Zambia’s challenges with interest repayments are bad, but not breaking, news. After having benefitted from the Heavily Indebted Poor Countries (HIPC) Initiative for debt relief in 2005, Zambia started borrowing heavily again in 2012, and was classified by the International Monetary Fund as at high risk of debt distress by 2017. All of this was compounded by Covid-19, (as the government needed to allocate funds towards the pandemic response) unnecessary expenditure, embezzlement, corruption, while at the same time facing lower revenues. This led to an estimate drop of around 10% in Zambia’s exports.
Zambia borrowed heavily, in particular, to pay for infrastructure. Here, it is seen that external debt has been one of the few tools the government has at its disposal to fill its infrastructure financing gap. This has caused some real issues, and the country has even been downgraded by rating agencies.
According to official government data, Zambia's debt totalled $31.74 billion at the end of 2021 - of which $17.27 billion was external debt. China held $5.78 billion of the external debt.
Therefore, the lack of resources for debt service has magnified investors’ risk assessment of Zambia’s structural weaknesses – a country with high risk of debt distress, copper-dependent exports, double-digit inflation and dwindling foreign reserves. These factors have made it difficult for the government to mobilise revenues to pay its debt up to today.
For the problems and reasons given above, there is a need for debt restructuring.
SO, WHAT IS THIS DEBT RESTRUCTURING THAT WE ARE HEARING ABOUT?
Debt restructuring is an event in which a debtor (in this case Zambia) is in financial difficulty and a creditor (in this case China) grants a concession to the debtor in accordance with a mutual agreement or court judgment.
In a layman's language debt restructuring is a process used by companies, individuals, and countries to change the terms on loans to make them easier to pay back.
HOW DOES DEBT RESTRUCTURING WORK?
There are various modalities of restructuring the debt such as, (i)lower the interest rate, (ii) extension on the payment date, (iii) change in terms of sanction like margin, (iv) conversion of debt to Equity or similar instruments (v) combination of any two or more,(vi) restructuring the repayment schedule within the original repayment schedule etc. In order to prevent the business or economy from coming to a standstill, this system is highly favourable. Moreover, you can even pay back your dues on time if you are expecting adequate cash flows in the future. For instance,
1. the Zambian government want to engage the IMF.
Zambia has secured a staff-level agreement on a $1.4 billion three-year credit facility with the fund in December.
2. Zambia aims to increase copper production from 800,696 tonnes of 2021 to three-fold 3 million tonnes a year within the next decade.
3. It also aims to increase production of wheat and maize in order to export, that is what President Hichilema Hichilema said, adding that the country has held talks with the European Union among others about providing wheat to the bloc.
So, the more the cash flow in Zambia, the high the chance of paying back the loans on time.
WHAT ARE THE BENEFITS OF DEBT RESTRUCTURING?
Debt restructuring can offer many benefits for Zambia's business and economy, but most importantly, it helps us emphasize making our business and economy survive and sustain. Some of the benefits include:
1. Free up your cash: deferment and /or reduction in installments/ interest rate free up the immediate cash and avoid mismatches.
2. Reduced interest rates: existing loans may be at a higher interest rate because your firm or economy was in urgent need of funds. Therefore choosing debt restructuring for your business or economy can save your firm or nation or government from over the top interest rates. Thus you can keep the money for your forthcoming plans. There is also a possibility that the lenders may agree to lower interest rate initially and get compensated with a higher interest rate at a later date, to avoid any immediate cash flow mismatches
3. Make national or government finances more organized: If a nation or government has taken multiple loans for its businesses and economy, then debt consolidation will help it plan its finances more wisely. It can make sound decisions by converting these loans into in single loan with a restructured repayment schedule to match the existing and projected cash flows.
WHAT ARE THE FUNCTIONS OF DEBT RESTRUCTURING?
Bane, debt restructuring has several purposes for coming into existence. These include:
1. To ensure that a timely and transparent mechanism is present to support the borrowers in financial distress.
2. To reduce the losses incurred to the lenders and stakeholders through this procedure.
3. To protect and preserve those corporations that are facing difficulty due to any reason.
4. To revive the economy keeping in mind its stakeholders and creditors.
To sum up, debt restructuring has proven to be a sigh of relief for corporations, entrepreneurs, governments and nations that wish to make their businesses and economies flourish and meet debt obligations. In fact, debt restructuring is a win-win situation both for the lenders and the borrowers. So, for Zambia to set its foot out of debt crisis, it must take debt restructuring process more serious.
ADDENDUM
Inkongole tashibola: (Bemba proverb by Sir APM Lukwesa) translation: Debts don't decay. Interpretation: No matter how long one takes to repay a debt - it still remains a debt: The debts which another person owes you are not like perishable goods regardless of how long you want to be paid back.
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𝒮𝒾𝓇 𝒜𝒫ℳ ℒ𝓊𝓀𝓌ℯ𝓈𝒶 iii
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| A need for Zambia's debt restructuring |
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