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Wednesday, 23 January 2013

Bondmania

By Chola Mukanga

Road Development Agency (RDA) becomes the latest public body to announce plans to sell bonds. It plans to sell $1.5 billion of bonds by the end of the year. RDA has presented a plan for the sale to the Ministry of Finance and expects positive feedback. According to RDA, it plans to securitise the bond with the revenue it generates from a fuel levy. Part of the proceeds of the planned bond sale will go toward funding a US$300m project to repair 2,000 urban roads across the 10 provinces. RDA also plans to start building a toll-gate system across national road network by the end of the year. The plan will be rolled out in June. But it will be key to paying back the bond debt.

RDA joins others in a rapidly growing queue for international finance. ZESCO has been on the road looking to acquire $2 billion debt to fund new investments. The company sent managers to the U.K. and the U.S. in a bid to raise the money from investors. South Africa's Standard Bank Group Ltd is advising the company, which has met investors in London, Boston and New York. According to Mr Chitundu (CEO) the company may also sell a Eurobond similar to the $750 million raised by the government in September 2012, “We are probably talking $1 billion, probably even $2 billion".

Lusaka City Council (LCC) is pressing ahead with the $500m municipal bond proposal. It has called for the expression of interest for a book runner and legal advisor. The appointment will be made in February. When the money is raised, it will be used for construction of 3,500 high rise housing units. Livingstone City Council also has plans to borrow (though its members are now suspended). In case of the councils, a municipal bond when bought is equivalent to offering a loan to the local council that promises to pay back at maturity and pays interests at set amounts annual / semi-annual. In truth to call these "bonds" is simply a matter of custom, these really are "debentures" (unsecured promises to pay). The local councils cannot pledge public assets as security but can pledge certain revenues. Future revenue is not guaranteed for many reasons including corruption, mismanagement and general failure by tenants to pay back debts. So we can expect, this new municipal bonds to be guaranteed by Government in some way. Government will eventually bailout Lusaka City Council due to rampant fiscal irresponsibility. This issue therefore goes beyond the councils. (We have touched on alternative ways of local finance here.)

The pressure to borrow is particularly high for new initiatives. Zambia Railways's Clive Chirwa says the railway company needs about US$1bn to fully recapitalize the company. The reconstruction stage will involve replacing of the railway line, training of experts and buying of new locomotives. Zambia Railways is currently living off the US$120m from the Eurobond. In truth, it will need more than $1bn. Sorting out TAZARA alone requires US$700m. The real question is where the US$880m going to come from. Clive Chirwa recently hinted that "the company will soon invest in capital markets to resuscitate the railway industry". In other words non-concessional borrowing perhaps in excess of US$1bn.

We should be clear that Zambia has some capacity to borrow at present. External debt relief through the HIPC program and the Multilateral Debt Relieve Initiative (MDRI) reduced Zambia’s debt burden significantly. In 2005, when Zambia reached the Completion Point of the HIPC program, its total debt was reduced by about 55 percent. In December of the same year, under the MDRI, Zambia received 100 percent relief on all debt owed to the World Bank and the IMF before 2005. These debt-relief measures were accompanied by the cancellation of debts with several bilateral creditors. Consequently, the external debt-to-GDP ratio fell from about 86 percent in 2005 to around 9 percent in 2006. Since then, we have adopted a conservative debt policy, borrowing mostly on concessional terms (concessional loans are loans provided to poorest countries with lower interest rates and longer repayment periods than typical or standard market or multilateral loans, i.e.  less than market interest rates and extended grace period.). The debt ratio currently stands below 10 percent.

The Debt Sustainability Analysis undertaken in November 2010 suggested that Zambia’s overall public sector debt dynamics are manageable in light of the current domestic debt stock. The Government can afford to borrow up to US$470 million per year up to 2016. So whilst the recent international bond may not have a material effect, rampant borrowing from all corners along the lines being suggested would have an impact. We need to manage debt carefully, especially non-concessional borrowing. The government has rightly emphasised the need for sound macroeconomic policies. It needs to remember that includes prudent fiscal management, strong debt management and sound project appraisal capacity. These things are necessary to maintain debt-sustainability. 

The question is what is being done to improve our debt management? In general, securing debt is not necessarily a bad thing if we are spending money on important projects and we have a coherent debt management strategy in place. Unfortunately at present there's no parliamentary oversight over Zambia's growing debt accumulation. Parliament continues to be sidelined because no clear debt management strategy exists. There should be a halt to all external debt procurement by public bodies until that is resolved - not least because Zambia has not fully capitalised on leveraging domestic sources of revenue. It seems we want to become more indebted before we see the need to plan better. Not very wise.


Chola Mukanga is an economist and founder of the Zambian Economist which provides independent economic perspectives on Zambia's progress towards meaningful development for her people

Copyright: Zambian Economist, 2013
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