Yesterday, I posted a video of the IMF MD Kristalina Goergieva congratulating President HH and Zambia on being a good example in reference to debt restructuring. Under the comments, I noted several remarks from people that confessed not knowing what exactly this restructuring meant and why it was important (or indeed not important, for critics).
I have put down what I have come to understand about this process and some of the benefits and indeed potential dangers for Zambians. Please note, I am not an economist and the knowledge I share is based on the basic understanding I have of this subject by talking to different experts and reading up on what has been said about such a process.
As you may be aware, Zambia, like many other developing countries, has faced significant challenges in managing its national debt. With limited resources, our country has struggled to meet its debt obligations, resulting in a growing burden that hampers economic growth and development. In this context, debt restructuring emerges as a crucial tool for Zambia to regain financial stability, foster sustainable growth, and safeguard the well-being of its citizens.
So then, you’ve been asking what really debt restructuring is. Well, this is a process that allows us as a country to negotiate with our creditors and in turn be able to modify the terms and conditions of the existing debt agreements between us and and our creditors. This new deal aims to alleviate the financial strain by providing Zambia with relief measures such as extended repayment periods, lower interest rates, or even partial debt forgiveness. By renegotiating the debt terms, we gain breathing space to stabilize the economy, implement reforms, and pursue long-term growth.
Now, as you already know, high levels of debt have impeded Zambia’s ability to invest in essential sectors such as healthcare, education, infrastructure, and social welfare. This debt restructuring allows us to free up resources that would otherwise be dedicated to servicing debt, enabling the government to redirect funds towards vital sectors and stimulate economic growth.
Further than that, this restructuring that we keep talking about helps Zambia achieve fiscal sustainability by aligning debt repayment obligations with the country’s economic capabilities. By negotiating more favorable terms, such as longer repayment periods and reduced interest rates, the burden of debt servicing becomes more manageable, reducing the risk of default and preserving the government’s creditworthiness. As things stand, you may know that Zambia has defaulted and this puts us in very negative standing internationally.
A successful debt restructuring program has the potential to enhance our reputation as a country and will improve our credibility in the eyes of international investors. By demonstrating a commitment to resolving these debt issues, Zambia becomes a more attractive destination for foreign direct investment. You may need to know that increased FDI can inject capital into the economy, promote job creation, and facilitate technology transfer, fostering sustainable development in the long run.
For those in support of this process, it is viewed as a crucial opportunity for Zambia to address its debt challenges and set the stage for sustainable economic development.
Those against restructuring argue that it often leads to credit rating downgrades and is most likely to be the case for Zambia. This will effectively make it more difficult and expensive for us to borrow money in the future. After debt restructuring, we may face limited access to international capital markets. Lenders may be hesitant to provide new loans or investments due to the perceived risk associated with the restructuring.
While it has the potential to boost FDI which I earlier talked about, it can equally erode investor confidence in our ability to manage our finances effectively. This can potentially lead to a decrease in foreign direct investment and economic growth prospects.
In the long run, critics argue that this process is going to require diverting funds from social and developmental programs to service debt obligations. This will have long-term negative consequences for the country’s development and the well-being of the people.
All of these concerns are dependent on what President HH and his team have negotiated as terms.
By Dingindaba Jonah Buyoya