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China and other creditors have reached an agreement to restructure multi-billion dollar loans to Zambia.
The deal ends a long impasse over the South African country’s 2020 default, which has exposed a rift between Beijing and western lenders over how to resolve a spate of debt crises in the developing world.
Zambia’s President Hakainde Hichilema, French President Emmanuel Macron and China’s Premier Li Qiang were scheduled to meet Thursday at the global finance and climate summit in Paris to mark the deal, nearly three years after Zambia’s default.
Africa’s second-largest copper producer found itself in financial limbo, unable to gain further access to a $1.3 billion IMF bailout package, while China, the country’s biggest creditor, and other lenders fought for months over a proposal that the Value of nearly $ 13 billion to reduce the total foreign debt by about half.
As part of the breakthrough, China-led bilateral lenders have agreed to rearrange payments and extend the maturities of $6.3 billion in loans. This paves the way for Zambia to resume IMF financing and to restructure another US$6.8 billion in private debt.
“Today we can say that there is agreement on the outline of a debt restructuring,” said a French official. “We have come to the end of the negotiations that started months ago.”
The deal is a diplomatic victory for Macron at the high-profile summit that has brought together world leaders to discuss credit system reforms between richer and poorer countries.
The Zambia deal will also raise hopes for other countries like Ghana and Ethiopia. They are in similar talks to restructure debts funded primarily by loans from China, which has emerged as the developing world’s largest lender over the past decade.
China has been reluctant to accept direct write-offs of foreign loans by its banks and, in the case of Zambia, had proposed to multilateral development lenders such as the World Bank take the unprecedented step of participating in the restructuring.
Under the Zambian agreement, bilateral creditors pledge to extend their loans by more than 20 years and allow a three-year grace period for interest payments.
A banker involved in the negotiations said a deal among official creditors is “real progress”, although the full restructuring of Zambia’s external debt still requires a deal with private creditors, such as the holders of the country’s $3 billion Eurobonds , would require.
A debt investor involved in the talks said development banks would be more likely to provide concessional lending than debt write-offs to bring about a deal.
Concerned about domestic financial stability, Zambia has excluded its local currency debt from the restructuring, including foreign holdings of that debt. Some believers say the latter should be included. Others felt that current targets for enabling debt relief, such as the debt-to-exports ratio, were too pessimistic.
The investor said foreign buyers of Zambia’s domestic government debt appear to have reduced their holdings from $3.2 billion to less than $2 billion since late last year, fearing that domestic loans like those in Ghana and Sri Lanka in restructuring could be included.
The Lusaka Treasury said last October that servicing these holdings would absorb about 80 percent of the money available to pay down foreign debt. A drastic reduction in foreign holdings of domestic debt would free up more money for other creditors, including China, the investor said.
Eswar Prasad, professor of economics at Cornell University, said: “For China, the endgame appears to be a solution that will limit its financial losses while spreading the blame for the onerous and unsustainable situation faced by many heavily indebted economies distributed.”