Is Zambia the Piece that will Break the International Financial Architecture?

Zambia’s debt restructuring deal, finally signed in October 2023, following nearly three years of talks between the sovereign and bondholders, was supposed to be a moment of relief and achievement; not just for the African nation, but also for the IMF, the World Bank and the G20 as champions of the Common Framework. However, now that the deal has been effectively vetoed by the official bilateral creditors, the viability of the Common Framework has been called into question, with potentially grave repercussions for Zambia and other low-income economies.

The Covid-19 pandemic placed enormous strain on developing economies. Policymakers responded by establishing a process to address the long-standing issue of treating sovereign debt problems in a coordinated manner, seeking to balance intercreditor issues among different creditor classes—particularly official bilateral and external private investors.  The Common Framework was established to coordinate all official bilateral creditors to make restructurings more efficient, establishing key parameters of the debt treatment and relief in a transparent way; ultimately helping nations in need. Chad, Ethiopia, Ghana and Zambia have all sought respite under the Common Framework, with Chad so far being the only success story.

However, the Common Framework is now facing an existential challenge. Intercreditor coordination has always been an obstacle in sovereign debt resolutions, in part due to the divergent lending motives that span developmental, geopolitical and commercial interests.

Hopes for speedy resolution for Zambia were high this summer when an agreement was reached between Zambia and the official creditors (co-chaired by China and France), which was then swiftly followed by Zambia announcing it had reached an agreement in principle with its bondholders.

Despite the Zambian government being afforded greater debt relief by bondholders, the official bilateral creditors committee has now blocked the bondholders’ deal, on the basis that they were being paid a greater proportion of their claim upfront.

A prerequisite of the Common Framework is having an IMF debt sustainability analysis that estimates what the country will be able to pay in the reasonable future through assessing future cash flows, which in turn is used to calculate the perimeter of the debt to be restructured and the level of relief required for regaining debt sustainability.  Comparability of treatment then requires that Zambia seek a treatment at least as favourable as the one reached with the official bilateral creditors.

As both the IMF and Zambia supported the bondholder deal, with Zambia having determined that it met the comparability of treatment conditions, the fact that the official bilateral creditors veto came as a surprise, is somewhat of an understatement.

Historically, official bilateral creditors represented by the Paris Club have never denied support based on comparability of treatment where the creditors have met the IMF’s debt parameters. This highlights an inherent flaw in the Common Framework.

Why should Zambia’s case be seen as so concerning? The lack of transparency and subjective application of debt rules has granted the official bilateral creditors a veto power, unilaterally requiring bondholders to provide greater debt relief than that deemed necessary by the IMF. This unhealthy dynamic turns official bilateral creditors into judges, challenging the role vested in the IMF as an independent arbiter and consequently pushing bondholders away—along with crucial capital inflows to emerging economies.

African governments’ access to global financial markets is vital to the continued development of their economies. The pool of capital foreign investors provide is substantially larger than that of developmental finance or multilateral resources. For a continent with such a young demographic, taking actions that would likely increase the cost of much-needed funding for business expansion or infrastructure investments as the engines of growth and job creation can be very costly.

The Common Framework as it currently stands—slow, uncomprehensive and with varying transparency standards—is unravelling. Zambia’s experience has underlined the Framework’s unreliability and political bias towards official bilateral creditors. Its demise directly impacts Ethiopia, Ghana, and Zambia and indirectly those that are trying to avoid the unavoidable by delaying seeking assistance due, as they are now put off by the experiences of others. Zambia may only mark the beginning of many more protracted, multi-year restructurings.

The crisis now facing emerging market economies is that sovereign lenders are able to push debtor countries into an uncertain void of economic limbo, affecting ailing economies and people’s daily lives.  This is a very dangerous game. The IMF needs to assert its role assisting countries facing chronic economic imbalances and, where debt is deemed unsustainable, provide guidance to expediate a restructuring process as intended, or for now, see the Common Framework crumble.

Rodrigo Olivares-Caminal is the Chair in Banking and Finance Law at Queen Mary University of London.