Debt-burdened countries are hoping the International Monetary Fund can this week fulfil one of its main aspirations for its annual meetings: to sign a formal agreement on Zambia’s debt restructuring at last. The tortuous negotiations since its 2020 default have lasted an extraordinarily long time, throwing doubt on what was meant to be a breakthrough in sovereign debt restructuring.
Zambia in June became the first country to reach an agreement in principle under the new G20 Common Framework for Debt Treatments, which brings together official creditors including the Paris Club and China.
The international financial community was relieved, seeing this as forging a new model for restructurings in an age when China, not a Paris Club member, has become a huge lender to emerging markets.
But since then, talks have again dragged on, delaying the signing of a memorandum of understanding, which would normally take weeks, not months. The MoU would pave the way for an agreement with commercial creditors.
Whispers that it could be signed this week, perhaps on Thursday, are understandably being treated with caution, if not scepticism, by those who have been involved in the process over the past three years.
“One major theme this week will be whether there can be progress on speeding up the resolution of debt workouts, and the Common Framework is a large part of that,” said Graham Stock, EM sovereign debt strategist at RBC BlueBay Asset Management in London.
Speaking to GlobalMarkets, Zambia’s finance minister Situmbeko Musokotwane said the debt problem had caused not just an economic but a social crisis in his country. “We left a big part of the population behind, in the sense that many children could not go to school because their parents could not afford to pay for them,” he said.
“If you go to Zambia, you find a lot of infrastructure that was started but never completed — high schools, hospitals, roads — stuck at 15%, 20% or 30% of completion, because there was no longer enough money to complete them.”
Musokotwane, who has been in the role since a new government was formed in 2021, betrays a heavy disappointment that the international community has not been able to come together to resolve the issue before now. However, wary of destabilising the path to an MoU, he stops short of ascribing blame to China or the West.
“Zambia was very quick to do what needed to be done — the rest was up to the international community,” he said. “It has taken a long time, but we are happy about where we are on the debt restructuring. I don’t think it helps for us to start pointing fingers.”
Another source close to the negotiations said the delay since June in signing the MoU was largely down to issues around ensuring comparable treatment of official and commercial creditors. This is a long-established Paris Club principle, but China is eager to make this requirement more explicit than it has historically been.
That created worries among the other parties about whether such special terms on Zambia would create an unhelpful precedent for other situations.
It goes back to the central problem of Chinese officials being wary of being seen to agree to terms that might allow other creditors to make smaller sacrifices, according to the source.
It was not surprising, he said, that China would be hesitant to simply sign up to the approach Western countries have followed under the Paris Club for the past 30 years or more.
“I would see the fact that China belatedly got on board with the Common Framework [in Zambia’s case] as a sign of progress,” said Stock at RBC Bluebay. “They insist it’s not a template, because they don’t want to be rules-bound in future negotiations, but it’s at least a recognition of certain principles.”