Private lenders rejected Zambia’s request for a debt payment suspension last week, plunging the country into default. How did we get here, what does that mean for the people of Zambia and what does it mean for other countries affected by debt in the face of the pandemic?
The crisis has put more and more countries like Zambia at risk of default, and with private lenders refusing to act, G20 governments have to step up and push them to play their part.
Why did Zambia default?
By the time the country went into default last week Zambia had gone through extensive austerity measures to try and reduce its debt, and throughout the pandemic has been spending four times more on debt payments than on public health.
Zambia’s external debt payments have increased substantially over the last few years, from 4% of government revenue in 2014 to a projected 33% in 2020.
The squeeze was becoming too much. Zambia has had less and less room to move since the start of the pandemic, and because of underlying economic problems such as many companies which operate there not paying their taxes, borrowing has increased.
Private lenders lent to Zambia at high interest rates, looking to make a quick profit. This was despite knowing that there was a significant risk the country would not be able to pay these debts.
In April 2020 the G20 announced that some bilateral debt (owed between countries) would be suspended. Called the Debt Service Suspension Initiative, and acknowledged as a first step by many debt campaigners, the scheme has been criticised for not including private lenders or multilateral institutions. Most of the debt burden in Zambia is owed to private lenders – some of whom, if paid back in full, are set to make 75% to 250% profit from Zambia’s debt.
With a debt burden exacerbated by the effects of Covid-19, Zambia had requested a suspension of debt and interest payments from the private lenders, which was denied, pushing them into default.
What happens now
Should Zambia have continued to make debt payments when 88% of its population is surviving on less than £4.20 a day? Should Zambia have continued debt payments when it was already spending four times more on those repayments than public healthcare? The government has been faced with an impossible choice and has had little help from other world leaders.
The Zambian people deserve the same chance to fight the pandemic as people of any other country. Defaulting may turn out to be the first step in recovery. Stopping making debt payments keeps valuable funds in the country, rather than being wasted on debt payments to rich speculators. And the default could put pressure on those lenders to agree a proper debt cancellation deal.
To make sure that more countries and people aren’t squeezed we need some real changes to how debt is managed. Currently, too much lending is done in private. If practices around lending were more transparent, then citizens will be able to better hold governments to account for their borrowing, and loans will be more likely to be better used.
Private lenders very rarely face the consequences of their reckless lending. This unspoken impunity has come at the cost of an economic crisis, with their actions intensifying the suffering felt not only in Zambia, but in many other poorer countries around the world.
World leaders need to step up to the plate, cancel unjust debts, ensure more transparency and fix the fundamentals so countries aren’t forced to borrow at extortionate rates. The pandemic has shone a light on the already broken global debt system, what happens next is up to world leaders, and it’s up to us make sure they listen.