MINISTERIAL STATEMENT ON THE DEBT RESTRUCTURING AGREEMENT WITH OFFICIAL BILATERAL CREDITORS DELIVERED BY THE MINISTER OF FINANCE AND NATIONAL PLANNING, HONOURABLE DR. SITUMBEKO MUSOKOTWANE, MP, PARLIAMENT BUILDINGS, LUSAKA
A. INTRODUCTION
Madam Speaker,
I wish to thank you for according me this opportunity to provide insights on the debt restructuring for Zambia.
Our country has been trying to restructure its foreign debt from 2016. But that effort produced no results. I am happy to tell you that the efforts of the UPND government has now yielded the results that our country was looking for.
I will now provide the details.
BACKGROUND
Madam Speaker,
We have to start from the genesis of the problem of Zambia’s unsustainable debt. The stock of external debt in 2011 was only US $1.98 billion. By the end of 2021, the external debt had risen to US$13.04 billion. The rise in this stock implied an increase in debt service, that is, the amount of Kwacha cash that is needed to repay the principal and interest on debt.
Debt service payments accounted for only 9 percent of domestic revenues in 2011. This means that for every K1 raised in domestic revenues, about 9 ngwee only was used to repay the principal and interest on debt. In 2020, debt service repayments rose. That is, 51.70 ngwee of each one Kwacha raised in domestic revenues was required for debt repayments.
With 51.7 ngwee out of each one Kwacha of domestic revenues going towards debt service and another 39.4 ngwee going towards wages and salaries for public servants, this meant that 91.1 ngwee of each Kwacha of domestic revenues raised was committed to debt service and payment of wages and salaries. This, Madam Speaker, means that in every K1 raised in domestic revenues, 91.10 ngwee was committed to debt service and payment of wages and salaries.
The balance of 8.9 ngwee in a K1 raised in domestic revenues was what remained for all other government programmes, including buying medicines, provision of school requisites, Government operations, construction and rehabilitation of roads, supporting our small-scale farmers through the Farmer Input Support Programme, supporting parliament and supporting constituencies through the Constituency Development Fund (CDF). This was an impossible task. No wonder, CDF was seldom released by the Treasury.
Madam Speaker,
As the pandemic shock unfolded, financing pressures emerged. The Kwacha depreciated and inflation spiked, increasing the external debt burden expressed in Kwacha. Unencumbered foreign exchange reserves shrank to US $970 million by end of October 2020 against debt service of around US $1.4 Billion on contracted foreign currency denominated loans. Unable to meet its external debt obligations, Government defaulted on its external debt in November 2020 and implemented a moratorium on payment of debt obligations in order to undertake a comprehensive debt restructuring exercise.
A Debt Sustainability Analysis (DSA) that was conducted in 2020. It indicated that Zambia’s debt was unsustainable and the country faced debt distress. If nothing was done to restructure the debt, then out of each K1 of domestic revenue collected in 2021, 70 ngwee was needed towards debt service. If we add payment of wages and salaries, which was about 43.1 ngwee of each K1 collected in domestic revenues it would have meant 113.1 ngwee in every Kwacha was required for debt service and payment of wages and salaries.
Putting it in another way, Madam Speaker, it means that in order to service the debt and pay wages and salaries ALL of the domestic revenue collected would be utilized for that purpose alone. But that would not even be enough. The government would need to borrow another getting 13.1 ngwee to make it K1.1310. In other words, It meant that all taxes collected plus extra money that had to be borrowed would all go to debt service and paying public emoluments. Nothing would remain to spend on any other government program. Clearly, this would have brought the country to its knees.
Hence, In November 2020, the Zambian government suspended debt service payments to its creditors. This suspension was unilateral and as such, not agreed upon with the creditors. It was not a sustainable solution to the debt crisis facing the country because the creditors could any time drag the country to courts. The debt of the country needed to be restructured formally.
Madam Speaker,
Fortunately, a group of rich countries called the G20 realized that the debt problems that Zambia and other poor countries were facing was real and big. In 2020 they devised a formal but temporary solution called the Debt Service Suspension Initiative (DSSI). The DSSI, was an initiative of the G20 to allow countries facing debt distress to suspend payment of debt service to most creditors, except multilateral creditors, such as the World Bank and African Development Bank. But the DSSI was also a temporal solution. A formal and lasting solution to the debt problem other than mere suspension of debt servicing, was required.
Accordingly, the G20 established the Common Framework for Debt Treatment beyond the Debt Service Suspension Initiative or DSSI. This process was meant to provide long-term debt relief to countries like Zambia. This initiative was to be pursued together with creditors.
But restructuring the debt of a country is not automatic. It is a process that requires cooperation between debtors and creditors and indeed other stake holders. Also, a country that faces debt distress must satisfy some pre-conditions in order to be allowed into the process of restructuring its debt. This is where debtor countries sometimes fail to make progress. Indeed, Zambia was one of the countries that failed to make progress in this regard util when the UPND government came into office.
According to the Common Framework, a country that faces debt distress as Zambia did, it requires to discuss with all its creditors together and not discuss with them one by one to get the debt to be restructured. This creates trust and avoids suspicion of some creditors getting better deals on the side. This is why, for official creditors, the Official Creditors Committee (OCC) was formed to negotiate with Zambia on how to get her debt to be restructured.
In addition, creditors require that the debtor country must have an active program with the IMF. This gives them the assurance that the country whose debt is being considered for restructuring is conducting its financial affairs in a satisfactory manner. However, the IMF also requires that the creditors cooperate in restructuring the debt before they can agree to provide a financing program with the debtor country.
These complex relationships highlight the importance of strong coordination and cooperation among stake holders. It is here where prior to this government coming into office, Zambia failed to coordinate and manage relationships and her commitment to debt restructuring and prudent financial management was put into question.
Madam Speaker,
Zambia made a request through the G20 Common Framework for more sustainable debt treatment in 2020. Consequently, a Creditor Committee for the country was formed by countries with eligible claims on Zambia. The Committee was co-chaired by China and France with South Africa being the Vice-Chair.
This committee deliberated extensively regarding the extent of relief that Zambia requires which would be compatible with the IMF’s debt sustainability parameters. In other words, the outcome of the negotiations should be a restructured debt that takes the country out of debt distress. It is with this very committee that we have now reached an agreement for debt treatment in accordance with the principle of rendering Zambia’s debt to be sustainable.
B. FEATURES OF THE AGREEMENT
Madam Speaker,
The debt restructuring agreement covers about US $6.3 billion of Central Government debt owed to external bilateral creditors and the debt of ZESCO that has been guaranteed by Government and also owed to official bilateral creditors. Just so that we are all on the same page Madam Speaker, Bilateral creditors are official agencies that give loans on behalf of one Government to another Government or to public and publicly guaranteed borrowers in another country.
Countries such as China, France, Germany and others have agencies that lend money to other governments such as Zambia and to some public institutions such as ZESCO. Approx. $1.75billion in Sinosure-insured commercial claims – for which EXIM Bank China is not a lender – has been classified as other commercial claims and not as Official Creditor claims. This explains the difference between the $8 billion of official claims previously published and the $6.3billion figure outlined in the agreement reached with Official Creditors last week. In any cases, all of our commercial creditors will be asked to provide a debt treatment on terms no more favorable than those agreed with our official creditors.
Madam Speaker,
The official bilateral creditor countries have agreed to provide the much debt relief to Zambia as follows:
a) significant debt relief through a significant maturity extension of our existing claims by more than twelve years with a final maturity in the year 2043:
b) Interest rates will be set at a very concessional rate during the next 14 years and will not exceed 2.5% thereafter under the baseline scenario; and,
c) Principal repayment are starting in 2026 but only for 0.5% per annum for the period 2026 – 2035.
Madam Speaker,
The agreement also includes an adjustment mechanism that recognizes the uncertainties that exist regarding Zambia’s future debt carrying capacity. The adjustment mechanism provides for an accelerated repayment schedule and higher interest rates if Zambia’s debt carrying capacity improves from the current “weak” classification to “Medium” classification. This assessment will be jointly undertaken by the IMF and the World Bank in 2026. Should the assessment results show that Zambian’s debt carrying capacity has improved from “weak” to “medium” capacity, the agreement provides that:
(a) Final maturity will be reduced by 5 years from 2043 to 2038; and,
(b) Interest rates will be higher than the baseline scenario.
Madam Speaker,
Full details of the agreement will be explained to the House and the Zambian people after we have negotiated and signed the Memorandum of Agreement with Bilateral Official Creditors.
Madam Speaker,
This debt treatment that we have agreed with our Official Bilateral Creditors ensures that Zambia achieves debt sustainability in all cases; whether the debt service carrying capacity is low or moderate. Official creditors have also agreed with the Government that domestic debt i.e local currency denominated debt (T-bills and T-bonds) will be excluded from any treatment. Let me repeat this Madam Speaker, we have agreed with the Official Creditors that we will not include domestic debt in the restructuring perimeter. This is essential to preserve financial stability and ensure a well-functioning domestic debt market.
Madam Speaker,
The postponement of payments through extended maturities will generate about US $5.8 billion in debt service savings over the period 2023-2031. Therefore, Zambia will be paying its official creditors about US $750 million only over the next ten years, compared to about US $6.3 billion that was supposed to be re-paid in the same period, under the previous contractual arrangements. In economic terms, or should I say considering the time value of money as described in the IMF’s Debt Sustainability Framework, the agreement delivers close to 40 percent reduction of our debt burden as a result of the postponement of repayments and a reduction in interest rates.
C. BENEFITS OF THE AGREEMENT
Madam Speaker,
The agreement with the official creditors has several benefits for the country and beyond in various ways:
a) It generates US $5.8 billion in debt service savings which unlock resources that can be utilized for our developmental programmes; In the absence of debt restructuring, Zambia would have to pay $6.3 billion in debt servicing official creditors in the next 10 years. With the restructuring, the amount reduces to $750 million only.
b) It unlocks extra funds from cooperating partners. This year 2023 For example, arising from the agreement reached, both the IMF and the World bank will disburse funding to Zambia (US $188.8 million and $75 million respectively). This will result in positive cashflow for the country as opposed to the situation without a debt restructuring agreement in place. Whereas it’s true that debt servicing will resume in three years, the effect of the restructuring – reduction in principle amount payable due to stretching the maturity as well as lower interest rates – means that the annual cost for debt servicing will be very low. At the same time, the support coming from cooperating partners in support of Zambia will exceed debt servicing. This means that Zambia will enjoy positive cash flow when one compares the debt outflows versus the debt inflows and the extra cash will be available for development.
c) It provides a pathway to restoring debt sustainability in the medium term, thereby leading to an improved macroeconomic environment. In particular, the impact on exchange rate stability should be tangible. I wish to remind the House that some of our locally issued Treasury bonds are bought by non-residents who bring in foreign exchange. Before the restructuring agreement was reached, many new investors in the bonds held back their foreign exchange. For those whose bonds were maturing, they chose to externalize their money rather than re invest it for fear that their bonds might be subjected to restructuring as well. This contributed to pressure against the Kwacha /US$ exchange rate. With the agreement in place, this is no longer a concern and therefore the stability of the Kwacha exchange rate will be enhanced.
d) It will promote renewed interest for Zambia as a country dedicated to economic transformation, making it easier to attract more investment; and
e) It paves the way for debt restructuring to be undertaken in a number of African countries facing, or close to facing debt distress.
D. NEXT STEPS
We still have some work to do with our official bilateral creditors even after this general agreement, made under the auspices of the G20 General framework for debt treatment. The next step will be to negotiate and sign a Memorandum of Understanding between Zambia and its Official Creditors. The Memorandum of Understanding will outline in detail the terms of the agreed debt treatment, which will then be implemented through bilateral agreements with each member of the Official Creditor Committee. We will, with the cooperation of the official creditors, expeditiously undertake this work, including undertaking the necessary reconciliations.
Madam Speaker,
I have so far focused on official bilateral creditors. Members of the House are aware though, that as a country, we also have commercial debt that is owed to private creditors for a total amount of $6.8 billion as of end-2022, with notably the Eurobond Holders which are due US $3.5billion ($3bn in face value and $500m in outstanding arrears as of end-2022).
Madam Speaker,
As a nation, we have already been engaging with private creditors. With the official creditor committee parameters of the debt restructuring made clearer, we will continue the engagement with the private creditors at an accelerated pace. Under the G20 Common Framework, a key feature is that private creditors must also provide debt restructuring on comparable terms as the official creditor committee. Reaching an agreement with the official creditor committee should provide impetus to the on-going discussions with private creditors.
Madam Speaker,
We are aware that a lot has been done, but considerable work still lies ahead. The urgency and importance of finalizing debt restructuring cannot be over emphasized, as it is the surest way towards economic recovery. As the debt restructuring process continues, Government commits to ensure that it utilizes concessional financing to meet its development aspirations, while improving domestic resource mobilization. This will be supplemented by the grant financing which will be provided by our cooperating partners.
Madam Speaker,
As a responsible Government, we are also keen on ensuring that the country should never find itself in a position of unsustainable debt accumulation. It is against this background that we brought to this August House the Public Debt Management Bill which requires the executive arm of Government to seek authority to borrow funds from the Legislature through the Annual Borrowing Plan.
I must thank Members of the House through the able leadership of you, madam speaker, for supporting such a progressive Bill. Be assured that we will implement the provisions of the Public Debt Management Act to the letter.
E. CONCLUSION
Madam Speaker,
As I conclude, allow me to express Governments gratitude to all our official bilateral creditors for the favorable debt restructuring agreement that was reached on 22nd June 2023. Special thanks go to the Co-Chairs, France and China as well as South Africa who were the Vice Chair of the creditor committee. We are also indebted to the Paris Club Secretariat for their unwavering support. I would also like to extend our heartfelt gratitude to the International Monetary Fund and the World Bank that have stood with us during this period.
Madam Speaker,
My special thanks go out to the hardworking technical Team at the Ministry of Finance and National Planning and the Bank of Zambia, who exhibited the utmost focus-oriented resilience through the challenging journey that got us where we are today. Job well done!!
I would also like to convey our sincere thanks to our Financial Advisors (Lazard Frères of France), our Legal Advisors (White and Case LLP from the United Kingdom) and our Communications Advisors (Highgate from the United Kingdom). The knowledge and experience that was brought to the table by our advisors is second to none.
Madam Speaker,
Let me also thank my Cabinet colleagues for their support. This success is due to their commitment and active participation in the reform program that has brought us this far.
I also wish to thank all your Members of Parliament for supporting this cause when we brought up the matter to this august House and also for fully standing behind us and supporting our economic reform agenda which has contributed to official creditors’ confidence and acceptance to restructure our debt.
Finally, allow me to thank His Excellency Mr. Hakainde Hichilema, President of the Republic of Zambia for His visionary leadership and for steering us to where we are today. He spent countless hours in unlocking any stumbling blocks that we faced, and where it mattered the most, through various engagements.
To the Zambian public, thank you so much for the awesome support. Just under two years ago, this government took over an economy that was under stress and appeared to have no certain future. Step by step and methodically, this government is bringing back things in place. We promised to bring down inflation. Done. We promised to stabilize the change rate. Done. We promised to restore order and peace in markets. Done. We promised to provide teachers and health workers. Done. We promised to reconstruct the country, more especially the country side which was left behind. Being done through CDF. And, of course, we promised to restructure the debt. Now Done.
Madam Speaker,
The upward direction of development in our country is very clear. This is in great contrast to what was happening a few years ago. With this clear upward direction, I appeal to the Zambians for further support. You are in good hands under the government of President Hichilema.
MADAM SPEAKER, I THANK YOU.