/ 18 July 2023

Rethinking debt relief: Zambia and beyond

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US Vice President Kamala Harris and Zambian President Hakainde Hichilema are seen at the State House in Lusaka on March 31, 2023 after a press conference. Hichilema asked the United States to help expedite debt restructuring negotiations with the country's creditors. Photo by SALIM DAWOOD / AFP

At the end of June 2023, the International Monetary Fund (IMF) announced that Zambia had reached a deal with its official creditors committee under the G20 Common Framework for debt relief. 

According to the deal, Zambia would receive debt relief of $7.7 billion by 2026, in addition to the next payment of the external credit facility. 

While this deal should be celebrated because it promises to restore Zambia to macro-economic stability, the process also exposes the difficulties of providing timely relief within the current global debt context.

Since 2020, developing countries have faced increasing debt defaults and risks, rising interest rates and rising public debt. This has raised concerns about a global debt explosion worsening poverty. 

Egypt, Ethiopia, Ghana, Pakistan, Sri Lanka and Zambia have all defaulted or are near default, Providing timely debt relief under the existing programmes remains a challenge.

In a recent policy briefing on Zambia’s debt relief, I discussed challenges posed by austerity conditions, examined the potential impact of debt relief on the country and provided recommendations to link relief with long-term macroeconomic stability.

This article builds on that analysis, by assessing the challenges faced by African countries in their pursuit of debt relief and its importance for African and developing countries, considering climate change issues.

A deal for Zambia, at long last

Zambia has been pursuing a deal for debt relief since it defaulted on its obligations in November 2020. After the election of President Hakainde Hichilema in August 2021, Zambia and the IMF began the process with a staff-level agreement on an external credit facility to restore macro-economic stability.

 In addition, Zambia has collaborated with the IMF in the development of policies and processes to enhance transparency and accountability of public resource management as part of the external credit facility programme.

However, the progress towards debt relief has been slow, leading to a reminder by Hichilema that “you cannot eat democracy”. Without anything to show for the reforms made, in the form of improvement in the lives of citizens, there is a risk to rejecting the process of debt relief and, consequently, the country’s democratic process. The politics of the stomach should not be forgotten, especially at a time of rising inflation and food scarcity.

To enhance future macroeconomic stability, Zambia is implementing measures such as removing subsidies for electricity, fuel and agriculture. However, implementing these policies without exercising caution risks exacerbating poverty in the country. Zambia is also increasing the ease of doing business.

The country aims to seize opportunities arising from the energy transition and high demand for copper. Investment in the energy transition and copper value chain have the potential to foster macroeconomic stability and robust private sector-led growth.

A major challenge to Zambia reaching a deal was the need for the country’s official creditors committee, under the G20 Common Framework, to agree unanimously to the terms of the debt relief. Agreement would be followed by the signing of a non-binding bilateral memorandum of understanding by the members of the creditors committee and Zambia. The lack of agreement, and countries presenting new requests, stalled the process of relief.

Despite reaching a deal to restructure its public debt, and the potential for future relief from private creditors, Zambia still faces challenges. The slow progress to relief has resulted in the country being forced to default once more on its debt obligations in September 2022. More difficulties, created by delays, will require careful resolution, including rising inflation, low investor confidence and currency depreciation.

A changing debt environment and its incentives 

The current debt environment differs from what existed during previous debt relief programmes. Past programmes, such as the Highly Indebted Poor Countries programme, mainly involved bilateral lenders, such as the IMF and World Bank, and Paris Club countries. 

Today, new players such as China, in addition to  private creditors, have become important stakeholders. The misalignment of interests hampers progress towards effective debt relief and restored macroeconomic stability in some countries.

To effectively address changes in lending practices, and the growing number of debt-stricken developing countries, greater stakeholder engagement is crucial. African countries need a seat at decision-making tables regarding debt relief, rather than being passive recipients.

Furthermore, it is necessary to develop frameworks that consider the interests of private creditors in debt relief efforts. New approaches to debt relief, such as debt-for-nature swaps, can enable African countries to safeguard their natural carbon sinks (as the world scurries towards net zero) while fostering future macroeconomic growth and development.

Indebtedness – limiting resilience for the developing world

The high debt burden facing developing countries threatens the progress made to combat poverty over the last decade. Among the reasons for this are: 

  • Developing countries are charged higher interest rates on funds borrowed and are subject to changes in global interest rates. 
  • High debt servicing costs limit a country’s ability to provide services for its population, reducing its capacity to fund social welfare, healthcare and education programmes. 
  • Countries are unable to create savings to support themselves in times of crisis or assist in investment in new infrastructure.

Estimates suggest that poverty affects between 60% and 80% of Zambians. With reductions in social spending as part of debt relief, Zambia risks backsliding on human development and poverty reduction. 

Today, climate change presents a major challenge to African countries. Rising global temperatures will negatively affect agricultural output and increase water scarcity, necessitating greater amounts of food aid, and escalate conflict and displacement. 

Implementing austerity measures to promote debt relief without considering a country’s ability to invest in climate adaptation or mitigation can lead to a dangerous debt spiral. This will limit the economy’s capacity to address climate challenges.

The impact of the 2022 floods in Pakistan demonstrates what happens when a heavily indebted country experiences a natural disaster. This highlights the need for a global debt architecture capable of providing relief to climate affected countries in a suitable manner. Although the establishment of the Loss and Damage Fund during Cop27 was a positive step, it falls short of addressing the substantial problems faced by Africa and the developing world on debt and climate change.

Zambia’s slow progress towards securing debt relief exposes the shortcomings of the existing structures. This requires a reimagining of future debt relief mechanisms, especially as the number of countries in need increases. 

It is essential to address the links and connections between climate change and austerity within debt relief efforts. Thus, active inclusion of African countries in decision-making processes is crucial, shifting the paradigm from passive recipients to active stakeholders in debt relief discussions.

Vincent Obisie-Orlu is a researcher in the natural resource governance programme at Good Governance Africa.