Zambia has reached an agreement to restructure $6.3 billion of its debt with bilateral lenders, marking the first major relief received by a developing state under the Group of 20 nations' Common Framework.
Commenting on the development in talks on debt restructuring, the country's President Hakainde Hichilema called the agreement a "significant milestone" on the path to economic recovery.
"Today Zambia has reached an agreement on a debt treatment with our official creditors – a significant milestone in our journey towards economic recovery and growth. On behalf of the people of Zambia, I thank our official creditors for their continued engagement and support," the president said.
However, the Zambian leader didn't provide further details on the deal. According to media reports, the creditors led by China and France decided to extend debt maturities on their loans over 20 years, with a three-year grace period.
Zambia’s finance ministry announced that in the coming weeks, the parties will sign a memorandum of understanding for the debt relief, including "significant maturity extensions and reduction in interest rates." Finance Minister Situmbeko Musokotwane said in a statement that the agreement is an important step towards economic stability and improvement in quality of life .
"We will now work to achieve a swift resolution with our private creditors and deliver opportunity and economic stability to the Zambian people," he added.
French President Emmanuel Macron, Hichilema and Chinese Premier Li Qiang are expected to meet on the sidelines the Summit for a New Global Financing Pact, held in Paris from June 22 to 23, to mark the agreement.
According to IMF Managing Director Kristalina Georgieva, the deal specifies both a baseline and a contingent treatment. The latter provides for adjustments in relief in case Zambia manages to improve its economic performance and policies so that it justifies an upgrade from "weak" to "medium" debt-carrying capacity. Under this scenario, interest payments would be increased, while principal reimbursements accelerated.
The country is seen as a test case for the G20 common framework for restructuring low-income countries' debt, launched at the end of 2020. The mechanism offers a new approach to tackle sovereign debt, seeking to bring together traditional "Paris Club" creditors and lenders outside of it, including China and India.
Since Zambia defaulted on its sovereign debt in 2020, the nation has struggled to secure a relief deal with external creditors. According to the the nation's Ministry of Finance (MOF), official bilateral creditors account for 15 % of public debt, multilateral and plurilateral financial institutions for 11.5 %, while Eurobond investors for 11.7%. The largest creditor group by nationality is China, as approximately $6 billion is owed to Chinese commercial and state-owned lenders.
In February 2021, Zambia applied for a debt restructuring under the G20 common framework and introduced structural and fiscal reforms in a bid to restore macroeconomic stability and give a new impetus to growth.
However, the mechanism has been subjected to criticism by several officials who claim that the process is too slow. In particular, African Development Bank President Akinwumi Adesina urged the creditors "to make it work faster, work at scale."
Along with Zambia, three other African nations requested debt treatment under the framework, including Chad, Ethiopia and Ghana. In November last year, Chad reached an agreement on debt treatment with its official bilateral creditors - China, France, Saudi Arabia and India - securing the first Common Framework accord. At the same time, both Ethiopia and Ghana are still awaiting progress in talks on their cases.