Zambians’ suffering means profits for private creditors

The poor African nation has struggled to convince wealthy banks and investment funds to postpone debt repayment.

Zambia has refused to pay private creditors as it struggles to revive an economy hit by the pandemic. (PA)

The multi-billion dollar private creditors who refuse rescheduling loan repayments from Zambia, one of the world’s poorest countries, is expected to turn a dastardly profit in the years to come, debt relief advocates say.

Zambia was forced to miss a $ 42.5 million interest payment on a $ 1 billion Eurobond earlier this month after negotiations with lenders, including banks and funds broke down investment from countries like the UK and Israel.

The risk-reward relationship behind the bonds means that private creditors can make between 75% and 250% profit because they demand a higher return now that the country is in default, said Jubilee Debt Campaign UK.

Bondholders were well aware that Zambia could face difficulties in repaying loans, a situation that became evident when the bonds traded below face value in 2018.

“The first private lenders to Zambia were lending at high interest rates of 5.375% to 8.97% because they were high risk loans. Many of the current owners of these debts bought them cheaply because it was expected that Zambia would not be able to repay the debts in full ”, said Jubilee.

“A trader buying Zambia’s 2027 Bond could now make a profit of 250% if all interest and principal payments are made.”

Zambia has been hit hard by the Covid-19 pandemic.

Africa’s second largest copper producer relies heavily on the export of the ore. The country’s finances were under pressure even before the pandemic closed borders and affected the price of raw materials.

Exports of copper, the main source of foreign exchange, were not enough to offset the US dollars needed to pay foreign creditors.

The Zambian currency, the kwancha, depreciated over the past year, making debt repayment expensive, as more of the local currency was needed to purchase US dollars.

Lusaka says more than two-thirds of its income can be used to pay interest, leaving little for hospitals and schools.

Zambia’s economy is expected to contract with double-digit inflation.

Over the years, Zambia has accumulated around $ 11.9 billion in external debt, almost 50% of which is owed to private lenders.

Of the $ 1.7 billion Zambia had to pay in external debt payments this year alone, about $ 1.1 billion or 65% would go to private lenders.

The negotiations met with a roadblock after private lenders demanded information on loans the African country had taken from China.

The cash-strapped government of President Edgar Lungu was willing to share details under confidentiality agreements, but private lenders refused to agree to the terms.

Zambian President Edgar Lungu faces tough choices as his cash-strapped government tries to pacify foreign creditors.

Zambian President Edgar Lungu faces tough choices as his cash-strapped government tries to pacify foreign creditors. (AFP)

A model of challenge?

Zambia was facing a debt crisis even before the pandemic hit.

In September he noted it was suspending interest payments on foreign bonds, also known as Eurobonds, as it was diverting resources to deal with Covid-19, which has infected more than 17,000 people and killed 357.

It secured debt relief from G20 member states under the Debt Service Suspension Initiative (DSSI), which spreads interest payments over four years.

While bilateral lenders have given Zambia a breather, private lenders and multilateral banks such as the International Monetary Fund (IMF) have refused to join the initiative.

Private lenders fear that the payments they forego will end up going to Chinese creditors. Last month, the Development Bank of China Okay defer payments on their own loan.

“The only question of the payment of the bondholders is a fundamental question for the other creditors. If I pay, when I pay, the other creditors will put dynamite under my legs and explode my legs. I’m gone, ”Zambian Finance Minister Bwalya Ngandu noted after the default.

Private loans have become a serious problem as over the years many indebted countries have come to rely on them instead of government-to-government loans.

Of the total outstanding debt of African countries, about 32% is owed to private investors – that’s about $ 132 billion, according to a study carried out two years ago. Ten years ago, loans from private lenders were negligible.

Lobbyists calling for debt relief, like Jubilee, have long suggested that low-income countries stop paying their creditors, including those in the private sector.

Argentina recently negotiated a rescheduling plan $ 65 billion of its debt.

But private creditors, supported by rating agencies, often use fear-mongering tactics to prevent governments from withholding interest payments.

Source: TRT World

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