In 2021, the Zambian government spent more on debt servicing than the education, health, water and sanitation sectors combined. Debt servicing accounted for 39% of national budget at the time. As a result, Zambia applied to the G20’s Common Framework to restructure its debt. Yet, three years later, the country’s debt restructuring – and therefore wider economic development - remains in limbo. This lack of progress has hampered the country’s ability to invest in its own development and provide public services for its people. Zambia’s president, Hakainde Hichilema, warned this economic turmoil is a threat to Zambian democracy.
Zambia’s government creditors reached a restructuring deal in October 2023, providing hope that this prolonged debt relief process may be coming to an end. However, an agreement on comparable terms could not be reached with Zambia’s private creditors – who hold 42% of the country’s debt. The recent setback in Zambia's efforts to restructure its debt with private creditors highlighted a significant gap in the international financial system's ability to address debt crises in low-income countries. The government indicated that its bilateral creditors have blocked Zambia's agreement with its bondholders, arguing that it fails to offer sufficient debt relief.
The UK Government can help fix this broken system and prevent more countries ending up in limbo like Zambia. Given that a substantial portion of sovereign debt to private creditors is held under English law, the UK is uniquely positioned to take action on the global debt crisis. This is crucial given almost half of humanity now live in a country that spends more on interest payments than health or education.
The UK Government's International Development White Paper, while a step forward in many respects, unfortunately missed an opportunity to offer a bold vision for resolving the debt crisis. The White Paper was notably silent on exploring legislative options that would make it more difficult for private creditors not to provide debt relief on terms comparable to official creditors.
The UK can build on past leadership in this area given the UK introduced similar legislation in 2010. This legislation was notably made permanent under the guidance of Minister Mitchell as Secretary of State for International Development. The UK once again has a golden opportunity to explore legislation to compel private creditors to participate in debt relief efforts under conditions equivalent to those applied to official creditors. Such legislative actions could be key in addressing the debt crisis faced by countries like Zambia, freeing up more money for children living in some of the world’s toughest places at a low cost to the government purse.
ZAMBIA’S DEBT SITUATION
Zambia has faced significant challenges in debt restructuring since 2020, being the first country to default on its debt amid the pandemic. A substantial portion of Zambia's debt, 42%, is owed to Western private creditors, including major companies like BlackRock.
Prior to the pandemic, Zambia was already facing financial challenges, as its debt repayments had risen to four times its healthcare spending. This has had a profound impact on the most vulnerable populations, specifically children. Essential services crucial for their growth and development, such as healthcare, nutrition programs, and education, faced significant cutbacks due to the diversion of resources towards debt repayment. This is not only compromised immediate child welfare but also their future potential.
The onset of the pandemic worsened these challenges, disrupting Zambia's revenue streams and heightening demands on its already overburdened health and social services. Unable to meet its financial obligations, Zambia sought relief in early 2021 through the G20’s Common Framework.
ZAMBIA’S DEBT NEGOTIATIONS
The Common Framework initiative, jointly supported by the G20 and the Paris Club, was created to assist lower income countries grappling with unsustainable debt. It requires private creditors to provide debt relief at least as favourable as that offered by public creditors, aiming to overcome collective action challenges and ensure fair burden sharing. Yet, Zambia's recent restructuring deal with commercial creditors over its eurobonds, finalised on October 26, 2023, demonstrated the complexities in securing equitable terms from private lenders. Zambia’s government creditors rejected the deal, arguing that it does not align with the G20 Common Framework’s principle of “comparable treatment”, prompting Zambia to re-engage in discussions with bondholders and possibly reverse provisions of their deal.
In the absence of specific tools to enforce equitable treatment, Zambia now faces the prospect of drawn-out negotiations, extending an already lengthy three-year process. This situation not only diverts resources but also detracts from Zambia's focus on economic recovery and development, illustrating the critical role clear legal frameworks play in international debt restructuring.
Had there been specific legislation in place to guarantee the equitable treatment of private and government creditors, Zambia might have been able to avoid these complications. Such legislation could have given Zambia greater leverage in its negotiations with private creditors, thus levelling the playing field. Consequently, this could have streamlined the negotiation process, significantly reducing the likelihood of prolonged discussions and inconsistencies in the treatment of various creditor groups.
Sara (9) lives with her parents, four siblings and two cousins, in a tiny village in a remote part of Western Zambia. Her parents are subsistence farmers, farming maize as well as keeping a small kitchen garden. Sara goes to a nearby school, where she likes to learn maths and play with her friends. Her father Clement (42) is very worried about climate change. He has seen the rain patterns change in his village, which has made it very difficult for the family to farm. Normally the rains come in September or October and last about five months, but this year, they came in January. Now, they only have about three months of rain, which is not enough to allow their maize to grow. In 2019 there was a severe drought in their community, and the family struggled to survive. Sometimes they went two days without food. Sara and her siblings missed days of school because of hunger. Clement is concerned that this will happen again, and keep happening, because of climate change. Clement’s dream is for Sara and her siblings to finish school and move away from their cycle of hunger and poverty. She hopes to become a teacher if she is able to finish her education. How is Save the Children helping (or did we help) that child or family: Sara received a learning pack from Save the Children, including backpacks and books. The children also attend a school where Save the Children built a playground, including swings and a slide. Clement’s story in his own words - “We are subsistence farmers. We grow a little maize, and we grow vegetables on a small scale. The challenges are that there is not food enough for our survival. The rains were delayed – they started in January – so the time for the rains will be too short, we had to plant too late, and the plants won’t have time to get mature. The issue is that when it rains, it is too late for us to farm properly. “I was born near here. Yes, I have seen a change, with the rain patterns. It used to rain earlier, in September or October. But this time and in recent years, it is not. The rains have changed from October to January this year. “We need at least five months of rain, and now it's only three, and it comes after a long period of heat. “I live with my wife, five children and two nephews. “We eat two times a day. We eat sorghum and maize for our meals. “Our family has a fear of drought, as we don’t know how we are going to survive. To survive, we need rain. The reason we have started growing a vegetable garden is to have a little bit to eat if the crops don’t grow, but for them again there is a difficulty of water. We are in great fear of how to survive in coming months and years. “In 2019, there was a big drought and it was a big challenge. It was so hard for the family to know where to go. We survived through God. I can’t explain how we survived. There wasn’t even daily work where we could go. It was very hard. Sometimes we went for two days without food. “During that time, the children stopped going to school. They just cried and cried, saying we need food, but we didn’t have anything to give. This was a big challenge, the children stopped going to school because of hunger. “We know there is a change in climate, and we know we need to change crops. Maybe millet and sorghum grow better than maize now. It is hard to find early maturing maize seeds - that is a challenge. “The change is here. In the past, we used to experience heavy floods. But now, when the floods come, they come suddenly, and leave abruptly, damaging the crops. “Apart from farming, if there is any way you can help especially the children going to school, by giving financial support or materials to take to school. We know the importance of education. We are getting old, but we worry about the children. We need support from the people who wish to help. If they don’t educate the children, it will be a chain of problems, there will be no life change. We need support to survive, giving us things that we can use, for farming. “My hope is that my children can finish their education. I want to see at least one of my children become a teacher. I would love to see this in my children, so they can get a job, which will make our survival better.” Sara’s story in her own words: “My favourite subject is mathematics. I like subtraction. “I help my parents to wash the plates, then I do some cleaning, then I got to school. Then I go to fetch water for the family. “I would like to become a teacher. “I have two friends, from this village. “I like to eat nshima with pumpkin leaves, made by my mother.”
UK'S ROLE AND NEW LEGISLATION
This unwillingness of private lenders to offer sufficient debt relief has hindered restructuring efforts for three years. To prevent similar issues in other nations, it's crucial to limit private creditors' ability to demand excessive returns, aligning their terms with those of government creditors, as seen in Zambia's case.
Notably, the UK and the US are strategically positioned to drive this change. Half of the Global South's privately-held sovereign debt, including all of Zambia's, are governed by English law, and the other half by New York law. These countries could legislate to streamline debt restructuring and support private creditors to participate in the Common Framework on equal terms.
Momentum for such reforms is growing in both nations. The New York Assembly were considering the legislation last year but ran out of time in their calendar before they could vote on it. Legislation will likely be considered this year instead. The UK's International Development Committee has urged that the UK should explore a similar law. And of course, the UK has precedent in this realm: the Debt Relief (Developing Countries) Act 2010 stopped private creditors from suing borrowing governments for amounts exceeding those in the Heavily Indebted Poor Countries (HIPC) initiative.
Although the Government’s recent International Development White Paper missed a chance to signal support for such laws, there is still an opportunity for the UK to take a leading role in preventing future debt relief crises. By introducing legislation to support private creditors to participate in the Common Framework, the UK can contribute significantly to the global effort to alleviate the financial burdens of low-income countries. This would ensure that money currently used to pay off debt could be used instead to impact the lives of children in these nations, offering them a better chance at a more prosperous future.
