The poor African nation has struggled to convince wealthy banks and investment funds to postpone debt repayments.
The multi-billion dollar private creditors who refused to reschedule Zambia’s loan repayments, one of the poorest countries in the world, stand to make an ignoble profit in coming years, debt relief advocates say.
Zambia was forced to miss a $42.5 million interest payment on a $1 billion Eurobond earlier this month after negotiations broke down with lenders, which include banks and investment funds from countries such as the United Kingdom and Israel.
The risk-reward relationship behind bonds means that the private creditors can make between 75 percent and 250 percent profit as they demand a higher return now that the country has defaulted, says Jubilee Debt Campaign UK.
Bondholders knew well that Zambia could run into difficulties repaying the loans, a situation that became evident when the bonds traded below their face value in 2018.
“The original private lenders to Zambia lent at high interest rates of 5.375% to 8.97% because it was high risk lending. Many of the current owners of these debts bought them at low prices because it was expected that Zambia would not be able to repay the debts in full,” says Jubilee.
“A trader buying Zambia’s 2027 bond now could make 250% profit if every interest and principal payment is made.”
Zambia has been hit hard by the Covid-19 pandemic.
Africa’s second largest copper producer depends heavily on the export of the mineral. The country’s finances were under stress even before the pandemic led to the closure of the borders and hit the price of commodities.
Copper exports, the biggest foreign currency earner, has not been enough to make up for the US dollars needed to pay foreign creditors.
Zambia's currency, kwancha, depreciated last year, making debt repayments expensive — as more of the local currency was needed to buy US dollars.
Lusaka says more than two thirds of its revenue can be used up in making interest payments, leaving little for hospitals and schools.
Zambia’s economy is expected to shrink with the inflation rising in the double digits.
Over the years, Zambia has accumulated around $11.9 billion in foreign debt, almost 50 percent of it owed to private lenders.
Out of the $1.7 billion that Zambia had to pay in external debt payment this year alone, around $1.1 billion or 65 percent would go to private lenders.
Negotiations hit a roadblock after the private lenders demanded information about the loans that the African country had taken from China.
The cash-strapped government of President Edgar Lungu was willing to share the details under confidentiality agreements but the private lenders refused to agree to those terms.
A model of defiance?
Zambia was facing a debt crisis even before the pandemic struck.
In September, it said it was suspending interest payments on foreign bonds, also known as Eurobonds, as it diverted resources to deal with Covid-19, which has infected more than 17,000 people and killed 357.
It has obtained debt relief from the G20 member states under the debt service suspension initiative (DSSI), which spreads the interest payments over four years.
While bilateral lenders have given breathing space to Zambia, private lenders and multilateral banks such as the International Monetary Fund (IMF) have refused to join the initiative.
Private lenders fear that the payments they forgo can end up going to Chinese creditors. Last month, China Development Bank agreed to defer payments on its own loan.
“The issue of paying bondholders alone is a fundamental issue to the other creditors. If I pay, the moment I pay, the other creditors are going to put dynamite under my legs and blow off my legs. I’m gone,” Zambia’s Finance Minister Bwalya Ngandu said after the default.
Private lending has become a serious issue as over the years many indebted countries have come to rely on them instead of government-to-government loans.
Out of the total outstanding debt of African countries, around 32 percent is owed to private investors - this comes to approximately $132 billion, according to one study done two years back. A decade ago, loans coming from private lenders were negligible.
Lobby groups which call for debt relief, such as Jubilee, have long suggested that low-income countries stop paying creditors, including those in the private sector.
Argentina recently negotiated a plan to reschedule $65 billion of its debt.
But private creditors, backed by rating agencies, often use fear-mongering tactics to stop governments from withholding the interest payments.