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Unworkable Common Framework

11 December 2023   |  

Zambia defaulted in 2020 on its sovereign bonds and has been on an unrelenting quest to restructure its debt since. While finding itself in distress is not notable, the country’s plan to find its way out may be. Zambia serves as the first meaningful test of the Common Framework—a Group of 20 (G20) initiative to simplify and accelerate the sovereign debt restructuring process. In a perfect world, this initiative should create a quick and successful resolution for Zambia and pave the way for other emerging economies seeking debt-relief. Unfortunately, as we know all too well, the world is far from perfect. Recent snags in negotiations between bondholders and creditors (primarily China) suggest Zambia is unlikely to reach an agreement any time soon. The Common Framework has been met with skepticism since it was launched, but the hold-up in Zambia has taught on-looking countries an important lesson— and not the one everyone was hoping for.

The Common Framework was developed in 2020 for low-income countries that fell into distress during the COVID-19 pandemic. It is intended to be implemented alongside an IMF-supported reform program, and it aims to coordinate debt relief discussions between traditional Paris Club creditors, newer creditors, such as China and India, and other stakeholders. Zambia, Chad and Ethiopia were among the first countries to test the process. Ironically, all three faced significant delays as they tried to get various creditors to see eye to eye—the exact pain point the Common Framework set out to mitigate.

Zambia’s case is especially devastating because a successful resolution seemed to be just around the corner. In October 2023, an agreement in principle was reached between external bondholders and the government that, notably, both parties agreed was compatible with IMF debt sustainability targets and the Comparability of Treatment principle. However, the IMF pulled the rug out from underneath the agreement by requiring the proposal to not only meet their targets, but also attain fullest possible compatibility with their guidelines. A month later, the government, bondholders, and the IMF agreed to a revised agreement in principle. However, this time China and the Official Creditor Committee (OCC) pulled the plug. Despite meeting IMF criteria, creditors claimed the proposal violated Comparability of Treatment, a key principle that states no creditor should receive more favorable terms than another. Bondholders and the government are going back to the drawing board now with no guidance from the OCC on how the agreement can be amended to meet their criteria. In the aftermath, Zambia's dollar bonds plummeted, and bonds issued by other countries going through the same restructuring process, such as Ghana, also sold off.

Has the Common Framework met its demise? The disappointing saga in Zambia poses the larger question of how emerging economies will seek relief going forward. In recent years, China has surpassed traditional Paris Club creditors as the leading lender to emerging countries. However, it appears that restructuring when China is a member of a country’s OCC is like entering default purgatory. As we write this, Ghana is the latest victim to be claimed by the Common Framework and China for reasons eerily similar to what has played out in Zambia. We expect these events will create a stronger desire for countries to remain current on their payments and avoid restructuring when possible, especially when China has a seat at the table.

  • EMsights Capital Group

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