Zambia which is known as a country under “debt distress” from China has finally received a USD 1.3 billion financial loan from the International Monetary Fund, media reports suggest.
Zambia’s finance minister, Situmbeko Musokotwane, was able to receive a USD 1.3 billion loan from the IMF with a grace period of five and a half years and a final maturity of ten years, reported Financial Post.
This comes at a time when China is already responsible for almost 30 percent of Zambia’s debt when compared to non-Chinese private creditors. Describing it as “a great offer”, Financial Post said that the IMF agreement means a lot to the other low-and middle-income nations who are under the trap of China’s debt-diplomacy.
Looking at the IMF deal closely, it is understood that Zambia would prioritize recurrent expenses over investments in public infrastructure, which are traditionally funded by Chinese stakeholders, reported Financial Post.
Zambia has specifically stated that it will completely cancel 12 planned projects, half of which were expected to be funded by China EXIM Bank, along with one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital.
Additionally, the government cancelled 20 of the unpaid loan sums, some of which were for brand-new projects and others for ongoing ones. Such cancellations are not unusual for Zambia, but the majority of these loans come from Chinese partners. This means that the Hichilema government looks to dispense with Chinese forms of funding which made the previous government unpopular with most Zambians.
Ten of the cancelled loans are from China EXIM Bank; together with three other Chinese loans from ICBC (USD 303 million) and one from Jiangxi Bank (USD 157 million), these loans will save Zambia USD 1.1 billion over the next few years. The remaining six undistributed loan sums, totaling USD 483 million, are primarily from commercial lenders.
While some of these cancellations may have been initiated by Chinese lenders themselves, especially those in arrears, Zambia seems to have escaped the clutches of the Chinese. Dealing with the devil can never be beneficial in the long term.
China plays out a ploy when it comes to giving loans to the African nations because what Beijing actually seeks is the resources. In these loans, repayment is not made with cash but in terms of giving first access to China for its rare earth metals. Thus, the deals are usually associated with mortgaging of Africa natural resources as collateral for funding.
The other thing to comprehend about the Zambia-IMF agreement is that China will probably take a backseat as a development partner, which is connected to the first, as the IMF’s agreement permits the continuation of 62 concessional loan projects from 12 different lenders, the majority of which are managed by international institutions and once again include ongoing expenses as opposed to infrastructure-focused initiatives
However, economists suggest that the Zambia deal reinforces the need for urgent reform of the international financial system. While Zambia may be content for now to stop financing infrastructure, others may disagree that this is the best approach for their long-term development.
The case needs to be made within the IMF that alternatives to austerity exist, with a focus on encouraging countries to create assets through their spending and enabling debt and risk thresholds that account for this need. Other countries may also aim to secure more cheap, concessional finance with more favorable terms than Zambia has secured from the IMF.
Second, Zambia’s deal suggests that debtor countries should coordinate with each other to get better deals from all lenders. Zambia’s government seems to be comfortable with the IMF’s policy suggestions, and the country seems to have gotten what it requested from China – a cut in projects, creating fiscal space, with potential to shift to PPPs if Chinese companies remain interested in the country.
However, Zambia could have taken a different strategy and argued for expected future growth from maintaining Chinese-funded public infrastructure projects, increasing domestic revenue through this growth as well as corporate and investment taxes, while managing or cutting various types of recurrent expenditure.
It will be useful to other borrowers to understand why Zambia did not go down this route, to share experiences and discuss different strategies for debt sustainability. The call for debt relief and cancellation for African states is being spearheaded by African Forum on Debt and Development (AFRODAD).
COVID-19 and the war in Ukraine have been blamed as real hurdles that may stall progress in the development of most countries in the region if the debt question is not promptly addressed.
Sources: The Print, Financial Post