Resolving the Debt Crisis: Grim lessons from Africa C. P. Chandrasekhar

As the number of developing countries likely to default on external debt service commitments increases, the effort to resolve debt crises in countries that have defaulted many months back remains unsuccessful. The experience of Zambia, the first African country to default following the onset of the COVID-19 pandemic, is telling. The reason is the presence of private creditors, especially bondholders, who are unwilling to accept the haircuts (recommended by the International Monetary Fund) needed for a potentially sustainable solution. This has implications for other African countries like Ghana that have also defaulted recently, but in whose case private creditors dominate, with the share of bondholders in total debt stocks being extremely high.

Even as new signals from Egypt and Pakistan, for example, of likely defaults on external debt servicing emerge, the crisis in countries like Sri Lanka that have halted payments many months back remains unresolved. A continent where this failure stands out starkly is Africa, where debt crises or debt-stress bordering on crises abound, afflicting Angola, Chad, Ethiopia, Gabon, Ghana, Kenya, Mali, Nigeria, and Zambia, among other countries. The problem in all these cases (as much as elsewhere in the world) is the inability of the international community to fashion an early resolution, despite the urgent need for one not only for humanitarian reasons related to circumstances in the debtor countries, but also because debt crises are preventing progress on addressing global challenges such as climate change.

Attention is now focused on Zambia and Ghana two countries that have formally defaulted on debt payments where the international community’s most recent strategy for debt resolution titled common framework for debt treatments is under test. The process began in Zambia as far back as November 2020, when the country declared that, since it was unable to meet payments due to some of its creditors, it will in the interest of fairness stop servicing debt due to all of them. Zambia, which is the second largest copper producer in Africa, was the first country in the continent since the onset of the COVID-19 pandemic to default on sovereign debt. The fact that more than two years down the line Zambia’s restructuring exercise has not been completed points to the obstacles to getting the common framework to work. Ghana’s default on payments due towards external debt, estimated at $28.4 billion as of the third quarter of 2022, is much more recent having been declared mid-December 2022. But all parties involved in the Ghanian debt tangle hope that the Zambian restructuring would soon succeed, showing the way for resolution at home.

Coincidentally, it was when Zambia defaulted in November 2020 that the Group of Twenty (G20) countries announced the agreement on a common framework for debt treatments, which was seen as a major step beyond the Debt Service Suspension Initiative (DSSI) launched in May 2020 in response to the waves of infection by the COVID-19 virus. The DSSI merely temporarily paused debt service payments for the eligible poor countries devastated by the pandemic. As compared to that, the common framework has more ambitious objectives among which are: (i) the provision of debt relief that takes account of the debtors’ capacity to pay and allows them to sustain essential spending; and (ii) bringing all creditors to the table, including private creditors, when deciding and implementing an appropriate debt-restructuring programme that would be common for all. At its launch, the framework was to be adopted only for International Development Association and least developed countries earlier identified as eligible for the DSSI.

The International Monetary (IMF), promising programme support if a deal is struck between debtors and creditors, is a crucial player. The IMF estimates place total Zambian debt at around $24 billion at the end of 2021. It has cleared a $1.3 billion loan for Zambia, to be released after the agreement on restructuring. What is at issue is the restructuring of sovereign debt with net present value of $17.3 billion. Bloomberg reports that according to the IMF’s analysis when clearing the $1.3 billion Extended Fund Facility loan, Zambia “needs $8.4 billion in debt relief (from 2022 to 2025) to stay on track with its International Monetary Fund program that ends in 2025.” That amounts to a 49% reduction in the present value of the debt the government is seeking to restructure.

More than two years since the process began, meetings are still underway to reduce and restructure Africa’s first, post-COVID-19 defaulter Zambia’s debt, with the only real success as of now being the willingness of “all” creditors to come to the table in search of a solution. Considering that the fear of being completely locked out of private capital markets, which have been a major source of foreign credit for developing-country borrowers, has encouraged only the most desperate of countries to ask for support under the common framework, this delay is worse than disappointing. Even by 2019, before the pandemic disrupted global trade and reduced export revenues, Zambia’s debt-service commitments had amounted to 31% of its export revenues and exceeded its reserves.

Factors Delaying Resolution

Two factors appear to be important among those delaying resolution. First is to agree on what would be a sustainable level of debt that the debtor country can service while continuing to undertake expenditures that are essential. The issue is not one of just financing spending, but of meeting the foreign exchange outflow that would result from imports triggered by such spending, along with the foreign exchange required to service the debt. Private creditors who account for 23.5% of Zambia’s debt, of which 12.5% (of total debt) is in the hands of bondholders, are unlikely to accept a haircut of the magnitude the IMF sees as necessary. Bondholders include those who bought $3 billion of Euro bonds issued by the sovereign.

The second issue is, which creditors would carry the burden of loss in the restructuring? In times gone by, much of debt-restructuring was discussed and implemented by the Paris Club counting Western developed-country governments as members. But with “aid fatigue” having reduced the fl ow of bilateral credit from these countries, with whatever they provide being largely channeled through multilateral donors, not only has the share of bilateral credit in total external debt stocks fallen from 20.7% in 2012 to 17.5% at the end of 2021, but one country China accounted for 16% of Zambia’s external debt stocks in 2021.

This fact, together with the corollary that China accounts for more than a third of Zambia’s official dollar debt, has been used to argue that delays in debt restructuring was substantially on account of China that wanted to negotiate any restructuring of the debt it has provided on its own. It must be said that as the overwhelmingly dominant bilateral creditor, China did have a case to say that it would negotiate directly with the Zambian government when deciding the terms of the restructuring, rather than being advised by the Paris Club players who do not have as much of a stake. Even in the case of the IMF and other multilateral institutions, the absence of institutional reform changing voting shares in decision-making implies that they are substantially driven by the interests of the West, especially the United States. This could result in China carrying much of the burden of adjustment, while decisions on the strategy to be adopted to ensure the sustainability of residual debt will be decided by a “committee” in which China has a small, if not marginal, role.

Despite all this, China did go along with the decision to arrive at a common framework and has been at the table in negotiations to restructure Zambian debt. If there is still some difficulty in adopting a final resolution plan, it is because of the presence of private debtors who are unwilling to accept large haircuts and want appropriate “incentives” to be part of the solution. For China, this would mean that it would be bearing the cost of paying-off private creditors who, in all debt crises in the past, were the ones that got bailed out, as happened with the Brady Plan in Latin America in the late 1980s.

The Zambian case indicates that the common framework is not delivering on its promise. Chad is cited as a country in which the framework worked. But the reality is that negotiations on debt restructuring for Chad involving bilateral creditors like China, France, India, and Saudi Arabia, besides importantly mining and commodity multinational Glencore, which was a major creditor  was also stalled because of the intransigence of private creditors. A third of Chad’s external debt, $4 billion by end- 2021, is commercial and consists mainly of an oil-backed loan from Glencore. A solution was reached by declaring that there was no need for a restructuring plan with haircuts for Chad. A rise in oil price which could well prove temporary allowed the parties to close the negotiations without any relief in October 2022, saying, according to a Reuters report, that “they had agreed that the African country did not need debt relief at the moment given a surge in oil prices,” and promised to reconvene if a financing gap was identified.^[1] There was no clarity on how service payments would be modifi ed and for what time period, but that “agreement” allowed the IMF to provide additional funding. But negotiations under the common framework were deemed successful. But as World Bank President David Malpass noted:

The challenge is that the agreement that they reached with the creditors doesn’t reduce the debt …
There’s not a reduction in net present value.^[2]

In sum, as of now, for other countries eligible to approach creditors under the common framework, and for other low- and middle-income countries hoping that the facility would be made available to them as well, there is no assurance that the international community has found a workable and meaningful debt relief and restructuring mechanism. The Zambian experience suggests that the international cooperation needed for a solution is missing.

Shift in the Composition

The principal problem is the major shift in the composition of borrowing by developing countries, including the poorest among them. Even at the time of the heavily indebted poor countries initiative of 1996 and the multilateral debt relief initiative (MDRI) of 2005, the Paris Club countries along with the principal international financial institutions accounted for a large share of developing-country external debt. Since then, private creditors have come to play a major role. Initially, international commercial banks, which had begun their forays into risky developing country markets in the 1980s, recorded a significant increase in their share of developing country external debt. This not only increased the importance of private decision- makers, but also began the process of the fragmentation of the creditor community. Moreover, the share of bondholders in private credit has become extremely large. As a result, the number and role of independent, atomistic creditors in decisions with regard to debt restructuring has increased immensely. This makes the fair sharing of burdens when restructuring is occurring difficult to ensure.

This problem is likely to make debt restructuring in Ghana even more difficult to achieve. Of Ghana’s $28.4 billion external debt in the third quarter of 2022, only $1.9 billion were due to the Paris Club countries and just $1.7 billion to China. Multilateral lenders accounted for $8.1 billion or 29%, and private creditors for $16.3 billion or 57%. More importantly, of private credit, Euro bond holders accounted for a huge $13.1 billion of the country’s external debt or 46%. Clearly, financial investors did not exercise due diligence when lending to the country. But they are unlikely to be willing to accept the haircut needed for successful restructuring. However, in this case, there is no way China could be blamed or held responsible for any likely delay in arriving at the agreement on debt restructuring. With default having occurred, everyone needs a solution. But the experiences in Zambia and Chad suggest that it would take a long time and hard negotiations for a solution to be fashioned, if any. Ghana may prove a learning experience for the international community. But for the working people of Ghana, the immediate future looks bleak and painful.

Notes

1 “Creditors Say Chad Does Not Need Debt Relief Now Given Oil Price Surge,” 15 October 2022,
https://www.reuters.com/world/africa/exclusive-chad-creditors-issue-statement-contingent-debt-relief-deal-source-says-2022-10-13/.

2 “Chad Agrees Debt Plan with Creditors, Including Glencore,” 12 November 2022,
https://www.reuters.com/world/africa/chad-agreesdebt-plan-with-creditors-including-glencoresays-minister-2022-11-11/.

(This article was originally published in Economic & Political Weekly on January 14, 2023)