Zambia last week opted out of a $ 42.5 million Eurobond repayment, becoming the first African country to default on its debt during the Covid-19 era.

On Wednesday, Fitch Ratings downgraded a key rating for Zambia from CC to Restricted by Default. S&P Global Ratings had already reduced its rating equivalent to Selective Default before the expiration of a 30-day grace period and a creditors’ meeting on November 13, citing the Zambian government’s claim that it “will not reimburse the service. debt”.

Fitch also pulled the ratings off Zambia’s last two Eurobonds, assuming missed repayments or a new restructuring plan would see them default as well. Eurobonds are debt securities denominated in a currency other than that of the issuer.

The country the debt profile is skyrocketing in recent years, due to pre-pandemic issues, creditors have been arguing over who should suffer losses on loans.

Zambia is Africa’s second-largest producer of copper, and as copper prices have fallen over the past three years, servicing repayments on its estimated $ 11 billion debt has become increasingly difficult.

The country last issued a Eurobond in 2015, before its debt started to spiral out of control, with many of the country’s infrastructure projects being financed by Chinese loans as part of the Beijing’s Belt & Road Sweeping Initiative.

As such, Eurobond investors had asked the government for more clarity on Zambia’s Chinese debt obligations, fearing that other debt financing would be used to repay China before themselves.

All eyes are now on a possible bailout from the International Monetary Fund, and NKC African Economics’ senior financial economist Irmgard Erasmus has said the IMF will play a crucial role in any negotiation.

“We believe that an orderly process towards a bond swap agreement will require the mediating role of the IMF as the policy fulcrum, which in turn rests on the assumption that the Fund will support Zambia in as part of a formal Extended Credit Facility (ECF) program, “Erasmus wrote in a note Thursday.

“The absence of this kingpin risks a protracted and acrimonious restructuring process that will be accompanied by a prolonged growth shock.”

An IMF delegation is expected to visit Zambia early next month, but Erasmus suggested the fund would likely require greater progress in handling Zambia’s liabilities before offering a formal bailout package.

Robert Besseling, executive director of risk consultancy EXX Africa, said there was no guarantee that Zambia would be able to quickly restructure its Eurobonds or other debt instruments.

“There isn’t really an easy fix here. I mean Zambia needs to continue to balance the priorities of international bonds versus trade credits, versus Chinese project finance loans and World Bank loans. , AfDB (African Development Bank) and see which ones are the most important. ”Besseling told CNBC by phone from Johannesburg on Friday.

Besseling also noted that Zambia made a repayment on a World Bank loan two days before the Eurobond defaulted, indicating where the government’s priorities lie. He suggested that Chinese trade and international bonds would likely fall to the bottom of the pecking order and suffer a series of defaults from Zambia.

“You will see that repayments on loans from development finance institutions, like the World Bank and AfDB, are likely to continue, as all of this needs to be placed in the political context of next year’s elections,” he said. he declared.

“The World Bank provides huge development finance, which is important for the government because it has a real impact on people’s lives and will be an electoral advantage for them.”

Zambians will head to the polls in August 2021, with President Edgar Lungu seeking a third term and facing stiff competition from the United Party for National Development (UPND).

Besseling projected a “gradual and managed preparation” for the elections, with the government prioritizing the repayment of development finance loans. But he added that Lungu’s ruling Patriotic Front would likely keep in touch with the IMF should they win re-election, at a time when the most “unpleasant” conditions likely to be imposed by the Fund are seen as a worthy sacrifice for. consolidate the economy.