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In recent years, sovereign debt crises in developing countries have become more complex as countries are no longer just borrowing from a single institution, but from several sources, including private bondholders, China, other states, and international financial markets. This has resulted in a fragmented creditor system that makes restructuring repayments for developing countries difficult. When the government was suddenly unable to keep up with its payment schedule due to falling copper prices and the pandemic, Zambia quickly entered a crisis.�� In 2020, Zambia became the first African country to default during the pandemic. Since Zambia’s debt system was so fragmented, older institutions like the Paris Club and the International Monetary Fund (IMF) were not equipped to facilitate the level of coordination required to address this crisis. This resulted in Zambia becoming one of the first major cases to be taken on under the G20 Common Framework. The G20 Common Framework is an international initiative designed to help low-income countries restructure unsustainable debt in a coordinated way with both traditional and new creditors. This framework was built to increase cooperation between lenders, and in this case brought together Western countries, China, and private creditors to facilitate a restructuring of Zambia’s debt in the wake of their default. Zambia’s case shows how the G20 Common Framework improves debt restructuring by coordinating fragmented creditors, marking an important shift in how sovereign debt crises are managed.

Zambia’s debt crisis emerged from several factors, including extensive infrastructure borrowing throughout the 2010s, international loans, and over-dependency on its copper economy. Zambia’s copper accounts for over 70% of its exports, thus creating an economic vulnerability to fluctuations in copper prices (World Bank). Should the price of copper fall, the Zambian economy will follow suit. Zambia also received almost $3 billion in Eurobonds from 2012 to 2015 (Gelpern, 2023). Following the 2008 fiscal crisis, interest rates were low, and creditors saw Zambia’s copper market as strong and a stable investment. Zambia wanted to borrow money directly from financial markets instead of the IMF or World Bank, so it could retain a greater degree of sovereignty. However, since the bonds were in U.S. dollars, should the Zambian currency, the Kwacha, weaken, repayment will become much more expensive. Further, the interest rates on these loans were much higher than IMF loans at 8-9%. Since they had fixed repayment deadlines, Zambia was forced into a crisis due to COVID and falling copper prices, as it no longer had the revenue to pay. The situation is further complicated by the fact that they are in debt to private bondholders, whereas the IMF would be much more likely to restructure, private bondholders are profit-driven and have little incentive to restructure. Additionally, throughout the 2010s, Zambia borrowed heavily from Chinese lenders to develop massive infrastructure projects (Hsiang, 2023). By 2022, Zambian public debt was over $21 billion (IMF).

The resulting restructuring process of Zambia’s debt was a landmark case that resulted in China, private creditors, and the IMF cooperating under the G20 Common Framework. The G20 Common Framework was created in November 2020 during the COVID shutdown. This framework was designed to assist developing countries in restructuring unsustainable debt by coordinating between Western governments, China, and private creditors. In 2022, the IMF approved a $1.3 billion extended credit facility to Zambia (IMF). However, it came with conditions that Zambia works to reduce budget deficits, cut subsidies, and increase fiscal transparency. In 2023, the creditor committee, chaired by France and China, agreed to restructure around $6.3 billion of Zambia’s debt. Private creditors negotiated separately, where around $3 billion in Eurobonds were restructured. Most importantly, this restructuring included repayments based on copper price performance. Private creditors took longer to negotiate because they wanted the public institutions and countries, such as the IMF and China, to take losses before they did. Despite these challenges, negotiations were successful under the G20 framework and resulted in a restructuring of Zambian debt. Overall, the restructuring process of Zambia’s debt represents a landmark moment in international fiscal cooperation between sovereign states and private actors.

As of today, Zambia’s debt crisis has somewhat stabilized. Despite this, long-term projections show that the development of the country is still severely stunted and constrained by unstable fiscal conditions, particularly the fluctuating price of copper. Zambia was able to exit its formal default after prolonged restructuring agreements with Western countries, China, and private creditors. The IMF has now classified the Zambian debt as sustainable, but still high risk. This crisis exposed the vulnerabilities of resource-dependent economies, where external shocks can quickly translate into severe fiscal instability. Ultimately, Zambia’s case highlights the potential of the G20 Common Framework to facilitate recovery, signaling an important and evolving tool for managing global debt crises.

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References

Gelpern, Anna, et al. “Zambia: A Case Study of Sovereign Debt Restructuring under the G20 Common Framework.” Center for Global Development, 2023.

Hsiang, Evan. “Chinese Investment in Africa: A Reexamination of the Zambian Debt Crisis.” Harvard International Review, 2023. .

International Monetary Fund. “IMF Executive Board Approves New Extended Credit Facility (ECF) Arrangement for Zambia.” IMF Press Release, 31 Aug. 2022.

World Bank Group. “Zambia.” World Bank.