The Editor
Background
On 13th November 2020, Zambia became the first African country in the COVID-19 era to default on its Eurobond debt after missing a coupon payment of US$42.5 million.
Following the default, the Government sought for external assistance to bring the country’s debt back to sustainable levels and obtain the much-needed fiscal relief. 
Therefore, in 2020, the Government applied for the G20/Paris-Club Common Framework for Debt Treatment beyond the Debt Service Suspension Initiative (DSSI), thereafter, Common Framework, which included a formal request for debt restructuring to official creditors.
This came after the government’s admission that the country was already defaulting on its external obligations and would not be making debt service payments.
The stock of Zambia’s public external debt increased from US$1.96 billion, representing 18.9% of GDP in 2011 to US$12.7 billion in 2020, representing over 540% increase.
After spending most of 2010 decade with a credit rating of B, Zambia’s economic outlook deteriorated in 2016, and the country was downgraded several times in 2018 to reach the CCC credit rating in 2019, just before the COVID-19 crisis.
Due to increased borrowing and the 2019 depreciation of the Kwacha, interest payments had also shot up to 6% of GDP in 2019 from 3.4% of GDP in 2016.
Eventually, Zambia’s stock of public debt reached unsustainable levels, doubling from 60.6% of GDP in 2016 to 120% in 2019.
Understanding Debt
Before 2015, multilateral loans averaged 44% of total external debt, the largest component of the country’s external debt stock, for most of these multilateral loans, interest rates averaged 0.75%, with grace periods of up to 10 years and maturity of over 40 years, mostly directed towards education, health, agriculture and infrastructure, water and sanitation and energy sectors.
Besides multilateral loans, Zambia also borrowed from bilateral sources. These loans were mostly concessional with maturity periods of up to 40 years.
For Zambia, the main sources of bilateral loans were the traditional Paris and non-Paris Club members. The non-Paris Club sources accounted for a greater share with the largest non-Paris Club lender to Zambia being China.
For starters, Chinese companies dominated the financing window after 2011. This financing source became increasingly prominent in the recent past increasing from US$448 million in 2011 to over US$4 billion in 2021, averaging 26% of the external debt portfolio over the reference period and becoming the second largest source of total external debt
Euro Bonds
The government issued three Eurobonds in 2012, 2014, and 2015, amounting to US$750 million, US$1.0 billion, and US$1.25 billion, respectively.
The rapid issuance of the Eurobonds increased the proportion of external commercial debt to 45.3% in 2015 from 28.7% in 2012. By 2019, commercial debt accounted for 50.3% of the total external debt.
This significantly altered the public debt architecture, making commercial debt a crucial source of development finance.
Why Was Debt Restructuring Crucial
Firstly, when commenting on economic issues, political leaders have to be factual and use the available data. We have spent time giving the background for you to understand.
The Patriotic Front (PF) government over borrowed, and borrowed blindly.
The result of this runaway debt was that government budgets were increasingly diverted towards debt service. By 2019, debt service became the largest spending category, accounting for more than 30% of expenditure.
This surpassed economic affair spending and represented more than three times the allocation towards education and health.
During the same period, the government’s reliance on domestic sources of finance, such as government bonds and treasury bills, increased. Even before reaching maturity on the first Eurobond, Zambia was already expending on interest payments every six months, and with little or no foreign reserves and no sinking fund, the country defaulted on a coupon payment of US$42.5 million in 2020.
Mulenga Kapwepwe Comments
In her remarks, Ms. Kapwepwe accused the government of lying about the state of debt restructuring, dismissing the official position that 94 percent of eligible debt had been successfully restructured.
She cited a report indicating that only 44 percent had been covered and, on that basis, alleged dishonesty on the part of government.
Ms. Kapwepwe failed to acknowledge that the Zambia’s 2020-24 sovereign debt restructuring under the G20 Common Framework—was an epic story of protracted and back-and-forth negotiations among various stakeholders that kept the Zambian economy in standstill for over 3.5 years.
Ms. Kapwepwe failed to address what caused the fiscal and debt crisis. She didn’t explain why the Zambia under the PF administration switched to more expensive commercial loans amidst sluggish economic growth and weak Public Financial Management.
The Truth!
The benefits of the debt restricting can be seen from different angles, as explained by the Finance Minister Situmbemko Musokotwane.
Evidence of Progress
The minister rejected the claim that the government is “failing.” On the contrary, the evidence shows strong progress from the very worrying times of 2020/2021:
1) Economic Growth: In the five years up to 2021, the economy hardly grew. Over the past four years, growth has averaged around five percent.
2) Foreign Reserves: Five years ago, reserves stood at US $2.8 billion. Today they are close to US $5 billion.
3) Mining Sector: Previously, major mines were closed or threatened with closure. Today, they are operating and expanding, with production expected to reach one million tons this year and to grow further as new mines open.
4) Education: Five years ago, more than two million children were out of school due to fees. Today, education is free from grades 1 to 12.
5) Employment: Over 40,000 teachers and thousands of health workers have been recruited.
6) Infrastructure: Pupils who once learned in shacks now study in decent classrooms—the best learning environments since independence.
The truth is that 94 percent of Zambia’s eligible debt has been restructured.
The Outline of The Process That Led To This Stage.
Road to Successful Debt Restructuring
1) Agreement in Principle (October 2023):
An agreement in principle was reached with Official Creditors setting out the financial terms to guide Zambia’s debt restructuring.
2) Memorandum of Understanding (MoU):
The above agreement was translated into an MoU between Zambia and all participating Official Creditors. In this MoU, creditors collectively committed to the agreed financial terms. The VALUE of the debt covered in this exercise represents 94 percent of all debt eligible for restructuring. This means that the creditors (a) agreed to restructure Zambia’s debt; and, (b) committed to applying the financial terms outlined in the MoU.
3) Bilateral Agreements:
Since the MoU was signed jointly, individual creditor countries are required- by their own domestic processes and procedures—to formalise the agreement bilaterally with Zambia. This is standard procedure, similar to how the Zambia’s Parliament ratifies multilateral agreements.
So far, bilateral agreements have been concluded with India, Saudi Arabia, France, and China. The value of debt restructured at this bilateral level now stands at 57 percent, up from 44 percent previously reported, following new signings.
4) Pending Agreements:
The remaining bilateral agreements are at various stages of domestic processing. The pace differs by country, but this does not change the fact that once the MoU was signed, the debt was effectively restructured, as all participating creditors had agreed and committed—in good faith—to the financial terms.
To put it simply, the bilateral stage is largely a legal translation of what has already been agreed. It is like waiting for your graduation certificate when you already know your final examination results.
Beyond Percentages: Is Debt Restructuring Working?
The more meaningful question is not about percentages but whether debt restructuring in Zambia is working.
The answer is a CLEAR YES—Zambia’s debt restructuring is working remarkably well.
Example 1: Without debt restructuring, the cost of external debt service for both principal and interest in 2024 would have been US $2.6 billion just for the Eurobonds alone.
Example 2: By 2020, under the previous administration, debt levels had become unsustainable. For every Kwacha of tax collected, only nine ngwee remained for all other government expenses, with the rest going to debt service and salaries. This is why essential public services collapsed. We couldn’t continue on that path.
Conclusion
Public commentators are encouraged to research widely and give context to their arguments.
As for Ms. Kapwepwe, next time, she should first visit the Ministry of Finance website just to check for more data in order to understand the process more thoroughly before issuing public commentary.
Bonds are expensive sources of funding and require a clear and justified narrative for financial and economic returns. The third Euro bond was borrowed without a plan. It was borrowed like it’s weekend money for refreshments.
