Zambia could not pay an overdue Eurobond after the grace period elapsed on Friday, making it the first African nation to default on sovereign debt since the onset of the pandemic.
The Zambian government had asked its $3 billion bondholders for six month payment deferral as the nation is reeling from the pandemic coupled with a depressed economy but the creditors have turned down the request, citing a lack of transparency and communication.
The government had skipped a $42.5 million coupon on Oct. 14 and was given a 30 days grace period to pay the arrears or default which could leave the country shut out of debt markets for years.
The finance ministry in response to this said its only option is to accumulate arrears.
“They will not support the standstill or consent to solicitation and, given our precarious position that requires us to treat all creditors equally, we have no other alternative but to accumulate arrears,” finance minister Bwalya Ng’andu said.
Even before the coronavirus pandemic caused a global economic slowdown, Zambia debt problem started years earlier.
Zambia had an external debt stock of $4.8bn, or 18% of GDP, by the end of 2014. As at 2019, it had more than doubled to to $11.2bn, or 48% of GDP, data from Lusaka shows.
The International Monetary Fund has predicted that the country’s debt stock will surge to nearly 70 percent by the end of 2020.
Zambia’s dollar bonds traded around half a cent on the dollar higher on Friday, giving up some of their earlier gains and changing hands at 44 to 46 cents on the dollar, according to Tradeweb data.
The Eurobonds are not the country’s only debt, with it owing about $3.5bn in bilateral debt, $2.1bn to multilateral and $2.9bn to other commercial lenders. It owes about $3bn to China and Chinese entities.
“We remain committed to finding a consensual and collaborative resolution to debt sustainability issues,” the finance ministry said in an emailed statement after the bondholder’s meetings. “
Zambia is not alone in struggling with its debts. Many other African countries have been identified by the IMF and the World Bank as having a high risk of “debt distress” which can lead to default.
Many poor nations seeking debt relief are watching the happenings in Zambia keenly as a test case for how borrowers and creditors might navigate the crisis.