Debt restructuring is a complex process used by individuals, companies and countries to adjust the terms and conditions of contracted debt in order to make it easier to repay.
This process is necessary when debt becomes unsustainable or when a country is in debt distress or in what is called a “debt trap.”
As part of the many options under debt restructuring, a country can ask for “debt rescheduling,”which means that the period of repayment can be extended over a longer period, or partial debt forgiveness, also called a “haircut,”where it is agreed that a portion of the debt is written off and will never be repaid.
Another option is “debt refinancing,”where the debt is replaced by another loan which is more friendly or easier to repay. When refinancing is done, a new loan is essentially gotten in order to pay-off an existing loan, and thereby providing relief.
In terms of economic benefits to the country. The relief provided by the debt restructuring process will improve the country’s fiscal position. This means that the government will have more money to spend on social services such as health, education and social protection Programmes.
In the case of Zambia, with the debt restructuring deal in place, we expect an increase in allocation to social services in the 2024 National Budget, including more CDF allocations, and hiring of more health workers and teachers.
Secondly, the country will have increased investor confidence since this also indicates that the government is in a better position to honor its financial commitments.
Consequently, the Kwacha is likely to gain from the increased foreign direct investment and non-resident investments into our financial market instruments such as treasury bills and bonds.
In the long-run, and if the process is well managed in terms of repayments, it can also reduce the tax burden on the citizens such that they have more disposable incomes. This can then lead to more savings, lower interest rates, and increased economic activity through increased investment and consumption expenditure.
In terms of lessons, this deal has shown that there is need for strong government commitment in turning around Zambia’s economic fortunes.
It has also shown that Zambia has strong international support. This support is critical for progress when dealing with multinational and international investors.
We should therefore harness this support as we move forward to engaging the Commercial creditors, including the holders of our Eurobonds.
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