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Wednesday, 9 April 2014

Zambia's New Eurobond

Zambia has finally launched its US$1bn 10-year Eurobond at a final yield of 8.625%, according to government sources. The bond was allegedly oversubscribed by US$4.25bn, much lower than last time. The government tried to do this before Christmas but held back to see which way the liquidity wind was blowing.

As this is a 10 year bond, Zambia will be paying interest of 8.625% or $86m per year for the next 10 years. It will then need to pay back the final $1bn in 2024. Zambia is currently paying around $40m interest annually on its first Eurobond of $750m. It is due to pay back the full $750m in 2022.

This means whoever is in charge from 2021 will immediately have to find nearly $2bn to pay back on top of all other interest repayments from loans accruing between now and then.

People always me where government has spent the last Eurobond, and by extension where it plans to spend the new $1bn. I am always disappointed by these questions because it means people have not been reading properly what I have been writing for the past year.

All money spent by government comes from a single national finance pot. When the money (revenue) in the pot is lower than government spending plans, government has a fiscal deficit. Which means it has to borrow from abroad or domestically to meet this revenue gap.

So when government issues a Eurobond the money from that bond goes into that single national pot to meet the revenue gap. The revenue gap comes from new spending plans and old spending plans. Politicians usually tell you that they are borrowing to fund new infrastructure. That is a lie. It is more correct to say they are borrowing to meet the revenue gap made up of many things!

The true picture is that our government wants to do too many things at once. It wants to to have a a very large bloated government, award large salary increases, maintain many embassies abroad, countless bye-elections, new districts and build new social infrastructure.

All of these things means that we have a short fall in funding which means we have to issue Eurobonds. We have decided it is better to keep borrowing than cut government waste.

So in the final analysis, I believe it is just as true to say the Eurobond money is going on a large foreign service and the 2013 wage rises - as it is true to say it is going on social infrastructure. Basically we don't need to immediately borrow if we can cut waste and have a smaller government. And if we must borrow we should only do so after cutting waste and accompanied by strong cost benefit analysis.

This is why I opposed the wage rises in 2013. And I still oppose this latest attempt to borrow just to keep paying civil servants large salaries. And I refuse to be hoodwinked by some who say the Eurobond is for funding X.  That certain fools the ignorant, but not anyone who keenly thinks through issues.

Chola Mukanga | Economist
Copyright © Zambian Economist 2014

1 comment:

  1. TI am in full agreement with your observation; I have watched, read and participated in coversations in which some are thoroughly convinced that reasons given by government surrounding fiscal policy (or lack thereof) is correct. It reminds me of the allegorical story by George Orwell; the pigs had all the other animals fooled with stats that where just that, stats on paper but with no tangible benefits for the common farm animals. It's ironic that they are now refering to those that choose to voice their opposition in the slightest as dogs; that's the sound puppies make and it can be annoying.


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