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China and other creditors have reached an agreement to restructure billions of dollars in loans to Zambia.
The deal ends a long deadlock over the southern African country’s debt default in 2020, which has exposed a rift between Beijing and Western lenders over how to solve a wave of debt crises in the developing world.
Zambia’s finance ministry said in a statement on Thursday that creditors had agreed to “significant maturity extensions and interest rate cuts” after French President Emmanuel Macron’s government helped seal the deal at the Global Finance and Climate Summit in Paris.
Zambia’s Finance Minister, Situmbiko Mosokotwan, said, “Today is a big day for Zambia…we are grateful for the support from our official creditors in resolving Zambia’s debt overhang that is choking our economy.”
Africa’s second-largest copper producer has been left in financial limbo and unable to continue accessing a $1.3 billion International Monetary Fund bailout, while China, the country’s largest creditor, and other lenders have battled for months over a proposal to write down nearly half the value of Almost $13 billion. of the total external debt.
In light of the breach, bilateral lenders led by China agreed to rearrange the payments and extend the maturities of $6.3 billion in loans, paving the way for Zambia to resume financing from the International Monetary Fund and restructure another $6.8 billion of private debt.
“Today we can say that there is agreement on the broad lines of debt restructuring,” a French official said. “We have come to the end of the negotiations that began months ago.”
The deal represents a diplomatic boon for Macron at the high-profile summit that brought world leaders together to discuss reforms to the lending system between rich and poor countries.
The Zambian agreement will raise hopes for other countries such as Ghana and Ethiopia. They are in similar talks to restructure a debt dominated by loans from China, which has become the largest single lender to the developing world in the past decade.
China has been reluctant to accept direct write-downs of foreign loans from its banks and, in the case of Zambia, has suggested that multilateral development lenders such as the World Bank take the unprecedented step of joining the restructuring.
Under the Zambian agreement, bilateral creditors are obligated to extend their loans for more than 20 years and give them a three-year grace period on interest payments.
A banker close to the negotiations said an agreement between official creditors would be “real progress”, although a full restructuring of Zambia’s external debt would still require agreement between private creditors, such as holders of the country’s $3 billion eurobond.
A debt investor involved in the talks said development banks were more likely to offer soft loans rather than debt write-offs as a way to open a deal.
Because of concerns about domestic financial stability, Zambia has excluded its local currency bonds from restructuring, and even foreign holdings of that debt. The Finance Ministry said on Thursday that official creditors had agreed to accept the position.
The deal would also adjust debt relief if Zambia’s economy performs better than expected over time, a possible sign of objections from some creditors that current targets, such as the debt-to-export ratio, are too pessimistic.
The investor said that foreign buyers of Zambia’s domestic public debt appeared to have reduced their holdings from $3.2 billion to less than $2 billion since the end of last year, amid fears that domestic borrowing could be included in restructuring, as in the case of Ghana and Sri Lanka.
Lusaka’s Finance Ministry said in October that servicing those holdings would absorb about 80 per cent of the funds available to repay external debt. The investor said a sharp reduction in foreign holdings of domestic debt would free up more money for other creditors, including China.
“For China, the endgame appears to be a decision to limit its financial losses while spreading the blame more widely for the sad and unsustainable situation in which many heavily indebted economies find themselves,” said Eswar Prasad, professor of economics at Cornell University.
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