By Andreas Charalambous and Omiros Pissarides

Three years after defaulting on its repayments, Zambia recently reached a debt relief deal. The end of the impasse over the African nation’s bankruptcy involves the restructuring of $6.3 billion loans with bilateral lenders and may potentially unlock $188 million support loans from the IMF, provided Zambia restructures its $6.8bn debt with the private sector. The agreement, considered by many a landmark, was reached with the help of China, as the lead lender, while it was sealed with the contribution of the French president.

Zambia is not the only developing economy facing problems in managing its accumulated debt. In another corner of the globe, Sri Lanka is plagued by an external debt of more than $52bn which stems, primarily, from the mismanagement and corruption during the Rajapaksa brothers’ rule. Although Colombo had reached an initial agreement with its creditors, it defaulted on debt repayments and negotiated a $2.9bn bailout with the IMF.

In an unprecedented move, a number of economists under the “Debt Justice” campaign group have called for Sri Lanka’s external debt to be written off, stressing that investors who lend to corrupt politicians must face the consequences. This approach has been criticised as one that could contribute to the collapse of the global financial system. Certainly, a lot will depend on creditors, especially China, which owns more than 50 per cent of the share of debt of the bilateral creditors.

With the above in mind, the following points can be made.

Firstly, after decades of prolonged mishandling, the problems of developing economies are emerging. Although the world’s attention is focused on other crises (like the ongoing war in Ukraine), the issues of developing nations are expected to intensify and impact the global economy, partly through increased migration flows. The UN has specifically warned that 1.7bn people worldwide are at serious risk of food and economic insecurity.

Secondly, the causes of the problems of developing nations almost always concern mismanagement and serving specific interests, which is not conducive to socio-economic development. The easy path, selected by many African countries, of exporting their natural resources and raw materials constrains economic development and the inflow of foreign investments, creates serious environmental damage, and does not contribute to the proper functioning of the state, including its tax collection capacity.

Thirdly, the subject has serious political dimensions. Over the past decade, Beijing has emerged as the developing world’s largest lender. Effectively, no agreement with external lenders can be reached without the commitment of China, which, in this manner, is increasing its influence globally. At the same time, former colonial nations still maintain their own interests. As an example, the Zambian debt deal was seen as a diplomatic victory for French President Emmanuel Macron.

Fourthly, Zambia’s debt restructuring agreement includes, under the auspices of the IMF, an innovative provision involving less debt relief that would be automatically triggered in the event that the economy fares better than expected in the next few years. Whether in practice this will operate in a constructive manner remains to be seen.

Andreas Charalambous and Omiros Pissarides are economists