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Thursday, 9 July 2015

Chikwanda's Sinking Fund

The Government has allegedly set up a "sinking fund" to deal with any future risks of repaying the Eurobond debts when they mature in 2020 and 2022. This was announced recently by Finance Minister Alexander Chikwanda. Presumably the "sinking fund" will also be needed for the $3bn of new debts it is planning to acquire shortly.

Some analysts have been quick to praise this initiative. The JCTR said, "we are glad that government has created a sinking fund, though belated, as it will ensure smooth repayment of the two Eurobonds which were contracted in 2012 and 2014". A Daily Mail analyst said, "a sinking fund....will ensure prudent management and servicing of the debt in a transparent and accountable manner... the economic outlook of our country is not all that gloomy".

It seems that people in our country have a tendency to suspend reasoning when it comes to serious issues. The first question we should ask government comes up with any new idea is to ask, 'what does it really mean'? What exactly is a sinking fund? It is simply a means of repaying funds that were borrowed through a bond issue. The issuer (GRZ) undertakes to makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market. In other words the idea of a sinking is that GRZ plans to start paying off some of the bonds now.

One can now immediately see the flaw in the plan. Dedicating government revenues to repaying the loan adds more immediate funding pressures and will actually mean GRZ having to borrow more at a time when it is running an underlying fiscal deficit of around 14% and its debt levels are about to breach 50% of GDP. Zambia is so broke currently that it cannot run a credible "sinking fund" without making its problems worse in short term.

The only way for government to ensure it does not default on its debts in 2020 and 2022 is to try and find a way of boosting revenues now and cut down on borrowing for consumption. It needs to undertake a proper audit to cut waste. We have suggested many areas for cutting waste but there is no political will.

AUTHOR Chola Mukanga
Copyright © Zambian Economist 2015

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1 comment:

  1. can we have GRZ officials on board so that they can explain to the zambians on such issue affecting our country .


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