Why Eurobond holders rejected Zambia’s request to delaying paying interest

Why Eurobond holders rejected Zambia’s request to delaying paying interest

By David Whitehouse

A committee representing Western holders of Zambian bonds has rejected the government’s request to delay interest payments on the debt.

Zambia had asked to defer interest payments on the country’s $3bn of outstanding Eurobonds until April 2021.

Creditors are “unable to provide a positive response” given “absence of clarity on a number of issues”, the Zambia External Bondholder Committee said in a statement on 30 September.

The committee added that it “stands ready to engage constructively and proactively on finding ways to support Zambia.”

Lack of communication and transparency are at the core of the problem. “The Zambian authorities and their advisors did not engage with the Committee on any basis,” the statement said. The committee represents 14 international financial institutions in the US and Europe holding about 40% of Zambia’s outstanding Eurobonds.

Illicit financial flows and opaque debt, in particular related to state-owned enterprises such as Zesco, “limit the degree of confidence that the debt stock reported by government is exhaustive,” says Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town.

Zesco accounts for more than 45% of Zambia’s outstanding external debt, according to Africa Energy, which estimates that Power China, the parent company of Sinohydro, is Zesco’s largest creditor with more than 60% of the total.

Zambia’s credit profile is tarnished by “allegations of graft, misappropriation of funds and poor audit results on project loans,” NKC said in research in July.

“Untangling the debt web is a critical first step made excruciatingly difficult by the opacity of state-owned enterprise debt,” the NKC research said.

According to the Zambia Institute for Policy Analysis and Research (ZIPAR) “the absence of provisions for transparency and accountability of public debt has entrenched mismanagement of the proceeds of debt,” especially as “no penalties are stipulated for abrogating procedure. Clearly, the legal framework needs strengthening”.
Unreliable Data

The IMF said on 20 July that the recording of Zambia’s expenditure transactions should be investigated, with a focus on explaining discrepancies in the records of taxes, grant revenue, interest expenses and financial transactions.

“Outdated data-capturing methodologies, a decentralised system, misclassification of institutional units and transactions, as well as resource and personnel scarcity, have contributed to weak, unreliable data collection and reporting,” says Erasmus.

State guarantees seem to be excluded from the official public external debt report, although in the budget the net amount was stated to be in the region of $1.6bn, adds Erasmus. “There exists considerable scope to strengthen governance to ensure accurate debt reporting, which is greatly lacking at this stage.”

According to RMB Global Markets, Zambia’s debt will rise to 119% of GDP by the end of 2021, while the budget deficit will reach 14.6%. RMB estimates that about 30% of Zambia’s external debt is owed directly to China and its agencies.

That means creditors have no way of knowing if they are being treated on an equal basis with Chinese creditors.

According to the China-Africa Research Initiative (CARI), China’s loan commitments to Zambia are worth $9.7bn. The picture is muddied, CARI says, by the unclear distinction between Chinese loan commitments and disbursements.

Zesco signed off on $ 5.6bn in Chinese loan commitments for power projects between 2016 and 2018 alone.
But because of Zambia’s inability to contribute its side of some project costs, disbursement on existing projects has been halting, says CARI.
Bottom line

Zambia’s debt crisis is also a crisis of financial transparency.


The African Report

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