Zambian Government Fails to Reach Agreement with Bondholders on Debt Extension

President Edgar Lungu of Zambia (left) is welcomed by President Kagame to Rwanda in 2018. [Flickr]

Bondholders rejected a request by the Zambian government to delay interest payments on its debt this week in one of the most visible signs yet of economic uncertainty due to the COVID-19 pandemic. 

The Zambian government was forced to ask for an extension on $3 billion worth of bonds due to “a combination of declining revenues and increased unbudgeted costs caused by the COVID-19 pandemic.” Although the move was expected by bondholders after the government signaled its desire to restructure its debts in April, it was still a worrying sign. Bondholder Kevin Daly, who works for a firm holding Zambian debt, described the call for a 6-month freeze as “tantamount to default.”

This comes on the heels of an announcement by G7 finance ministers supporting the decision by the larger G20 to extend a suspension of debt payments by the world’s poorest governments. The original suspension, known as the G20 Debt Service Suspension Initiative (DSSI), was put in place in April 2020, just as the COVID-19 pandemic was beginning to take a significant toll on the global economy.

Some experts believe that this 6-month extension is insufficient and that the world’s poorest economies need more aggressive support. Iolanda Fresnillo, a policy expert who focuses on debt at civil society network Eurodad, has gone even further in advocating for debt cancellation. “By just postponing the payments,” she argues, “you are not solving the problems these countries are facing.” 

Even the G7 ministers themselves acknowledged that further restructuring will likely be necessary for many of these countries, and they have called on the larger G20 to establish guidelines to facilitate this process. 

Arguments for greater support are buoyed by the fact that the DSSI program has been less successful than initially hoped. Although it has thus far saved 43 countries nearly $5 billion in payments, it was initially projected to support a far more substantial $12 billion in savings globally.

There has also been some backlash within the G7 over the Chinese government’s efforts to limit their own participation in the DSSI. The program applies to public debt only, while China has made efforts to reclassify debt owned by its state-owned enterprises as commercial, rather than public, as a means of limiting the amount of support it must provide. 

A formal decision on the future of the DSSI is expected at the official G20 summit in November.