Is China Responsible for Zambia’s Debt Crisis?
The first country to default in the COVID era makes a deal with the IMF.
Welcome to Foreign Policy’s Africa Brief.
Welcome to Foreign Policy’s Africa Brief.
The highlights this week: Zambia signs an agreement with the IMF, Kenya’s Supreme Court upholds William Ruto’s presidential victory, and a Bitcoin controversy in the Central African Republic.
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Zambia Signs Agreement With IMF
Zambia’s struggling economy has been given a boost through a $1.3 billion loan agreement from the International Monetary Fund. Following the deal, Zambia’s kwacha became the world’s best performing currency against the dollar on Thursday, after being the worst-performing last year, gaining 18 percent this year. As part of the 38-month arrangement, the IMF will release an immediate payment of $185 million.
“Zambia is dealing with the legacy of years of economic mismanagement, with an especially inefficient public investment drive,” the IMF said in a statement. “Growth has been too low to reduce rates of poverty, inequality, and malnutrition that are among the highest in the world.”
Under former President Edgar Lungo, Zambia’s economy faced crippling debt, a weakened currency and high inflation blamed on corruption and state mismanagement. The coronavirus pandemic and other global shocks exacerbated the country’s economic decline. In 2020, Zambia became the continent’s first pandemic-era defaulter on its foreign debt, estimated at around $17.3 billion. Zambia is asking for $8.4 billion in debt relief from its foreign creditors, including China, over three years, according to IMF analysis published on Tuesday.
China is Zambia’s single biggest creditor with around $6 billion thought to be owed to Chinese financiers. Faced with international pressure surrounding its no-strings lending practices and accusations of “debt-trap diplomacy,” China has been scaling back on African Belt and Road Initiative programs and being more cautious on how it lends by shifting away from massive infrastructure projects.
At a summit attended by African officials, China recently announced that it would cancel interest-free loans in 17 African countries. In late 2020, China wrote off $113 million interest-free loan debts due to mature in 15 African countries.
Chinese-backed infrastructure developments in Zambia date back to the 1970s as they do in many other African countries. Only two months ago, work was completed on a new $60 million conference center in the capital Lusaka, a gift from China.
In recent years, Zambia had borrowed from China for infrastructure improvements on roads, energy, railways, telecommunications, and two state-of-the-art international airports. But with economic decision-making centralized in the presidency, the lack of publicly available information on the loans from Beijing and the absence of rigorous management systems enforced allowed some Zambian officials to inflate project costs and receive kickbacks.
Some experts suggest it is possible that at the beginning Beijing was perhaps unaware of just how much money was flowing out. Chinese President Xi Jinping was keen on promoting the Belt and Road Initiative. “If you wanted to raise money for something, you slapped a BRI label on it,” Minxin Pei, professor of government at Claremont McKenna College in California, told Euromoney.
Officials in Beijing also did little to assess the viability of repayments and the credible social benefits of some projects to the Zambian public. Last month, Lungu’s economic advisor Hibeene Mwiinga was arrested by Zambia’s anti-corruption commission over the source of funding for the multiple properties he owned.
Zambia’s current president, Hakainde Hichilema, who took office in August, has brought inflation down to 9.4 percent—compared to 24.4 percent a year ago. Last month, his administration canceled $1.6 billion in agreed upon but undisbursed Chinese loans. In July, Zambian lawmakers approved a public debt management bill that sets limits on public borrowing and requires parliamentary approval on all public sector loans.
The IMF deal was achieved following an agreement under the G-20 Common Framework to coordinate debt treatments and involved negotiations between Lusaka and Zambia’s main creditors: China, France, and the United Kingdom.
In May 2020, Beijing supported the establishment of the G-20 debt service initiative in which bilateral creditors agreed to temporarily suspend, until the end of 2021, interests on loans for the world’s 73 poorest countries. It later said it had deferred more than $2 billion in payments for those countries.
China’s critics have focused on the scale of Zambia’s Chinese debt, but 45 percent of the country’s borrowing is owed to external lenders that are not China-based, while its Chinese debt represents just 17.6 percent of total external debt payments.
Beijing is not solely responsible for Zambia’s economic woes. Zambia’s government directly asked private U.S. creditors such as BlackRock, Zambia’s largest bondholder, to agree to cancel at least two-thirds of the debt owed. However, Tim Jones, head of policy at advocacy group Debt Justice, said the company has so far declined to do so. Requests to delay interest payments were also rejected by a group of Eurobond investors holding 20 percent of Zambia’s total public external debt.
U.S. Treasury Secretary Janet Yellen said last year that she would not want debt relief aid given through the World Bank and IMF to go toward repaying China. “We would be very concerned to see the resources that are provided to these countries used to repay Chinese debt. That would defeat the purpose of the programs,” she told lawmakers at the G-7 summit.
Accusations of debt-trap diplomacy often fail to take into account African leaders’ choices as well as the unfavorable terms offered by Paris Club lenders. As the Guardian tells it, between 2002 and 2008 the value of Zambia’s mineral exports grew 500 percent, from $670 million to $4 billion, but it did not boost its tax revenue because Western and Indian commodity giants operating there were exempted from taxation on the recommendation of the IMF. (Zambia is Africa’s second-largest copper producer.)
Privatization and trade liberalization policies of state-owned companies were attached to the IMF debt relief package in the late 1990s. The privatization of the Zambian copper mining industry pushed by the IMF was accompanied by tax agreements with the new owners of the privatized mining assets between 1997 and 2004. This prevented the government from increasing the tax burden on each mining company for 15 to 20 years, despite copper prices increasing.
Some campaigners argue that the IMF deal should also not be used to pay Zambia’s bondholders in the West. Researchers Nicolas Lippolis and Harry Verhoeven wrote that “what really keeps African leaders awake at night is not Chinese debt traps. It is the whims of the bond market.”
The new IMF loan comes with strings attached. The IMF is expecting transparency on all former and future loans. Subsidies on fuel and in the agriculture sector are to end, which will directly impact poorer Zambians. Negotiations with private and bilateral creditors will begin “vigorously” this month looking at ways to reduce debts or extend their payment terms, Zambia’s chief economist at the Ministry of Finance, Mukuli Chikuba, said at a news briefing in Lusaka.
The Week Ahead
Wednesday, Sept. 7, to Thursday, Sept. 15: U.S. Horn of Africa Special Envoy Mike Hammer visits in Ethiopia, a trip that began on Monday.
Thursday, Sept. 8: The European Union’s foreign policy chief, Josep Borrell, meets with Mozambique’s President Filipe Nyusi and Foreign Affairs Minister Verónica Macamo in Maputo.
Friday, Sept. 16: U.S. President Joe Biden to meet South African President Cyril Ramaphosa at the White House.
What We’re Watching
Chad dialogue fails. Dozens of protesters from the opposition group, the Transformers party, were arrested Thursday for demonstrating against the national dialogue meeting in the capital N’Djamena. Transformers leader Succes Masra said security forces had detained him and his supporters at the party’s headquarters.
Chadians had hoped the national dialogue which began on Aug. 20, would lead to “free and democratic” elections. It was an attempt to find a political solution to a rift between the military junta in power, led by Chadian President Mahamat Idriss Déby Itno and armed groups who want a return to civilian rule. However, the dialogue was suspended on Saturday after groups opposed the list of the 21-member presidium which would lead the dialogue’s work.
Gali Ngothé Gatta was elected to head the presidium. Gatta was a presidential candidate in 2016 against Mahamat’s father and former head of state, the late Idriss Déby, who died in April 2021 after ruling the country with an iron fist for 30 years. Several groups participating in the dialogue withdrew, pointing out that the other members of the presidium were largely from the same political faction.
Wagner crimes. Russian mercenaries from the private military firm Wagner Group have targeted civilians in more than half of its operations in the Central African Republic, where it began operating under a deal struck in 2018, and in over 70 percent of operations in Mali, where it arrived last year, according to a new report by conflict monitoring organization ACLED.
In the Central African Republic, Wagner assistance helped in resisting a potential coup in 2020 and the seizure of towns by armed rebels last year, but abuses directed against civilians have angered the general public. In Mali, Russian mercenaries have been accused of carrying out a massacre in the central town of Moura. Moscow officially denies any formal ties to Wagner.
Fighting in Ethiopia. Fighting between the Ethiopian federal government and the Tigray People’s Liberation Front (TPLF) has now broken out in the country’s west in areas bordering Sudan. U.S. Special Envoy Mike Hammer headed to Ethiopia this weekend to seek an end to military operations and the engagement in peace talks. “We condemn Eritrea’s reentry into the conflict, the continuing TPLF offensive outside of Tigray, and the Ethiopian government’s airstrikes,” White House Press Secretary Karine Jean-Pierre told reporters.
Kenya court ruling. Kenya’s Supreme Court on Monday unanimously upheld the results of the Aug. 9 presidential election, which William Ruto won by a slim margin. Opposition candidate Raila Odinga and his supporters had disputed the results on nine counts including that the electronic voting system had been tampered with and alleged differences between paper tallies at thousands of polling stations and those uploaded to the online portal.
The court found little or no evidence for the claims. “We respect the opinion of the court although we vehemently disagree with their decision today,” Odinga said.
This Week in Tech
The Central African Republic’s highest court ruled that the government’s plan to offer citizenship to foreigners who buy $60,000 worth of its local cryptocurrency, Sango Coin, is unconstitutional. The scheme also offered land for $10,000 worth of investment in the Sango Coin and e-residency (government-issued digital identity and status) for $6,000. In April, the CAR became the first country on the continent to adopt Bitcoin as legal tender when it launched Sango Coin.
The move came under heavy criticism from the IMF, which had criticized El Salvador’s decision to use Bitcoin as legal tender because it increased the risk of financial instability. According to the IMF, adopting cryptocurrency as legal tender poses “risks to a country’s financial system, fiscal balance, and relationships with foreign countries.” There are other major hurdles: Internet access is needed to mine cryptocurrency, but in January 2021, internet penetration in the CAR stood at just 11 percent.
The CAR has sought to gain independence from the CFA franc, created by France for its former colonies and pegged to the Euro. The Bank of Central African States, which oversees that currency system has also called on the Central African Republic to reverse its cryptocurrency decision because it would be in competition with the CFA.
Chart of the Week
Beijing has been criticized for opaque lending practices. It regularly restructures or cancels small interest-free debts with African countries but the details around those loans are rarely disclosed. There are scant official figures for total debt cancellations.
What We’re Reading
Libya’s political crisis. In New Lines, Mohamed Lagha and Tim Eaton revisit the 2017 murder of Misrata’s mayor, Mohamed Eshtewi. The killing of Eshtewi demonstrated the monumental rifts between rival figures seeking political power in Libya and the influence of Islamic groups. “Eshtewi’s murder laid bare a major fault line in the city: What role should Islamists play in the governance of the state? Eshtewi had taken a strong stance on this, lobbying for the expulsion of Islamists,” they write.
Ethiopia’s stalemate. In The Elephant, Mehari Taddele Maru argues that former Nigerian President Olusegun Obasanjo must resign as the African Union mediator in the Ethiopian civil war. Maru warns that a failure to act decisively means the AU risks becoming irrelevant in the escalating conflict. “The AU needs to avoid political wrangling with Tigray about keeping its mediator and instead focus on fast-tracking the appointment of a new envoy who has the approval of all parties,” he writes.
Nosmot Gbadamosi is a multimedia journalist and the writer of Foreign Policy’s weekly Africa Brief. She has reported on human rights, the environment, and sustainable development from across the African continent. Twitter: @nosmotg
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