The last two months have been busy for Situmbeko Musokotwane, Zambia’s finance minister. He has finally secured a zero-interest loan of $1.3 billion with a grace period of five-and-a-half years, and a final maturity of 10 years, from the IMF. The loan was buttressed by a series of prior discussions by Zambia’s creditors that for the first time included China, which accounts for roughly 30 percent of Zambia’s debt – similar to (non-Chinese) private creditors.
But is this really a good deal? And what does the IMF deal portend for other low- and middle-income countries classified as facing “debt distress,” including with regards to finance from China?
Looking at the details of the IMF report released to set out the terms and conditions of the deal, as well as recent announcements by Zambia’s Ministry of Finance and National Planning, there are two key aspects of Zambia’s agreement with the IMF to understand.
First, Zambia will shift its spending priorities from investment in public infrastructure – typically financed by Chinese stakeholders – to recurrent expenditures.
Specifically, Zambia has announced it will totally cancel 12 planned projects, half of which were due to be financed by China EXIM Bank, alongside one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital. The government has also cancelled 20 undistributed loan balances – some of which were for the new projects but others for existing projects. While such cancellations are not unusual on Zambia’s part (similar announcements were made in 2018, for instance), Chinese partners account for the main bulk of these loans. Ten of the cancelled loans are from China EXIM Bank, saving Zambia $1.1 billion over the next few years, alongside three other Chinese loans cancelled from ICBC ($303 million) and one from Jiangxi Bank ($157 million). The remaining six undistributed loan balances come predominately from commercial lenders, equating to $483 million.
While some of these cancellations may have been initiated by Chinese lenders themselves, especially those in arrears, Zambia may not have needed to cancel so many projects. Since 2000, China has cancelled more of Zambia’s bilateral debt than any sovereign creditor, standing at $259 million to date.
Nevertheless, the IMF team justified the shift because they – and presumably Zambia’s government – believe that spending on public infrastructure in Zambia has not returned sufficient economic growth or fiscal revenues. However, no evidence is presented for this in the IMF’s report, and in general the evidence for such a statement is thin.
Indeed, there is significant academic literature on how infrastructure investment can contribute to economic growth directly, and indirectly by increasing productivity through scale and network effects, and at the micro level by improving access to markets, cutting operating costs, and so on. Recent analysis from the Asian Infrastructure Investment Bank also explained how better infrastructure is associated with lower trade deficits.
The fact is, 77 percent of Zambia’s population do not have access to clean drinking water, 60 percent do not have access to electricity, and 46 percent do not have access to the internet. Road infrastructure in the country would have to improve by 234 percent just to reach the same levels as China. The negative impact of (at best) postponing investments in these gaps cannot be understated.
Yet, the IMF’s deal encourages and locks Zambia into not just cutting investment spending but replacing it with recurrent spending. Zambia will continue to spend on salaries while cutting fuel and agriculture subsidies, which could mean increased prices for citizens. This type of austerity measure isn’t surprising; it is in line with the Oxfam finding that 13 out of the 15 IMF programs negotiated in 2021 required austerity measures. The IMF simultaneously suggests targeted social spending programs in Zambia will protect the poor. However, with an estimated 60 percent of Zambia’s population under the poverty line, it seems unlikely that social spending programs can be large or efficient enough to reach such a large proportion of the population. Indeed, evidence from China suggests “targeting” through social protection is best introduced at a later (lower) stage of a poverty reduction strategy.
The second aspect of the Zambia-IMF deal to understand, related to the first, is that China will likely take a back seat as a development partner. The IMF’s deal allows for 62 concessional loan projects to continue from 12 different lenders, most of which are administered by multilateral institutions and again involve recurrent expenditure – rather than infrastructure-focused projects. For example, the government will continue with 22 World Bank projects, the majority of which focus on social programs. The African Development Bank comes second, with 16 projects still running, with a mix of both social and infrastructure initiatives. The Zambian government will only pursue two Chinese-funded projects on water and sanitation and roads through the African Growing Together Fund (a fund co-financed by China and the African Development Bank).
Instead, Zambia’s government has suggested it will rely on its Public Private Partnerships (PPPs) policy to maintain Chinese engagement. Zambia’s PPP policy had seen some projects such as the previously Chinese loan-based 750MW Kafue Gorge Hydroelectric power station eventually move ahead with Chinese investment instead. However, the IMF deal also suggests this policy will be revised, causing much uncertainty. Furthermore, Chinese organizations are typically fairly reluctant when it comes to PPPs as they require more understanding of the local environment. On the other hand, loans from China EXIM Bank in particular typically comes with lower interest rates and longer maturities compared with Chinese and non-Chinese commercial lenders and in some cases even the multilaterals, especially for middle-income countries. Thus, it’s not clear this shift in strategy will be an ultimate win for Zambia.
So what should other African countries still reviewing their G-20 debt programs, such as Ethiopia and Chad, or others considering an IMF bailout, such as Ghana, learn from Zambia?
First, the Zambia deal reinforces the need for urgent reform of the international financial system. While Zambia may be content for now to stop financing infrastructure, others may disagree that this is the best approach for their long-term development. The case needs to be made within the IMF that alternatives to austerity exist, with a focus on encouraging countries to create assets through their spending and enabling debt and risk thresholds that account for this need. Other countries may also aim to secure more cheap, concessional finance with more favorable terms than Zambia has secured from the IMF.
Second, Zambia’s deal suggests that debtor countries should coordinate with each other to get better deals from all lenders. Zambia’s government seems to be comfortable with the IMF’s policy suggestions, and the country seems to have gotten what it requested from China – a cut in projects, creating fiscal space, with potential to shift to PPPs if Chinese companies remain interested in the country. However, Zambia could have taken a different strategy and argued for expected future growth from maintaining Chinese-funded public infrastructure projects, increasing domestic revenue through this growth as well as corporate and investment taxes, while managing or cutting various types of recurrent expenditure. It will be useful to other borrowers to understand why Zambia did not go down this route, to share experiences and discuss different strategies for debt sustainability.
As the first African country to negotiate a post-COVID-19 bailout from the IMF, under the G-20 framework with China, the Zambian deal looks concerning for other African borrowers, including with regards to maintaining finance from China. Zambia is having to choose between paying loans and addressing major development gaps and delivering poverty reduction – despite only facing a debt to GDP level under half its historic peak in the early 1990s. With or without China, it’s not Zambia that needs reform – it’s the international financial system.