Zambia, a landlocked country in southern Africa, had the spotlight last year for economic progress. Its local currency, the kwacha, had a splendid run against the dollar, and inflation fell. But it seems that tale is over as this year’s experience has been the opposite.

On November 22nd, Zambia’s central bank lifted its benchmark interest rate by the most in four years, hoping to curb inflation. The monetary policy committee raised the rate to 11% from 10% because inflation has now hit 12.6%. The central bank’s bid to support the currency also made it increase the reserve-ratio requirements for lenders for the second time in as many weeks. It will go up to 17% from 14.5%, effective November 27th.

The kwacha also reached a new low, trading at 23.345 against the dollar. The currency has plunged by more than a fifth this year because of dollar shortages, partly due to slumping output of copper, its primary foreign-exchange earner, lower metal prices and issues with debt talks.

Zambia’s quest to restructure its debt came to ruins after official creditors, led by China, forced the copper-rich African nation to suspend a deal of almost $4bn in dollar bonds. On November 20th, the finance ministry said that President Hakainde Hichilema’s government “currently does not have the support of [official creditors] and is unable to move forward at this time” on a deal with bondholders, derailing attempts by the country to move on from its years-long default.

The private bondholders said official sector creditors’ rejection of their deal also threatened the credibility of the G20 common framework, agreed during the pandemic to secure agreements on debt relief for poor countries.

Zambia, which started missing debt payments in 2020, reached a deal in October to push back repayment dates and cancel $700 million in interest that accrued after the default on bonds with an initial value of $3 billion.

Africa’s second-largest copper producer needs to agree with external creditors to keep getting money from IMF’s $1.3 billion bailout. The country needs it, especially now that its recovery is not going smoothly. But creditors have disagreed over how much debt it can conveniently pay in the next few years. Some creditors think the October deal was too generous to private sector bondholders. They had offered debt relief this year on $6.3bn of debt.

Beijing is Zambia’s biggest creditor, thanks to the several loans it has taken from Chinese banks over the last decade. Full terms of the official debt relief have not become public knowledge.

Zambia’s government thinks of the deal as “compatible with the objective of restoring debt sustainability” and said it met with “the principle of comparability of treatment”, a rule in sovereign debt restructuring that creditors should take roughly equal losses.

Their losses amounted to 39 per cent of the projected flows versus 41 per cent for the official sector in at least the first few years of a deal. In 2026, Zambia will be assessed on whether it can carry more debt which could trigger higher payments. In that scenario, bondholders would give up 18 per cent of the value of their debt, versus 13 per cent for the official creditors.

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