Mon, October 03, 2022

Zambia is on the Verge of Default

Zambia and interesting details

Countries in different parts of the world are trying to minimize the damage, caused by the coronavirus pandemic. However, in the case of many countries, it won’t be easy to handle all problems. Unfortunately, it could take years to stabilize the situation. Zambia is also struggling to cope with issues, as the country has only several weeks to find a solution.

It is worth mentioning that, the country has three weeks to improve transparency over its debt obligations as well as to make progress regarding an International Monetary Fund (IMF)-backed reform package. Otherwise, Zambia risk defaulting on its loans. People should take into account that, last week a meeting of creditors was adjourned until November 13. As a reminder, a consortium that consists of around 40% of the country’s Eurobond holders. This consortium decided to refrain from voting on Zambia’s relief proposals.

For example, experts suggest bondholders are hoping the government will be able to offer more clarity on its debt, particularly to China. However, if the government fails to demonstrate progress, it would be hard to avoid default. Interestingly, last week the S&P Global Ratings made the decision to downgrade Zambia’s foreign currency rating to “selective default”.

Zambia and its government

It is worth noting that, the state of the local economy was far from being ideal even before the coronavirus pandemic. Let’s have a look at the situation. Interestingly, on October 13 the Zambian government made an important announcement.

According to the announcement, the government made the decision to suspend debt service payments to external commercial creditors. Zambia’s government-linked this decision to liquidity challenges compounded by the coronavirus pandemic. Importantly, if failed to make an interest payment due on October 14, for its 2024 Eurobond. People should take into account that, Eurobonds are debt instruments denominated in any currency other than that of the issuer.

Last month, more precisely on September 22,  the government asked Eurobond holders to agree to a temporary debt repayment freeze.

As stated above, Zambia’s problems started before the coronavirus pandemic. Notably, structural factors such as low wealth, high fiscal deficits as well as a heavy debt burden. However, the coronavirus pandemic created additional pressure on the economy.

Importantly, the key issue for bondholders remains a lack of clarity on the size, composition as well as terms of Chinese funding and assurances that an IMF program is imminent.

Zambia is struggling to cope with problems, the country’s government should work with local and international organizations. This way it will be easier to boost the local economy.

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