Janet Yellen Pushes China on Debt Relief for Zambia

Treasury secretary pursues crucial test of U.S.-backed effort to help developing countries.

Zambian President Hakainde Hichilema, pointing, met Monday with U.S. Treasury Secretary Janet Yellen during her three-country trip to Africa.

LUSAKA, Zambia—Treasury Secretary Janet Yellen called on China to forgive debts owed by Zambia, whose two-year struggle to restructure a $17.49 billion pile of foreign-currency loans and bonds has become a cautionary tale for other developing countries.

Zambia defaulted on its dollar-denominated bonds and loans from Chinese banks in November 2020, just hours after finance ministers from the Group of 20 major economies said they had come up with a new process for restructuring the debts of the world’s poorest countries.

Under that process, dubbed the Common Framework for Debt Treatments, China, which is now by far the biggest government lender to the developing world, for the first time agreed to join debt-relief talks with more established creditor nations such as the U.S. and European governments. The framework also calls on indebted governments to seek comparable relief from their private creditors, including Western banks and bondholders that have also poured billions into developing countries over the past decade.

On a visit to the capital Lusaka, Ms. Yellen said the U.S. was concerned that Zambia was still waiting for its creditors to agree on the terms of its debt restructuring, but that recent talks with her Chinese counterparts gave her hope that a solution could be found soon.

“It’s taken far too long already to resolve this matter,” Ms. Yellen said during a visit to the Zambia National Public Health Institute and ahead of meetings with President Hakainde Hichilema and other officials in the southern African copper producer. “I am encouraged that progress may become possible shortly.”

The U.S. and China have in recent months taken steps to try to renew their engagement and cooperation on the world stage after the relationship between the two superpowers reached its lowest point in years.

Zambia, like other poor countries, borrowed heavily from Beijing and Western fund managers that snapped up its dollar-denominated bonds to build infrastructure and finance other government projects. About one-third of Zambia’s foreign debt is owed to Chinese lenders.

Ahead of his meeting with Ms. Yellen on Monday, Zambia’s finance minister, Situmbeko Musokotwane, said weaknesses in the Common Framework debt-restructuring process had left his country stuck and unable to develop its economy.

“I can only on behalf of Zambia request that the global leaders of the world, including yourself, who designed this process…do everything possible to move us forward,” he said.

Now, faced with a strong dollar, rising borrowing costs because of the Federal Reserve’s interest-rate increases and high inflation driven in part by Russia’s war in Ukraine, other governments are looking at Zambia as a test for how they can ease the burden of some of these debts. Kristalina Georgieva, the managing director of the International Monetary Fund, was also in Lusaka on Monday to urge faster progress on debt relief.

When Ghana’s finance minister last month announced plans to restructure his country’s foreign-currency debt, he said he wasn’t planning to use the structures of the Common Framework to deal with creditors, citing the long delays faced by Zambia. More recently, however, the Ghanaian officials said they would give the process a chance, provided it can produce speedier results.

In an interview, Ms. Yellen said the U.S., which was a significant driver behind the G-20 debt initiative, was seeking to show other poor countries that the Common Framework process could function.

“We’re very focused on trying to get this Common Framework agreement to work,” she said.

Before traveling to Lusaka—her second stop on a three-country trip to Africa—Ms. Yellen raised Zambia’s debt restructuring with Liu He, the economic adviser of Chinese President Xi Jinping. Ms. Yellen said she left the meeting in Zurich encouraged about progress in the talks.

Mr. Liu told the World Economic Forum in Davos, Switzerland, last week that China had agreed to “work with all parties to promote the resolution of the debt problems of some developing countries.”

Among the holdups in the Zambia debt talks, Treasury officials said, are finding common ground among the Chinese lenders that had financed projects in Zambia, as well as Beijing’s demand that multilateral agencies such as the IMF or the World Bank take losses on their loans. China also wants foreign holders of Zambia’s local, kwacha-denominated debt to participate in the restructuring, a Treasury official said.

“We have counterparts we’re able to talk to in a reasonable way and work through our differences,” Ms. Yellen said in Dakar, Senegal, the first stop on her Africa trip.

In an interview with The Wall Street Journal in Davos, Mr. Musokotwane said there were continuing discussions with private creditors and described the talks as “good.” Three meetings have been held with government creditors, with the most recent meeting focused on the parameters around the debt relief, he said. A fourth meeting was in the works.

“There is a need for equitable burden-sharing,” he said. “I am optimistic, because the mood from the last meeting was, ‘Yes, we need to do something.’ Everyone is pulling in the same direction.”

The World Bank and other multilateral lenders took losses during the previous big round of developing-country debt forgiveness in the early 2000s, but have rejected doing so now. The U.S. is opposed to China’s demands on multilateral institutions and local-currency debt, the Treasury official said.

After China and other government creditors agreed in principle to provide debt relief to Zambia last year, the IMF released a first slice of its $1.3 billion bailout for the country. But further IMF support will only come once Zambia has completed the terms of its debt restructuring with Chinese and other bilateral lenders.

Ms. Yellen said that like the U.S., China was worried about how heavy debt burdens were holding back economic growth and causing human suffering in developing countries.

“We both agree this is a major problem especially given…all the new strains that countries in Africa and elsewhere are facing because of Russia’s brutal war in Ukraine and its impact on energy, food and fertilizer,” she said.

Brad Setser, a former Treasury official who is now a senior fellow at the Washington-based Council on Foreign Relations, said the U.S. was focused on Zambia’s debt restructuring because of the precedent it will set for other countries deeply indebted to China.

In addition to Ghana, whose debts to China are relatively small, Sri Lanka and Ethiopia are seeking debt relief from Beijing. A recent analysis by the World Bank found that in 2021, China’s loans to developing countries totaled nearly as much as those of all other governments combined.

“Zambia is the most high-profile case right now, but it’s not the only one,” he said.

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