Rachel Savage & Leigh Thomas

LONDON/PARIS, (Reuters) – China’s inexperience with complex debt restructurings, and the slow coordination between its public lenders, is hindering debt relief for Zambia. This case, which was a major emerging market creditor test case, came from three people familiar with the situation.

In 2020, Zambia was the first to go bankrupt in the COVID-19 era. It had a 120% debt load. The country had $17 billion in external debt at 2021’s end, with a third owed by China.

China and France agreed to jointly co-chair Zambia’s official creditor panel. This was welcomed by the government of Zambia, which made debt reduction a top priority after taking office last year.

Investors from emerging markets and countries with debtors are watching closely Zambia’s case to see if there is any indication of Beijing’s future leniency towards overextended borrowers.

Boston University researchers found that China was the leading public lender of African countries over the last decade. They have extended $160 Billion in credit to African nations since 2000.

A French official said that China has a learning curve and should be recognized. He declined to name the person due to sensitive issues.

Another reason was “delays in China’s internal processes”, which the official added, “We also need better coordination between China and itself because there are many agencies that lend to China.”

The creditor committee has yet to meet, so the G7 finance ministers urged China to contribute constructively to debt relief after meeting with German officials this month.

China’s foreign ministry stated in a statement emailed directly to Reuters that China attaches great importance to Zambian debt issues and supports multilateral solutions to the problem.

‘COSTLY PRECEDENT’

A source close to the matter said that, while China’s central banks were willing to go ahead with their plans, the finance ministry was wary about “setting a costly precedent” elsewhere in case it takes large losses on loans given to Zambia.

According to the source, China’s finance ministry is particularly interested in China’s development banks. These are where much of Chinese credit can be extended.

An unnamed third source said that China is hesitant about participating in multilateral negotiations to resolve its debts. This would be more beneficial than bilateral negotiations, which could allow it to focus on larger strategic objectives.

China’s foreign minister did not answer specific questions regarding whether delay were due to problems in internal coordination or unwillingness to take losses on loans.

The case of Zambia is expected to be closely monitored in other countries. Sri Lanka for instance, has defaulted on its loans for the first time in this month. It owes money, among others, to several creditors such as China, India, Japan, and Eurobond holders.

The International Monetary Fund reached December a staff level agreement with Zambia on an extended credit facility of $1.4 billion. However, the money can’t flow until Lusaka (and its creditors) agree to reduce the debt to sustainable levels.

According to the Chinese foreign ministry, “China is open to working with international communities and continuing to support Zambia in any capacity necessary to resolve its present practical difficulties.”

According to analysts, the timeframe that Zambia’s Finance Minister has set for the negotiation is ambitious. He stated several times that he hoped it would be done by June.

Responding to questions regarding China’s participation in the debt crisis, Zambia’s finance minister stated in an emailed statement that the “our debt burden is hampering our country’s growth potential” and called for debt restructuring.