Discover more from Satoshi
Is Zambia an emerging case study of debt-trap diplomacy?
Kitwe, Copperbelt Province, ZAMBIA
A Chinese supervisor in an underground pumping station at the NFCA's (Non-Ferrous Company Africa) Chambishi Copper Mine in Kitwe, Zambia. The NFCA is a Chinese owned company that operates several mines across Zambia’s Copperbelt.
— Photography by Sven Torfinn (2013); ‘Mining for Mao’
What is debt-trap diplomacy?
The term ‘debt-trap diplomacy’ refers to the practice of one country (the creditor) lending excessively to another country (the debtor), typically for the construction of critical infrastructure such as roads, railways, and energy projects. The infrastructure itself acts as the ‘collateral asset’ backing the loan, meaning that if the debtor country (the borrower) fails to pay back the loan, the creditor country (the lender) can seize control of the infrastructure project. In the process, the creditor country seeks to gain ownership of a strategic resource (be it a port, road, or railway), which is potentially much more valuable than an immediate financial return.
Many have argued that China’s Belt and Road Initiative is a prime example of debt-trap diplomacy. In 2018 President Xi Jinping pledged US$60 billion in support for infrastructure projects across Africa, but at what cost? The conditions attached to loans extended to African nations are often shielded from public scrutiny, and the most recent paper published by the Chinese Communist Party detailing foreign aid initiatives appears to be from 2014. Meanwhile, public debt burdens across Africa have been rising sharply since the mid-2000s, in-part driven by borrowing from China.
By closely examining the emerging debt crisis in Zambia, we can begin to develop a more detailed picture of the diplomatic relationship between China and several African nations in an era of rapid development, paired with crippling debt.
Lungu’s looming crisis
Debt sustainability issues began to emerge in Zambia not long after the 2011 general election, in which the opposition party, Patriotic Front, defeated the incumbent Movement for Multi-Party Democracy. When the Patriotic Front came into office in 2011, public debt totalled US$1.9 billion, equating to just 8.4% of GDP, well below the global average for developing countries. Led by President Michael Sata (2011 - 2014) and subsequently Edgar Lungu (2014 - present), the Patriotic Front almost immediately began borrowing heavily. By 2018 public debt reached US$9.9 billion, a 5-fold increase from 2011, equating to 88% of GDP according to the World Bank.
Borrowing has not slowed since, in fact it is gaining pace. In 2019, Lungu’s government ran up a budget deficit of 9% of GDP, a larger deficit than 2018, according to Fitch Ratings (a credit rating agency). Today, the largest government expense is paying down interest on existing debt, seriously hampering the Patriotic Front’s ability to pay for basic services for the people of Zambia.
The coronavirus pandemic has further accelerated Zambia’s economic crisis. In a national broadcast on April 24th 2020, President Lungu asked the country the following question: “Where will we find money to pay salaries for our public service employees?”
“Public debt” is defined as borrowings owed by the national government of Zambia, public corporations, state-owned enterprises, political sub-divisions, and private debtors if the loan is guaranteed for repayment by a public entity.
Please note that these figures rely on official reporting by the Zambian Ministry of Finance, which some argue understates debt levels.
— Data Source: World Bank (explore the data here)
Zambia, built by Beijing
— Photography by Sven Torfinn (2013); ‘Mining for Mao’
“Rock falls are the most frequent of the severe problems. They are at times fatal, or result in crushed bones”, says a nurse at Sino-Zam Friendship Hospital in an interview with Human Rights Watch. The hospital is located in the heart of Zambia’s Copperbelt Province, where local mine workers at multiple Chinese-owned copper mines receive medical care.
The humanitarian impact of Chinese owned copper mines in Zambia has been well documented, however the consequence of Chinese infrastructure investment on Zambia’s public debt levels is often overlooked.
So, how much debt does Zambia actually owe to China? It turns out that question is difficult to answer. Many of the loans are organised between specific Zambian government agencies and The Export-Import Bank of China; they are not necessarily reported by the Zambian Ministry of Finance. A comprehensive analysis is provided by the China-Africa Research Institute, an ongoing project by researchers at John Hopkins University. Their analysis finds that from 2016 to 2018 alone, China issued 30 loans to the Zambian government or state-backed enterprises, totalling US$5.7 billion (explore the data here). If this figure is correct, Chinese loans may account for 50% of Zambia’s outstanding public debt, an incredibly large figure.
Putting aside the sheer magnitude of Zambia’s debt burden, the rapid pace of infrastructure development is remarkable. For instance, construction of the Kafue Gorge Lower Power Station, scheduled to be completed this year, will increase Zambia’s electricity supply by an estimated 20%. The project is funded by a US$1.7 billion loan from the Export-Import Bank of China.
Another notable project is the Mongu-Kalabo Highway, a 34 kilometre bridge across the Zambezi flood-plane that provides a critical road link between Zambia and Angola. This US$300 million project was completed in 2016 by PowerChina, a Chinese state-owned contractor.
The fear with these immense infrastructure projects is that they may result in China taking control of critical state resources, if debts are not repaid. This fear is justified, but often overstated; contrary to sensational media articles, China does not own Lusaka Airport (yet). The serious risk for the Zambian government is that many projects currently underway are structured as Build-Operate-Transfer (BOT) agreements. This means that a Chinese contractor (often a state-owned enterprise) builds the infrastructure and operates it until the debt is repaid (perhaps over a 20-year period). Following repayment, ownership of the project is transferred to the host government (Zambia). In the event that the host government cannot afford to repay the debt, it is entirely possible that the infrastructure ends up in the hands of private investors, or a foreign state (this occurred with Sri Lanka’s Hambantota Port in 2017).
Perhaps debt relief is just a phone call away. President Lungu released an official statement in March detailing a private phone call with President Xi Jinping, in which he asked the Chinese leader for “debt relief and cancellation”. Increasingly, it appears as though a direct deal with Chinese leadership is the only way out for Zambia. Whether history will view China’s influence in Zambia as aggressive debt-trap diplomacy or benevolent foreign aid will ultimately be determined by the generosity of Xi Jinping and the Politburo. The fate of the Zambian people lies in the hands of a foreign creditor. That in itself is a shame.
Half price Eurobonds…
A significant portion of Zambia’s debt has nothing to do with China, and is equally troubling. Since 2012, Lungu’s government has issued multiple ‘Eurobonds’ to public market investors, totalling US$3 billion dollars. These debt obligations actively trade on the London Stock Exchange, and fall due for repayment in specific portions between 2022 and 2027.
First, a quick primer on Eurobonds. A Eurobond is essentially a large loan (a ‘bond’) typically issued by a government or major company to investors, and it is denominated in a currency that is not the local currency of the country issuing the bond. Counterintuitively, Eurobonds do not necessarily have any direct association with Europe or the euro currency. For instance, Zambia’s Eurobonds were issued in US dollars (to be specific, a Eurobond priced in US dollars is referred to as a ‘Eurodollar bond’).
In September 2022, Zambia’s first Eurobond will ‘mature’, meaning that the US$750 million face value of the loan is due for repayment. Following that, in April 2024, Zambia’s second US$1 billion Eurobond falls due for repayment. Finally, Zambia’s third US$1.25 billion Eurobond must be paid back over three instalments in July of 2025, 2026, and 2027.
Investors are already ‘pricing in a default’ for Zambia’s first Eurobond maturing in 2022, meaning markets do not have confidence that Lungu’s Patriotic Front will be able to repay the money. As a result, Zambia’s debt trades at around 50 cents on the dollar. You can view global bond markets just like any other prediction market: investors (essentially professional gamblers) weigh the probability that the Zambian government will repay holders of its debt, and make trades with other market participants as their perception of the risk of default changes. Currently, investors believe the probability that the Zambian government will be able repay is about as a good as a coin flip. On the other hand, if you invest in a Zambian bond today and the government does repay, you can double your money in two years time! Zambia’s bonds are almost as ‘cheap’ as the debt of Venezuela, Turkey, or Lebanon (countries experiencing severe humanitarian crises and therefore have a high probability of defaulting on loans). This is because the price of the bond is inversely related to the probability of repayment; as countries veer towards economic collapse, the risk of defaulting on debt rises, and investors become less willing to hold on to it, causing the price of the debt to fall.
Defaulting on Eurobond debt will cause severe difficulties for future government administrations by cutting off access to international capital markets and damaging Zambia’s reputation. At this stage, alternative options are dwindling.
Is another debt jubilee Zambia’s only escape?
The World Economic Forum, 2005 (Davos). World leaders discuss solutions for debt relief in Africa. Pictured left to right — Bill Clinton, Bill Gates, Thabo Mbeki, Tony Blair, Bono, and Olusegun Obasanjo.
In 2005 the international community came together to cancel the developing world’s debt. None other than U2’s Bono graced the stage alongside world leaders at the World Economic Forum in Davos, and proclaimed that “the world spoke, and the politicians listened.” The Heavily Indebted Poor Countries Initiative resulted in a total of $100 billion in debt cancellation for 37 countries, 31 of them in Africa, including Zambia. The achievement was celebrated as a historic “debt jubilee”, allowing African nations the opportunity to prosper, unshackled from the chains of interest and principal.
Today, 15 years later, debt levels have well exceeded previous highs, and we find ourselves in an all too familiar predicament. The infrastructure projects that China is funding are critically important, but the magnitude of the debt is insurmountable. This is not a path towards sustainable development. With the world reeling from an unprecedented public health crisis, and $143 billion owed by African governments to Chinese lenders, we may soon face cascading sovereign insolvencies across Africa, with Zambia the first of many to come.
Unfortunately, I can offer no easy solutions, only questions.
Why must African nations, time and time again, succumb to the illustrious charm of the imperial purse?
Why is sustainable development so elusive in Africa, despite incredible progress across much of Asia?
Why do we continue to elect incompetent leaders more interested in self enrichment than collective enlightenment?
I hold on to an uncompromising faith that the answers we seek will reveal themselves just beyond the horizon. From the temples of Aksum in the Horn of Africa, to the far flung reaches of the Afro-diaspora; down the waterfalls of the Great Zambezi and across the plains of the Serengeti, freedom will flow. Our generation has the power to create the change that we so desperately need.
—Armah D. Blay