Zambia's US$3bn Eurobond Debt Restructure Deal To Unlock FDI Inflows & Jumpstart Social-Economic Development

Africa's second largest copper producer, Zambia has sealed a US$3bn Eurobond debt restructuring deal with its commercial lenders, bringing the country closer to concluding a delicate, yet complex process that commenced over three years ago.

The announcement was made by the Zambia External Bond Holder Steering Committee (The Committee) on 25th March 2024.

The Committee is pleased to announce that it has reached an agreement (The 2024 Agreement) with the Government of Zambia on restructuring of Zambia's Eurobonds i.e., (i) US$750m 5.375 %. Notes due 2022, (ii) US$1bn 8.5%. Notes due 2024, (iii) US$1.25bn 8.97%. Amortizing Notes due 2027, read the press statement in part.

The terms of the 2024 Agreement are now compatible with Zambia’s Official Creditor Committee (the “OCC”) assessment of comparability of treatment and the IMF’s program parameters under the Second Review framework.

The concessions in the 2024 Agreement will cure the standing default on the Eurobonds, and will have a significant impact on restoration of the country's macroeconomic and debt sustainability within the context of the 38 months US$1.3bn IMF bailout programme.

Additionally, this agreement will subsequently lead to restoration of full international capital markets access to Zambia and attract long term investments, including FDI in the country.

Zambia owes in excess of US$13bn to both bilateral (official) and commercial lenders (US$3bn Eurobonds).

In June 2023, Zambia commenced debt restructuring for its US$6.3bn bilateral debt owed mainly to China. But the process stalled when China, the single biggest creditor, rejected to a deal with private investors involving about $4bn in US dollar bond claims.

China had rejected the June 2023 deal with Zambia's bondholders as the agreement was not in line with its understanding of 'comparability,' a crucial yet notoriously slippy concept in sovereign debt restructuring. The objective of the concept is to ensure that both private and official creditors are treated equally.

Fortunately, the bilateral debt restructuring process scored a big win in February 2024 when China and India finally agreed to sign MOU's to restructure the Zambian debt. This paved way for accelerated negotiations with Eurobond holders and private creditors.

Speaking in Lusaka Monday, March 25th 2024, Republican President Hakainde Hichilema said that high external debt was chocking the country (like a python), and its resolution marks a great day for Zambia.

Signing off the deal will provide relief to the cash strapped southern African country as funds meant for debt servicing will now be channeled towards other key developmental needs. These include economic and social development, and most importantly, to reconstruct and grow the economy.

In a communique issued by the Presidential Delivery Unit Zambia (PDU) on 26th March 2024, the following were highlighted as some of the key positive outcomes of a successful debt restructuring deal:

1. Economic Stability: Successful debt restructuring will help stabilize Zambia's economy by reducing the debt repayment burden, resulting in economic growth and enhanced investor confidence. Improved investor confidence will no doubt result in increased inflow of Foreign Direct Investments (FDI)
2. Fiscal Space: Successful debt restructuring will free up funds initially meant for debt repayment and channel them towards social economic development. Critical areas include infrastructure development, education, and health among others.

In November 2020, Zambia became the first pandemic-era sovereign defaulter after missing a US$42.5m interest payment on one of its Eurobonds.

But the Hakainde Hichilema administration made debt restructuring a priority following their ascension to power after a landslide election victory in August 2021.

Transparent debt restructuring negotiations of both official debt and commercial debt, on comparable terms, is essential for the successful conclusion of the debt restructuring deal under Official Creditor Committee (OCC) of the G20 Common Framework.

Under the 2024 Agreement, the US$3bn bonds will be consolidated, and two new bonds (Bond A and Bond B) will be issued. These will provide future debt relief commensurate with Zambia's economic progress and debt carrying capacity in the medium term. Restructuring will extend the debt repayment period to between 8 and 15 years at the minimum.

The Agreement requires both additional debt reduction and net present value relief. It also includes enhanced repayment terms and higher coupons on Bond B in the event that (i) Zambia's debt carrying capacity moved from weak to medium, as assessed by The World Bank / International Monetary Fund composite indicator, or (ii) if Zambia continues to meet or exceed current IMF projections of export of goods, services, and fiscal revenues measured in US dollars.

The restructuring deal comes at a time when the country is battling sharp depreciation of the Kwacha against the dollar, high inflation, heightened threats to electricity generation (commencement of 8 hours load-shedding), and threats to food security, following a severe drought occasioned by El Nino.

The signing of the US$3bn Eurobond debt restructure deal is a positive development as it will unlock FDI inflows & jumpstart social-economic development.

The author is a Development Finance Expert. He holds a Master of Philosophy (MPhil) in Development Finance from Stellenbosch Business School , South Africa.