Every debt is a burden

In the Post Newspaper of 5 May 2014, under the headline, “Gondwe demystifies current govt debt”, the Bank of Zambia Governor was quoted as having said, “There is a lot of myth surrounding Zambia’s current borrowing, most of which is just politicking.” He further said, “The current regime is cognizant of future implications of the current debt contraction”. This was shocking especially coming from someone who should know better that this is not the case. Let me take time to explain to Dr. Gondwe the sources of our concerns:

Red Flags

1. Debt must be contracted within the parameters of a broader developmental strategy in which some projects can only be achieved through debt contraction. The PF currently does not have a developmental strategy we know of. A manifesto is not a developmental strategy;

2. Most projects especially in the transport sector are politically motivated and thus construction and capital expenditure may not contribute to the creation of the necessary reproductive capacity to enable the economy meet redemptions without creating funding pressures. Remember that most if not all the contractors are foreigners and so the money borrowed is not finding itself in the domestic economy;

3. The government has so far issued two bonds one after the other in under two years meaning that together with the FQM corporate bond issued for purposes of furthering Kansanshi operations, the years 2019, 2022, and 2014 will be crucial redemption years in which the economy will see capital outflows of $350 million for the corporate bond (FQM), $750 million, and $1 billion for the sovereign bonds respectively. This is in an economy which would not have received any contributions to its reproductive capacity from the two sovereign bonds. On 4th October, First Quantum Minerals (FQM) successfully priced its debut 144a/RegS USD350mn senior unsecured notes due October 2019 at a yield of 7.250%. The bond is callable after the first 3 years. The transaction marked the first non-sovereign bond out of Zambia and followed Zambia’s debut sovereign bond in September in the same year (2012);

4. PNB Paribus BNP Paribas, a global co-ordinator and joint book-runner, has just announced another mandate for US $650 million likely issuance by FQM due 2022 for purposes of repaying bank loans. First Quantum Minerals is Zambia’s leading single tax payer accounting for around 20 per cent of all taxes collected in Zambia. It has assets in Zambia, Mauritania, Turkey, Australia, Finland and Spain and development and exploration assets in Panama, Peru and Zambia. FQM is listed on the Toronto Stock Exchange and London Stock Exchange with market cap of $11.4bn, revenues of $3,542.2mn and EBITDA of $1,441.2mn. Revenues by location: Zambia (48%), Mauritania (7%), Australia (13% of Revenue), Finland (11%), Spain (14%) and Turkey (7%). The company’s activities are therefore of great interest to Zambia;

5. There is massive corruption and pure inefficiencies especially in the transport (road and rail) construction sector. Borrowed funds that are corruptly applied led Greece to the total collapse of the economy. We are headed that way!

6. We have moved from the traditional borrowing instruments we are used to, to more complex instruments such as bonds. We might soon include funding options such as syndicated loans, debentures, Export Credit Agreements (ECAs), project finance, private placements, equity contributions etc. The question is: is growth in our debt management capabilities matching the rate of growth in the complexity of our borrowing activities and instruments?

To those that have ears and care about the future or have no immediate plans to die

It is said that a journey of a thousand miles starts with one step – the first step. Zambia has quietly made several steps and charted an unequivocal and clear path to a defined destiny. The destiny is “debt trap”. Let me be very clear on the matter and may those that have ears and care about the future or have no immediate plans to die and will be around for a while, listen.

The following are the steps taken to our destiny of debt trap:
1. Lack of a developmental strategy;

2. Mismatch between asset nature and funding options and also mismatch between project duration and funding tenure (duration);

3. Lack of a well sequenced project implementation strategy to strike a delicate balance between economic projects that create reproductive capacity in the economy and social projects that are more often than not, politically motivated.

Having paid critical attention to the deliberations from the Ministry of Finance in Parliament, I came to a conclusion that there were and there could still be many gaps in the way the Ministry runs its debt management functions.

To start with foreign borrowings have a myriad of potential risks for a low exporting economy such as our own. A detailed foreign funding strategy which should be part of the broader funding strategy of a government is therefore cardinal to guide our borrowing activities. Such a funding strategy should cover both the domestic and foreign funding for a medium term fiscal framework and should include the following issues:

• A review of the current fiscal year’s funding strategy which covers an overview of the gross borrowing requirement,
• the budget balance
• extraordinary receipts
• extraordinary payments and loan redemptions
• How the gross borrowing requirement was financed using domestic short-term loans, domestic long-term loans (such as fixed income, variable notes, CPI linked if applicable) and foreign loans (market versus concessionary loans).
• Also the strategy needs to provide the performance of the different instruments such as turnover ratios, yield curve performance and risk spread performance.
• The impact on cash balances and state debt costs and finally a risk assessment of the current funding strategy against the risk parameters that were set in the beginning of the fiscal year such as percentage of fixed rate debt versus floating, maturity analysis, short term debt relative to total debt, foreign debt relative to total debt, average time to maturity and average weighted duration of the debt portfolio also need to be unpacked.
• The variances from the risk benchmarks should be explained as well.

Incompetencies of the Ministry of Finance and Bank of Zambia Governor

During my stay in Parliament, I failed to come to a conclusion that this was happening at the Ministry.

One would hope that if there was a comprehensive funding strategy being prepared, this information should be taken into consideration when such a funding strategy for the new fiscal year is being determined. Important considerations included for the following fiscal years’ funding strategy would be issues such as the global economic outlook, emerging market developments, domestic market consideration (for example inflation), and how this translate into challenges for the funding strategy. It might be useful to have a simple yield curve model to test the impact of different economic scenarios on different areas of the curve, but it is not a prerequisite. This will however help to plan for different funding scenarios.
An explanation should be provided, given the important considerations, on how the borrowing requirement will be financed using domestic short-term loans, domestic long-term loans and foreign loans. Based on the funding strategy, the impact should be shown on state debt cost and cash balances. It is also important to conduct a risk assessment of the proposed funding strategy.

The Governor of the Bank of Zambia should have assured us that debt acquisition and management is being done prudently and that the use of such borrowed funds is contributing to the creation of the productive capacity of the economy. But this did not happen and instead, the Governor went on to throw aspersions on everybody who comments on the debt acquisition issue despite the fact that we will all suffer the consequences of an economy facing undue funding pressures in the redemption years.
In the same article, it was also reported that, “According to the Treasury, both external (plus US $1billion sovereign bond) and domestic debt levels remain below the international thresholds of 40 per cent and 25 per cent respectively”.
This means that the only motivating reason for the government’s borrowing is because we have not yet reached the thresholds rather than that such borrowings should be meant to meet the much needed developmental needs. It must be pointed out that a threshold is not a target to run to, but a restraint to stay away from. Justification of being below the international threshold as a reason for borrowing is very unfortunate.

By Lucky Mulusa