The Zambia Institute for Policy Analysis and Research has pointed out that the latest US$1.25 billion Eurobond issue by Government will increase total interest payments on the three Eurobonds taken out so far from about US$125 million a year to over US$240 million or ZMW1.8 billion a year.
In a statement released by ZIPAR Acting Executive Director Caesar Cheelo, the organisation has observed that the latest US$1.25 billion Eurobond comes in the wake of a depreciating Kwacha and declining non-traditional exports.
The Institute notes that other challenges include 30-50% drop in electricity supply, which are likely to reduce production and productivity, and ultimately dampen growth even further than the 5.8% revised economic growth for 2015.
ZIPAR says, with all these economic malaise, it is therefore not surprising that the third Eurobond, at an annual interest rate of 9.375%, is more expensive than the 2012 and 2014 Eurobonds whose interest rates were 5.375% and 8.5%, respectively.
It says this means Zambia will pay US$117.2 million annually in interest until 2025 on this new Eurobond alone adding that between now and 2022, interest payments for the three Eurobonds will increase from US$125 million to over US$240 million annually.
ZIPAR says while the third Eurobond should provide some respite for the weakening Kwacha, and is also expected to reduce the reliance on short-term expensive domestic debt, it warns that higher interest payments on Eurobonds are likely to crowd out public investment and social spending.
It cited the interest on all external debt, owed by the Zambian government to international lenders which include Eurobonds alongside other borrowing, were budgeted at K 2.4 billion in 2015, but this will rise to about K3.8 billion.
The Institute said coupled with domestic interest payments currently budgeted at K2.9 billion, total interest payments on public debt may rise to over K6 billion from 2016 saying this will be higher than the 4.5 billion allocation to the health sector and the 5.6 billion allocation for roads construction in the 2015 budget.
ZIPAR reiterated that commercial borrowing from international markets can be beneficial if the proceeds are invested wisely hence, the Zambian Government should formulate credible spending plans, which should be publicly announced for transparency and accountability, with clear and strengthened project selection processes that prioritise capital spending on viable, high economic return projects.
It says Government also needs to improve tax administration and should in particular tap into new high-economic-return projects.
ZIPAR says it will also be prudent for government to rationalise spending on non-priority areas.
It says Government should also avoid the temptation and pressure for fiscal spillages as the borrowing has come at a time when there are so many headwinds and when we are about to enter an election year.
The Institute added that the establishment of the sinking fund approved by the Minister of Finance for the first two Eurobonds should be fast-tracked and extended to the third Eurobond.
It said through the sinking fund, government will set aside funds annually, which would be used to make payments against the principal.
ZIPAR Research Fellow Shebo Nalishebo when funding is invested well there can be benefits to international borrowing.
“However, the risks also need to be managed. One such risk is the cost of paying the interest on a growing debt and how that can reduce government investment in services such as health and education. To manage that risk, government should, amongst other things, put more funding aside into a sinking fund with funds generated from domestic revenue receipts,” Mr Nalishebo said.
He added, “Due to issues of fungibility – the possibility that funds are used in ways not intended – the sinking fund should be set up as a bond buy-back scheme rather than a reserve fund. Government should also update its Debt Sustainability Analysis – a vital tool for effective debt management.”
ZIPAR notes that the last DSA was conducted in June 2014 adding that some of the baseline macroeconomic assumptions that were used no longer hold.
“For example, the 2014 DSA assumes no issuance of Eurobonds in the short to medium term after the 2012 and 2014 issuances. Therefore, the third Eurobond changes the debt dynamics upon which the 2014 DSA was premised. A new DSA will enable the country assess the vulnerabilities of the current debt portfolio,” Mr Nalishebo said.
He said this will be key for coming up with a medium-term debt management strategy and annual borrowing plans consistent with fiscal policy, monetary policy and current macroeconomic conditions saying sound debt management will help the government to reduce its exposure to interest rate, currency, refinancing, and other risks.