it accepts large losses on loans to Zambia.
The finance ministry was particularly on the lookout for China’s development banks, through which the majority of China’s credit is issued, according to the source.
According to a third source familiar with the situation, China has been hesitant to participate in the Group of 20 leading economies’ multilateral debt process, preferring bilateral negotiations where it can focus on the country’s broader strategic goals, in addition to coordinating its many lenders.
China’s foreign ministry did not answer specific inquiries about whether the delays were caused in part by internal coordination problems and a refusal to accept loan losses.
Other countries are likely to keep a close eye on Zambia’s situation. For example, Sri Lanka defaulted on its debt for the first time this month, owing money to a variety of creditors including China, India, Japan, and Eurobond holders.
Zambia and the International Monetary Fund secured a staff-level agreement in December on a $1.4 billion extended credit facility, but the money cannot flow unless Lusaka and its creditors agree on debt reduction to sustainable levels.
“China is ready to engage with the international community and continue to offer Zambia the necessary help within its capabilities to handle its current practical issues,” said a statement from China’s foreign ministry.
Zambia’s finance minister has stated several times that he believes the talks would be completed by the end of June; a deadline that observers believe is unrealistic.
In response to inquiries regarding China’s engagement in the debt process, Zambia’s finance ministry stated in an emailed statement, “Our debt burden is strangling our country’s growth potential, and the debt restructuring exercise is getting more essential by the day.”
