Zambia’s demand for a general suspension of debt service from creditors brings the country closer to default and highlights the limits of Chinese debt diplomacy.
The government has decided to ask all external creditors to agree to the suspension of debt service on the same terms, the Zambian finance ministry said in a statement on October 13.
The only debt denominated in foreign currencies that Zambia will continue to pay comes from multilateral agencies, as well as the debt of a few priority projects, the statement added.
“If Zambia does not come to an agreement with its commercial creditors. . . the Republic with its limited fiscal space will be unable to make payments and, therefore, will fail to prevent the accumulation of arrears.
At the heart of the problem is debts to Chinese commercial lenders. In a separate statement to the London Stock Exchange (LSE) on Oct. 7, the Zambian Ministry of Finance said the state of discussions on the postponement of debt service “varies among Chinese lenders.”
Zambia “hopes to formalize all debt service suspension agreements before the end of the year,” the statement said.
- Zambia is vulnerable to default in the absence of confirmation from Beijing that it recognizes the China Exim Bank, which finances the expansion of Kenneth Kaunda International Airport, as official creditor, said Nick Branson, director of Gondwana Risk in London.
- Even though Zambia gets the $ 225 million in debt service relief it has requested from what the G20 considers Chinese bilateral creditors, the state owes an additional $ 158 million to unofficial creditors Chinese, Branson said.
- Zambia has yet to come up with a plan for $ 200 million in arrears to Beijing, he adds.
Belt and road limits
The current situation illustrates some of the limitations of China’s Belt and Road initiative, explains Gabriel Collins, co-founder of the China SignPost research group in the United States.
- Lending diplomacy “often fails to buy lasting strategic influence,” he says. “Such an influence is, at best, temporarily rented and financial outlays that opened doors when times were good suddenly become liabilities when a macroeconomic shock leaves debtors unable to pay.
- “Chinese lenders will eventually agree to Beijing’s demands, but in the meantime they will push their cause as far as they deem politically desirable in an attempt to at least minimize the haircut that could occur,” Collins said. , fellow of the Baker Institute at Rice University. for public policy.
Chinese commercial lenders see a wealth of assets such as copper outlet that could be used to meet obligations, Collins says. But Beijing is unlikely to allow it, as Zambia would view such a position as “a hostile act that would destroy any strategic position China might have gained through the loans.”
- It is “very likely” that the Chinese government will eventually see its commercial lenders publicly write off some debts or allow temporary forbearance, but then pay them off privately, Collins said. Such a reward could come from measures in China, such as direct money transfers or preferential stakes in projects, he adds.
The BRI is “a good deal more fragmented and chaotic than most Western media coverage claims, explains Sébastien Strangio, author of a new book “In the shadow of the dragon”, which traces the extension of Chinese power in Southeast Asia.
- “While Chinese private lenders and the Chinese state are undoubtedly close, there may be limits to how far the state can go to tell the former what to do. After all, Chinese commercial lenders have their own economic measures and incentives that would ease the restructuring or forgiveness of foreign debts. “
The Zambian experience shows that China’s lending strategy must change, says Harry Broadman, president of the emerging markets practice at Berkeley Research Group LLC in Washington. He wonders why a borrower like Zambia wouldn’t go to a commercial bank – which has no political ulterior motive – if the loans are made at commercial rates.
- “If China is to stay in the game of international creditors – where, because of its political structure, it is not a commercial economy and its motives as a lender are much more than commercial – it has to make itself attractive by ‘other ways for debtors if they want to charge commercial rates,’ Broadman says.
Conclusion: As British economist John Maynard Keynes once said: “If you owe your bank a hundred pounds, you’ve got a problem. But if you owe a million, it is.
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