Way Forward on Debt and Default
By Hakainde Hichilema
The PF have delivered to the Zambian people a disaster that has tarnished the reputation of our country. We are the first African country to default in the COVID-19 era, following our failure to pay a $42.5 million coupon on the expiry of grace period on November 13, 2020. This reputation will unfortunately remain with us for decades to come.
As we had earlier advised on the need to avoid a default at all cost, the country now faces a real risk of holdout creditors taking legal action to seize our sovereign assets. There are reports already that some creditors have embarked on a process to determine a possible payout to holders of default insurance, which may trigger a chain of collection of payouts that could lead to the recall of the loans in full. Some banks are considering withdrawing confirmations of letters of credit issued to our business community, while other have suspended the global custody service and advised their clients to change future investment strategies for our country.
This basically means that our business entities shall now have to pay upfront for all our imports. Our access to cheap sovereign financing is severely diminished, and potential investors will now adopt a cautious approach to investing in our country. Simply put, the confidence in our economy, that was earned through the painful sacrifice of the majority of struggling Zambians, has been wiped out in a flash. We are staring at hard and long years of austerity, unless we as Zambians collectively decide to take away the responsibility to manage our economic affairs from the hands of this PF administration – the architects of this mess!!
While it is acknowledged by all, including local and international observers, that this crisis has its roots in the PF’s poor economic mismanagement, it is the ordinary Zambian who will have to pay the price. We all must therefore lend a hand in burying the hole the PF has dug us into. We therefore suggest the following steps that the PF administration must pursue to rebuild our credibility and creditworthiness, and to earn the trust of the global village, and above all restore our pride as a people.
First and foremost, we implore the PF leaders to ensure they always read from the same script. We can no longer afford situation where the Vice President assures creditors that there will be no default, and the country defaults within a few hours of issuing that statement. It reflects a lack of sincerity in handling this serious matter. Honesty is a virtue that should not be placed into doubt in any situation.
Second, we should pay the $42.5 million we defaulted on to unlock the support we need from the bondholders, as we embark on the more critical negotiations to restructure our debt.
Third, we must immediately engage the IMF and request for a staff programme, as a basis to embark on the journey to earn our credibility, creditworthiness, and a path to fully-fledged support. This will give the needed assurance to our creditors and potential investors of our commitment to a coherent recovery programme as we focus on rebuilding our creditworthiness.
Fourth, we have to come clean and be transparent about our country’s total debt exposure. The government must provide a full picture of our public external debt, domestic debt and private debt by quasi-government institutions that are not publicly guaranteed (including those contracted by companies now owned by ZCCM IH and IDC), arrears to suppliers of goods and services to the government and VAT refund exposure. The full disclosure must cover the terms on which the debt was contracted, for example, interest rates and maturity profiles. According to our constitution, this information should already have been in the public domain for the consumption of the citizens, who ultimately are the debtors. But that is not the PF way. We the people need to know the terms and application of the loans that we will have to pay through the taxes that we diligently contribute to the treasury.
Fifth, we have to scale up the engagement with all our creditors, especially the bondholders, who feel that the level of engagement has so far fallen short. This process must be handled with seriousness, transparency and honest yon the part of the PF government to demonstrate the expected seriousness and commitment to finding acceptable solutions.
Finally, we need to revise our 2021 budget as it is the tool through which the country manages its public finances. Our budget has significant gaps (refer to the statement by the UPND on the budget), and our creditors have expressed similar misgivings. The theme should be to cut all wasteful expenditures, such as slush funds, bogus expenditures on harmful and sub-standard goods and services, huge emoluments spent on politicians’ lifestyle, including the presidential jet. There will also be a need to reprioritize expenditures, by allocating freed-up resources towards growth enhancing expenditure lines.
We encourage the PF to learn from the experience of Argentina and Ecuador, which only a couple of months ago successfully restructured their debt, with the active engagement of the bondholders. We do note, however, that sound leadership is an important requirement under these circumstances and call on the PF to own up and do what is right to address the crisis facing our beloved Zambia. There is no time to waste.