Zambia’s spiraling debt offers glimpse into the future of Chinese loan financing in Africa

Zambia’s spiraling debt offers glimpse into the future of Chinese loan financing in Africa

Lusaka, Zambia
By Tom Cockrem (CNBC)

KEY POINTS
China has provided billions of dollars of loans for infrastructure projects to a host of Sub-Saharan African nations as part of its sweeping Belt & Road initiative in recent years, with Zambia one of its most prominent debtors.
Research from business risk consultancy EXX Africa suggested that Chinese firms are seeking control of Zambian mining assets as collateral for potential loan defaults.

Zambia is already restructuring, renegotiating or refinancing its extensive Chinese project finance debt, and Chinese companies are playing hardball, according to new research.

Southern Africa’s third-largest economy is under pressure from an impending breakdown of its power supply and its inability to pay for electricity imports, and is staring down the barrel of further defaults on construction project financing and bond payments.

State power utility Zesco revealed last month that a supply shortfall reached 810 megawatts in November, with Zambia and neighboring Zimbabwe both suffering 20-hour per day power cuts due to extreme drought conditions blighting its hydropower output.

Given its spiraling debt profile, Zambia has been unable to tap into its foreign reserves to import power from the likes of South Africa and Mozambique. The country’s sovereign debt is expected to reach 96% of GDP (gross domestic product) in 2020, while the country has defaulted on a spree of loans in 2019.

The most substantial of these was $107 million loan from Italian bank Intesa Sanpaolo to buy two military transport aircraft from Italian aerospace company Leonardo, according to reports from business risk consultancy EXX Africa and local media outlets.

China calling in arrears

China has provided billions of dollars of loans for infrastructure projects to a host of Sub-Saharan African nations as part of its sweeping Belt & Road initiative in recent years, with Zambia one of its most prominent debtors. The Belt & Road is China’s huge investment program around the world and is viewed as an attempt to control a global supply chain and boost economic activity.

In March last year, China Exim Bank threatened that Chinese contractors would suspend work on infrastructure projects in Zambia if arrears were not paid. According to a recent report from EXX Africa, several road construction projects contracted to Chinese firms were suspended late in 2019.

The International Monetary Fund has twice withheld a credit facility amid warnings that Zambia’s high debt and shrinking foreign exchange reserves leave its economy vulnerable. Zambian GDP has halved to just 2% over the past three years, the kwacha currency has depreciated by almost 17% against the dollar over the past year, and inflation is running at almost 10%.

In order to address the country’s economic slowdown, President Edgar Lungu said last year that his government would seek to reduce its domestic arrears and maintain debt within sustainable levels, having already delayed the receipt of loans totaling $2.6 billion contracted in 2018.

Official reports had external debt rising by $10.05 billion at the end of 2018 compared to $8.74 billion a year earlier, but EXX Africa and other independent research institutions have maintained that obligations are likely to be much higher than stated, on account of undisclosed Chinese project finance agreements.

China wants collateral

Zambia is already restructuring, renegotiating, or refinancing its extensive Chinese project finance debt, EXX Africa Executive Director Robert Besseling told CNBC, but evidence of Chinese patience wearing thin extends beyond road construction projects.

“Chinese companies are putting pressure on the Zambian Finance Ministry to avert further delayed payments or defaults on their loans. However, Chinese companies are refusing to restructure existing debts and are instead seeking fresh collateral in case of default,” Besseling highlighted in the report.

Most notably, Chinese firms are seeking to capitalize on the liquidation of Konkola Copper mines, a subsidiary of London-based Vedanta Resources. Zambia is Africa’s second-largest producer of copper

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COMMENTS

WORDPRESS: 10
  • comment-avatar
    anthony simmons 1 day ago

    They are not lending you money they are BUYING your country.

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    They are not lending you money,they are buying you country

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    Weston 2 days ago

    ZANU PF failed project exported here just to fail again. China is the new colonizer.

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    Tipakinge chola 2 days ago

    Zambians have been harmered below the belt. Many parents have failed to pay school fees. Inkongole even at individual level ni mbweee. Ba pf namufilwa. Just declare that you have failed before you put many Zambians in further kaloba that they will not manage to pay back. Insoni ebuntu!

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      Draw Parallels 2 days ago

      China debts trap
      When President Emmerson Mnangagwa, otherwise known as “the crocodile” took over the helm of impoverished Zimbabwe, most Zimbabweans thought theirs was set to be a different story especially after close to three decades under strongman Robert Mugabe.
      Mnangagwa was the vice president of Zimbabwe before he fell out of favor with his boss and using the army to oust the man he had served for more than 20 years. To some of the Zimbabweans, and to the rest of the world, the crocodile was no different from Mugabe. He was a branch of the same tree.
      For years, Uncle Bob was not a darling of the West. To the West, he an enemy, a tyrant and butcher of Western policies. Uncle Bob always turned East whenever heeded financial support. He found darling in China and Cemented what came to be known as Zimbabwe’s “Look East” Policy.
      Zimbabwe has always looked up to China for years. The Chinese presence in Zimbabwe cannot be disputed with China taking part in almost every infrastructural project. China is also constructing the main parliament of Zimbabwe, and taking part in the printing of the currency.
      It is said that Zimbabwe has taken so many loans from China that it will take centuries for the country to pay back in full. Apparently, even if China took over all the sectors in Zimbabwe, the debt cannot be cleared even for years.
      In recent months, President Emmerson Mnangagwa seems to have angered his creditor, President Xi Jinping of China, after for the first time he broke the “Look East” Policy and looked West. Mnangagwa has been engaging Western nations in salvaging his nation’s economy which is now ailing with inflation ballooning by more than 200 percent.
      According to Spotlight Zimbabwe, China wants the crocodile to either resign or retire from office and hand over power to his Vice President Rtd General Constantino Chimwenga. The paper says, if Mnangagwa will fail to do what China wants, he will have to deal with “unspecified political action from Beijing.”
      If the contents of the paper are something to move along with, Zimbabwe is likely to witness yet another political drama that will see Mnangagwa and his Vice President face-off with Chimwenga having the support of Beijing. It is alleged that Beijing made the announcement while Chimwenga was in China for “official duties.”
      It is said that China was behind Mnangagwa’s promotion to the office of Vice President in 2014 after Xi Jingping lobbied Mugabe to promote him. In other words, Beijing was preparing Mnangagwa to take over from Mugabe for they believed that he was better placed to sustain the “Look East” Policy.
      Beijing believed that Mnangagwa was better placed to protect China’s enormous economic and investment interests in Zimbabwe. But the man seems to have let them down by ”cunningly turning to the West” during the night and “East” during the day.
      The Swahili say lisemwalo lipo na kama halipo basi laja (what’s bound to happen will definitely happen) and other African countries should prepare if what is set to happen in Zimbabwe will turn out to be true. There were rumors that China was planning to take over the Port of Mombasa (Kenya) after Nairobi failed to honor the payment schedule for a loan that the country took from China.
      Kenya’s public debt now stands at 6.5 trillion shillings with a huge percentage of it coming from China. The terms of the loans taken from China have never been made public and there are fears that a time is coming when China will claim to have the whole of Kenya to pay itself back.

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    MUNYENGE 2 days ago

    Unless you are blind and cant see the development that these monies are bringing into the country. Open your eyes and don’t let HH blind you from seeing the good things that the PF is doing. ECL is doing an incredible job and its for this reason that the people of Zambia have decided to give him another five year mandate to rule come 2021.Long live ECL!!!!

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      Respond to what EXX Africa report is saying about zambia’s debt. Its HH who wrote the report you idiot.

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    Sarah 2 days ago

    As the saying goes: there are no free lunches. PF thought loans without Western conditions would give them ample opportunity to steal without consequences. They are learning that the Chinese are no joke.

    Zambia will be suffering for generations because of stupidity like this: “…$107 million loan from Italian bank Intesa Sanpaolo to buy two military transport aircraft from Italian aerospace company Leonardo”. What the hell? Why does Zambia need military airplanes at this price? This kind of nonsense was discussed in parliament?

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      I can c some idiots can’t see what is wrong with the PF. That’s y we can’t develop…..

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        Sarah 1 day ago

        The biggest idiot and paid PF vuvuzela Munyenge (above) is all the proof you ever need to verify your statement.