Saturday, October 13, 2018

Zambia's Debts

In a world of depleting mineral resources, industrialised countries, especially resource-dependent Europe, need Zambia's copper, uranium and cobalt - the latter is in high demand recently due to the booming electric vehicle industry. They are also interested in the landlocked country's strategic position at the heart of the African continent. Zambia has borders with eight countries and close ties with neighbouring conflict-ridden and resource-rich Democratic Republic of the Congo. Zambia is the 4th most unequal country in the world, and 74.3 percent of the population lives on less than $3.20 a day.

Zambia's public debt has increased significantly in recent years, and concerns over a possible crisis have lately attracted the attention of the media. UK, Ireland, Finland and Sweden froze its aid to Zambia following an investigation into large-scale corruption.  A British business intelligence outlet Africa Confidential warned of escalating debt caused by allegedly unsustainable Chinese loans.  China probably holds a quarter to a third of Zambia's external debt.  Critics point out that a large number of these loans might be unaccounted for in the government official figures. Either way, the government declared a staggering $9.4bn of external debt in June this year, or 34.7 percent of GDP, up from $1.9bn at the end of 2011, or 8.4 percent of GDP which includes borrowing US dollars through large bond sales (known as eurobonds) on international markets controlled by Western institutions. The government issued three eurobonds between 2012 and 2015 for a total of $3bn - this does not include interest repayments, which keep going up due to sinking investor confidence. The yields on these bonds reached 17 percent last month. The first 10-year eurobond was issued in 2012 with a 5.6 percent yield.

 A debt default would open up opportunities for vulture funds and international creditors to take over the country's rich mineral and land resources and the few remaining parastatals that survived two decades of aggressive privatisation and public spending cuts imposed by the IMF and the World Bank from the 1980s to the mid-2000s. Health, education and other public services have already been decimated and the mining sector, previously under state control, is now for the most part in foreign hands - as are most sectors of the formal economy. China is now being blamed by the West for allegedly doing exactly what the IMF has been doing for decades: providing unsustainable loans to countries in need to further plunge them into debt, weaken state capacity and open up national economies to international investors.

President Edgar Lungu and his entourage are now perceived as an open threat to Western hegemony due to their vocal support for Beijing. Lungu's blatant mismanagement of public finances and his increasingly authoritarian tendencies show that his stance is far from principled and is driven by desperation. 

China is understandably hiding details of its loans from IMF oversight. An eventual IMF bailout would come with hefty conditionalities, imposing further spending cuts and privatisations in an already downsized state. There is no evidence that suggests that an IMF programme would be better than a Chinese deal. The Saudi government is financing several projects in Zambia, including hospitals and roads. Western media have been largely silent about these developments. This is not surprising, given Saudi alignment with the US and UK administrations.

If the country was to defaultthe biggest losers will be the Zambian people. A default would also trigger a chain reaction and bring down other African economies that borrowed heavily through eurobonds and are struggling with debt repayments.

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