Tuesday, September 28, 2021

Zambia's Chinese Debt in the Pandemic Era

Figure 1: Chinese loans, copper prices, and Zambian elections


In August 2021 a new president, Hakainde Hichilema, took office in Zambia, facing a debt burden that had never been fully transparent to Zambia’s public and the world. 

In two CARI papers released today, we shed light on Zambia's Chinese debt dilemmas. 

In CARI Briefing Paper 05/2021, "Zambia's Chinese Debt in the Pandemic Era," Yinxuan Wang and I use CARI data and research on loan disbursements and repayments to estimate Zambia’s outstanding external public debt to all Chinese financiers, official and commercial: approximately US$6.6 billion. This figure is more than double that of the most commonly cited figure for Chinese debt in Zambia (US$3 billion). 

  • 18 major and minor Chinese financiers have provided external loans to Zambia and its state-owned enterprises since 2000, the highest number of any country in our data
  • Loan commitments by Chinese financiers between 2000 and 2020 totaled US$10.3 billion, with 63 percent (US$6.47 billion) committed just since 2015 (Figure 1)
  • Based on project implementation status, we estimate that US$7.8 billion was disbursed by August 2021. 
  • Contracted but undisbursed Chinese loans as of August 2021 amounted to US$2.5 billion, around 13 percent of 2020 GDP.
  • We calculate that Zambia and its state-owned enterprises have repaid at least US$1.2 billion to Chinese lenders since 2000. 

Our estimate should not be interpreted as evidence that Zambia’s total public external and publicly-guaranteed debt as of December 2020 was significantly higher than Zambia has previously reported ($14.3 billion). These Chinese debt figures can largely be accounted for in aggregate figures published by Zambia’s Ministry of Finance's Annual Economic Reports and the new "Government Debt Portfolio Review."  For example, Chinese creditors are likely buried in the "other creditors" category of US$4.0 billion in external debt in the end-2020 central government debt report and in the US$527 million of government guaranteed debt owed by ZESCO.  It does mean that the Lungu government was not transparent about the heavy weight of Chinese financiers among its many external creditors. 

As there are many rumors about Chinese “debt traps,” it is important to emphasize that Zambia is an outlier when it comes to the weight of Chinese loans (Figure 3). We estimate that Zambia’s loan commitments to all Chinese creditors at the end of 2019 was close to 43 percent of 2019’s gross national income (GNI). The average for Africa was 10 percent (all data refers to the African continent). Figure 2, based on World Bank data for GNI and external PPG debt, and CARI data on Chinese loan commitments shows how Zambia, Djibouti, Angola, and the Republic of Congo stand out.

Figure 2: Chinese loan commitments as % of 2019 GNI vs External Debt Stock as % of GNI

In a second paper, CARI Working Paper No. 51, "How China and Zambia Co-Created a Debt 'Tragedy of the Commons'," I analyze how Chinese creditors, contractors, and Zambian stakeholders failed to take steps to make Zambia's borrowing sustainable. Curious why Zambia was a clear outlier (Figure 2), I explored the system for project development and loan approval in Zambia and China. 

My argument holds that principle-agent problems, including information asymmetries, the tragedy of the commons, and moral hazard, explain the Zambian case. In particular, Zambia has the largest number (18) of separate Chinese lenders of all the African countries in our data, and the second largest number of separate Chinese contractors (29). It also is the African country with the largest amount of Chinese interest-free loan debt write-offs, and the country with the highest number of separate debt cancellations.

Figure 3: Zambia: Chinese contractors' annual revenues
and Chinese lenders' annual loan commitments

This large number of stakeholders competing for business in the "pond" of public resources created Zambia's unsustainable debt. Figure 3 shows the relationship between contract revenues in Zambia and loans. A dip in contract revenues after 2013 was followed by significant new lending in 2016 and 2017, and contract revenues rose again.

Given the complicated situation with at least 18 Chinese lenders having provided external loan funding to the Zambian government and its state-owned firms, reaching consensus on burden-sharing in the Common Framework is likely to prove exceptionally difficult. 

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