Zambia’s debt restructuring stalls as IMF flags weak debt management

For international investors, Zambia’s debt restructuring journey has been a closely watched case study. As the first African nation to default in the pandemic era and seek relief under the G20 Common Framework, its path to financial recovery was seen as a potential blueprint for other struggling economies. However, that journey took a significant step back on Wednesday when the country’s international bonds plummeted, a direct reaction to a new report from the International Monetary Fund (IMF) that highlighted a worrying weakening in the country’s debt management capacity.

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The immediate market impact was palpable. Zambia’s 2053 dollar-denominated bond, a key benchmark for the nation’s financial health, shed more than 4 cents in early trading. Its value fell to 68.542 cents on the dollar, sinking below the critical 70 cents threshold that analysts and asset managers often use to define a country’s debt as “distressed.” While the bond pared some of its losses later in the day, the initial drop signaled profound disappointment and renewed anxiety among investors who had placed their faith in the country’s recovery.

This market turmoil was not triggered by a new default or a major policy failure, but by a subtle, yet crucial, shift in a technical measure: the IMF’s composite indicator for debt-carrying capacity. The Fund’s latest assessment showed the score for the southern African nation had weakened to 2.58 from a previous 2.62. This seemingly small downward revision had outsized consequences because of its direct link to the terms of the country’s restructured bonds. The intricate relationship between these technical indicators and real-world market sentiment lies at the heart of Zambia’s ongoing debt saga.

Understanding the IMF’s Debt-Carrying Capacity Indicator

To grasp the full weight of the recent bond drop, one must first understand what the IMF’s debt-carrying capacity indicator is and how it works. This is a crucial metric used by the IMF and the World Bank to determine a country’s ability to handle its debt burden. It’s not a single number but a composite index derived from three key factors:

• Country’s Economic Performance: Measured by its real GDP growth rate.
• External Debt-to-GDP Ratio: The amount of external debt relative to the size of its economy.
• Import Coverage: A measure of a country’s liquidity, calculated by comparing its foreign exchange reserves to the value of its monthly imports.

A higher score on this indicator signals a stronger capacity to manage debt, while a lower score indicates a higher risk of financial distress. The indicator is a critical tool for the IMF and its partners because it informs the terms of their lending and debt relief programs.

In Zambia’s case, the IMF’s finding that the score had fallen from 2.62 to 2.58 was primarily attributed to a deterioration in the country’s import coverage ratio. This metric is a bellwether for a nation’s financial health. If a country’s foreign exchange reserves are dwindling relative to its import needs, it suggests potential difficulties in paying for essential goods and, crucially, in servicing its external debt obligations. The decline in this specific area suggests that while Zambia’s broader economic reforms may be on track, it is facing liquidity pressures that could jeopardize its ability to meet its financial commitments.

The Gamble on the Bonds: State Contingent Debt Instruments (SCDIs)

The reason the composite indicator’s decline had such a dramatic effect on Zambia’s bonds is because of a unique feature of the country’s new debt instruments: State Contingent Debt Instruments (SCDIs). These are a new class of financial tools designed to offer creditors a more attractive return if a country’s economic performance improves. They essentially tie a portion of the bond’s payout to the country’s economic future.

When Zambia restructured its debt, it combined roughly $3 billion of its existing bonds into two new ones. The most talked-about is the long-dated 2053 dollar-denominated bond. This bond was structured with a trigger mechanism tied directly to the IMF’s composite indicator. Specifically, as explained by Samir Gadio of Standard Chartered, for the 2053 bond to “become a higher-paying 2035 bond,” the country’s composite indicator must reach a score of 2.69 for two consecutive semi-annual reviews. The “observation period” for this to happen is set for 2026-2028.

This means that if Zambia’s economic performance, as measured by the IMF, improves to the point where it consistently scores 2.69 or higher, bondholders will be rewarded with a more valuable instrument that pays out sooner. The latest IMF report, with its revised score of 2.58, was a major blow to these hopes. Instead of moving closer to the 2.69 threshold, Zambia moved further away, casting doubt on whether the trigger would be met. This disappointment is what drove investors to sell their bonds, causing the price to fall and highlighting the market’s deep sensitivity to the SCDI’s terms.

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The Context of the Crisis: Zambia’s Journey Through Debt

To fully appreciate the significance of this event, it’s important to understand the road that led Zambia to this point. For years, the country engaged in a period of heavy borrowing, particularly for large-scale infrastructure projects. Much of this debt was incurred under the previous government and was often not transparently managed. The COVID-19 pandemic, coupled with a collapse in commodity prices, delivered the final blow, making it impossible for the country to service its burgeoning debt pile.

In 2020, Zambia became the first African nation to default on its sovereign debt. This action kicked off a complex and arduous process of renegotiating its debts with a wide range of creditors, including international private bondholders, multilateral institutions like the IMF and World Bank, and its largest bilateral lender, China.

Zambia opted to restructure its debt under the G20 Common Framework for Debt Treatments. This initiative was created to bring major creditor nations, including China, to the table to ensure a coordinated and fair restructuring process. The process, however, was far from smooth. It was a test case for the nascent framework and was plagued by delays and disagreements, particularly between traditional Western creditors and China. The eventual deal, struck last year, was hailed as a breakthrough, but the recent bond drop shows just how fragile that victory was. The G20 Common Framework is now being used by other nations, and its success or failure in Zambia will have a major impact on future debt restructuring efforts.

The Broader Economic Picture: Copper and Currency

The IMF’s composite indicator, particularly the import coverage ratio, is not an abstract financial metric; it is deeply connected to the reality of Zambia’s economy. The country’s primary export is copper, and the price of this commodity on the global market is a critical determinant of its economic health.

When copper prices are high, Zambia earns more foreign currency, which boosts its reserves and strengthens its ability to pay for imports and service its external debt. Conversely, a drop in copper prices can put immense pressure on the economy, causing a decline in foreign exchange reserves and a weakening of the national currency, the kwacha.

The IMF’s latest assessment suggests that despite some positive developments in the copper market, Zambia’s foreign exchange reserves are still not sufficient to provide a comfortable buffer against a decline in imports. This is a major concern for investors because it implies that the country’s financial position is still vulnerable to external shocks, like a sudden drop in global copper prices.

The IMF’s Role and the Path Forward

The IMF’s report came as part of the approval of the fifth review of Zambia’s Extended Credit Facility (ECF) program. This program is a lending arrangement that provides financial support to countries with protracted balance of payments problems. The ECF is not just about money; it’s about a commitment to a series of economic reforms. As part of its program, Zambia has agreed to implement a range of fiscal and economic policies aimed at restoring macroeconomic stability, strengthening fiscal management, and promoting sustainable, inclusive growth.

The IMF’s reviews are a crucial part of this process. They act as a report card, assessing whether the country is meeting the agreed-upon conditions. While the approval of the fifth review is a positive signal, the downward revision of the debt indicator score is a sobering reminder that the reform process is not linear.

Moving forward, the focus for both the Zambian government and its bondholders will be on improving the composite indicator score. As Aberdeen’s Anthony Simond pointed out, there is still hope for a future upgrade. The key will be for Zambia to rebuild its foreign exchange reserves, a process that will likely require continued fiscal discipline, strong management of its trade balance, and a stable, if not rising, global price for copper. The market will be watching closely for any signs of improvement in the next semi-annual review, as the fate of the state contingent bonds and the country’s financial reputation hang in the balance.

The bond drop on Wednesday serves as a powerful illustration of the delicate balance in a post-restructuring world. It shows that even a successful debt deal is just the beginning of a long and challenging journey. For Zambia, the hard work of building a resilient and stable economy continues, with every move scrutinized by a global market looking for concrete evidence that the country’s long-term financial health is on a path to recovery.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

7th August, 2025