The ‘blood, sweat and tears’ behind Zambia’s default

When Zambia sold the last of its three US dollar bonds in 2015, it capped a decade in which the copper-endowed African country went from needing debt relief reserved for the world’s poorest nations to tapping the global capital markets with ease.

But just five years later, that bond is in default, with the rest of Zambia’s $3bn international bond borrowings, after President Edgar Lungu’s government skipped a $42.5m interest payment due last week in the middle of fraught negotiations on restructuring its debt.

Africa’s first bond default during the coronavirus pandemic — and its first ever default on multiple US dollar bonds at the same time — “risked setting a more adversarial backdrop” for those talks, bondholders said this week. With an IMF visit due next month over a potential bailout, direct discussions with bondholders are yet to be scheduled.

Mr Lungu’s government, which is battling for re-election next year, has blamed coronavirus for problems managing its $12bn of debt.

The Zambian kwacha has fallen about a third against the US dollar alone this year as the coronavirus dented demand for copper, and the IMF forecasts the economy could shrink by nearly 5 per cent this year. The G20 group of the world’s largest economies has sought to help poorer countries with their debt problems during the pandemic.

But analysts say the default also illustrates how high-octane borrowing and misrule combined to scupper one of Africa’s fastest-growing economies.

Successive governments in Africa’s second biggest copper producer “went through a lot of blood, sweat and tears” to establish the country as a credible borrower, said Bradford Machila, an opposition politician. For this to end in default in just a few years was, he added, a “massive embarrassment and a huge source of anger”.

Gregory Smith, a strategist at M&G Investments and a former World Bank economist in Zambia, said the “market access came at a time when Zambia had very low debt”, under a third of gross domestic product, and “a wonderful growth spurt”.

The economy doubled in size in the decade to 2015, powered by mine privatisations and insatiable Chinese demand for copper. The economic take-off and the need to tackle high rates of rural poverty led to demand for infrastructure projects that traditional concessional loans for poor countries from lenders such as the World Bank could not meet. Zambia turned to China and other lenders. Mr Lungu, who took power in 2015, promised to transform rural voters’ lives.

“Where it goes wrong is they didn’t have the right system for selecting projects,” Mr Smith said. Some were valuable for development, such as a hydropower dam project. Others were more dubious priorities, including a second international airport for the country’s Copperbelt mining region and haphazardly planned highways. “You could argue that Zambia had an investment problem, not a debt problem, in those years,” Mr Smith said.

Now its complicated debt stock has set creditors against each other.

Hours before the default, bond investors rejected a request for a standstill over concerns that Mr Lungu’s government was not coming clean on Chinese debts worth $3bn. The government said that bondholders were getting the same treatment as Chinese and other creditors that it had already defaulted on.

“If I pay [bonds], the moment I pay, the other creditors are going to put dynamite under my legs and blow off my legs. I’m gone. I can’t walk any more,” finance minister Bwalya Ng’andu said on state television days after the default. “If I don’t pay the bondholders, my legs will remain intact,” he said.

While Zambia had reached payment deferrals with two Chinese creditors, China ExIm Bank and China Development Bank, for a full debt workout and resumption of market access, it needed dialogue with all creditors, Mr Smith said.

Mr Lungu is betting that voters will be more accepting than bondholders that the airports and roads built using the debts have been worthwhile. “Zambians will bring me back in 2021 because I have done a lot of works for the country,” he said last month.

Mr Lungu’s bid for re-election was already shaky because civil society activists and opposition parties regard it as a de facto attempt at an unconstitutional third term and may mount challenges in court. He became president during the first term of his predecessor who died in office. Mr Lungu then won a poll in 2016. He insists he has served only one term. More recently, a set of constitutional changes that would have increased his powers, known as Bill 10, failed to win support from lawmakers.

Default “doesn’t really affect him politically,” said Trevor Simumba, a Zambian analyst of the country’s debts. If anything, Bill 10’s failure meant that Mr Lungu “must spend more on patronage projects” for the polls, including a recent fourfold rise in fertiliser subsidies in the national budget, he said.

Analysts say that Mr Lungu could press the central bank to buy domestic state bonds to fund spending. That will complicate Zambia’s quest for a bailout from the IMF that Mr Lungu once scorned. Analysts doubt that the fund will be able to secure a commitment to fiscal belt-tightening before the polls.

Mr Lungu “just wants to buy time” rather than seriously rethink how Zambia uses debt for development, Mr Simumba said. “The focus of everything, even the request for relief, has been aligned to the election . . . when they manage to win the election, then they are going to have to take the hard decisions.”

Additional reporting by Tommy Stubbington in London