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International relations

African nations stare at defaults as debt to China swells

Zambia accused of putting Beijing first in deferment talks with creditors

CAIRO/BEIJING -- Zambia sits on the brink of Africa's first sovereign default since the coronavirus outbreak, amid accusations from commercial creditors that the country is prioritizing servicing its ballooning debt to China.

Zambia failed to make an interest payment on $42.5 million in dollar-denominated debt due Oct. 14, citing "liquidity difficulties compounded by the impact of the COVID-19 pandemic." Though there is a one-month grace period, the government is headed for an official default on Nov. 13 unless it can reach an accord with lenders, many of whom have refused to engage.

The debt owed to China by copper-rich Zambia and other African countries has skyrocketed in recent years under Beijing's Belt and Road infrastructure initiative. As default risks mount due to the pandemic, the Group of 20 rich nations have tried to ease the debt burden, but China has faced criticism that it has been slow to offer relief.

Zambia's direct external debt totaled $12 billion at the end of June, according to its finance ministry. World Bank data shows $3.4 billion in debt to China, more than double the level at the end of 2015. Zambia has not revealed the terms of its debt to China, frustrating other creditors. 

The finance ministry in September asked private-sector creditors for a six-month deferment until next April. But a consortium accounting for 40% of Zambia's outstanding foreign-currency bonds refused to grant the reprieve. 

They "were concerned that we were not treating all creditors equally," Finance Minister Bwalya Ng'andu said last month.

The ministry announced an agreement last week with the China Development Bank, a major state-owned Belt and Road lender, to defer debt payments, likely in hopes of winning concessions from other creditors.

Though the coronavirus is the direct cause of Zambia's funding crunch, there have been concerns about the country's finances for some time. With an economy heavily reliant on copper exports, the government has aggressively pushed infrastructure projects. The weakening of Zambia's currency has caused the value of its dollar-denominated debt to swell, deepening Lusaka's dependence on Chinese funding.

Other African nations, including Kenya and Djibouti, have also seen their debt to China more than double in the four years through 2019, with Angola not far behind with an 80% increase.

Western countries are "reluctant to offer concessions for fear that released resources will simply be transferred to Beijing," Ghanaian Finance Minister Ken Ofori-Atta wrote in an opinion piece for the Financial Times.

Beijing has come under fire by Western countries for piling debt on developing nations in Asia and Africa with massive infrastructure projects. Total investment under the Belt and Road initiative swelled fourfold in just two years to $4.2 billion as of the second quarter of 2020, according to Refinitiv.

Western critics accuse China of using "debt traps" -- loaning large amounts of money to poor countries and, when they are unable to pay it back, seizing assets such as natural resources or ports. Sri Lanka's signing of a 99-year lease with China on the port of Hambantota in 2017 is a frequently cited example.

China has bristled at the suggestion that it is responsible for these countries' economic woes, arguing that developing nations had high debt-to-gross domestic product ratios in the first place.

"China-assisted infrastructure hasn't led the country into a debt trap," Foreign Ministry spokesperson Hua Chunying tweeted Friday about Sri Lanka.

The Group of 20 nations have rolled out a program to freeze debt service for the poorest countries over the economic strain caused by the coronavirus pandemic, but China has been criticized for being slow to get on board.

Official Chinese lenders have "expanded their portfolios dramatically and are not fully participating in the debt rescheduling processes that were developed to soften previous waves of debt," World Bank President David Malpass said in an early October speech.

Zambia owed 29% of its external debt to China at the end of last year, up 7 percentage points from four years earlier. In Angola, China's share of external debt rose to 43% from 32%.

Chinese loans tend to carry higher interest rates than other sources of financing, at 3%-plus compared with the 1% or so offered by the International Monetary Fund and the World Bank, adding to the burden on countries that rely on Beijing for funding.

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