DR Caleb Fundanga says Zambia is headed for a sovereign debt crisis as it is most likely going to default on the first US $750 million Eurobond payment when maturity date falls in five year’s time.
A sovereign debt crisis occurs when a country fails to pay its external debts and is blocked from accessing more money from official lenders.
And Dr Fundanga has called for an end to corruption in usage of government funds. Meanwhile, Lusaka businessman Muna Hantuba says the government’s insatiable appetite for borrowing is no longer just starving private investments but also hurting spending on education and health.
Dr Fundanga, a prominent economist and former Bank of Zambia governor, said Zambia would soon become a case study of how not to spend huge amounts of money borrowed at very high interest rates.
In a paper he presented on Zambia’s debt position at the Economics Association of Zambia public discussion last Friday in Lusaka, Dr Fundanga, said the country would not be in a position to redeem the first Eurobond when it falls due in 2022.
Zambia contracted its first Eurobond in 2012 for 10 years at coupon rate of 5.6 per cent, meaning the whole borrowed amount would have to be returned to the lenders in five years plus interest payments due.
“I am sure most of you will recall that in 2012 when the first Eurobond was issued, there were newspaper reports that the Minister of Finance was scouting around for commercial banks to borrow the dollars because they didn’t have a spending plan; it can be that bad that money is given to you [when] you don’t have any plans of how to spend it but it is accumulating interest. We had that situation,” Dr Fundanga said. “The lessons for Zambia are important to other countries when there is so much money more than you can handle.”
He said although pro-government voices argued that Zambia’s debt position was still sustainable, evidence on the ground was to the contrary.
“However, recent debt sustainability analyses conducted by the IMF and World Bank indicates that Zambia has a high risk of external debt distress emanating from the Eurobonds maturing in between 2022 and 2027,” Dr Fundanga said. “Those Eurobonds when they are given, the immediate financial exposure you have are the interest payments, then comes the date when they mature. At maturity, you have to pay back the principal. You can all imagine US $750 million will mature in 2022; will we have US $750 million on top of other financial burdens to pay off those people? If we won’t have, how are we going to solve those people? Obviously, some people can say ‘go and borrow some more’; that’s the easier way to go. I don’t know whether we are prepared.”
He regretted that the planned “sinking fund” to prepare for repayment of the Eurobonds never moved beyond rhetoric.
“The main risk to external debt sustainability associated with external debt distress are heightened by the fact that economic performance will remain subdued over the medium term,” Dr Fundanga said. “Liquidity indicators show significant fiscal pressure between 2022 and 2027 due to the maturing Eurobonds. The ratio of external debt service to revenue is expected to increase and breach the sustainable threshold of 20 per cent between 2022 and 2027 from nine per cent on average between 2015 and 2021, and obviously this will be a big burden. Obviously, all indicators are that probably the economy will remain depressed for some time; so, if that’s the medium term prospect, the prospect of raising the millions we need to retire those bonds might not be available.”
He said Zambia was being studied by its peers on how not to utilize the capital markets.
“The fact that money is there is not the reason why we should always go and draw from there. Let’s not forget that we are making certain people rich; those who arranging those Eurobonds, the fees they charge are very high and they are not even justifiable,” Dr Fundanga said. “But we think it’s the easiest because nobody will ask for the conditionalities; nobody will ask us how we are going to spend this money and so forth and so we think it is easy money but in fact, it’s the hardest money you can get because when it is time to pay, you are going to regret it. Let me emphasise that I don’t see another round of international goodwill to cancel our debts like we saw during HIPC and MDI [Multilateral Debt Initiative].”
Specifically on higher expenditure of most Eurobond proceeds on building new roads, Dr Fundanga said: “These things of corruption we talk about are things that need to be addressed. What did we do with the money [from Eurobonds]? Some people will tell you that at least you have got good roads; not the best but…indeed its true that some roads were built with some of that money but the truth is that we could have gotten more.”
At the same forum, Hantuba, who is also AfLife Holdings group chief executive officer, said government borrowing had now become a danger to both private sector investments and the country’s social spending.
“The private sector needs as much money at this stage as government needs to prop up their businesses. But what does happen is, the private sector has largely been crowded out because increasingly, as the government borrows the money, they are even crowding out certain essential expenditures of the social nature such as education, health and the network as they call it,” Hantuba said. “Now, if the public sector itself is going to take a bit more money from internal and external debt, it means that the private sector has got very little chance in queuing up for limited resources that are available.”
Hantuba who also doubted Zambia’s ability to redeem its first Eurobond when it falls due in 2022, said Zambia’s public debt, the bulk of which was foreign commercial rated, was already a crisis.
“…it’s possible that we could, subject to good behavior, surf around and remain in a position to meet our debt obligations as they fall due but…when the first Eurobond falls due in 2022 which is a year after the next government comes, they will have to deal with the payment of a minimum of US $750 million together with arrears and so on and so forth,” he explained. “My suspicion is that, and I suspect most of you will be there, we will most likely not be in a position to pay it. Why will we not be? Because we have not gathered sufficient prowess to deal with debt the way debt must be dealt with.”
Hantuba urged the government to practice good governance and restrained appetite for fresh loans.
He also regretted the use of K2 million of emergency funds to debate Zambia’s continued affiliation to the International Criminal Court at the time the government was grappling with serious shortage of cash.
“Don’t be corrupt because corruption is very expensive; don’t misapply resources, stick to the budget. If your 2017 budget says ‘you are not going to talk about constitution,’ don’t do it. If 2017 does not say anything about appointment of extra cabinet, don’t do it,” Hantuba advised. “That’s what private sector hopes the government would not do. Private sector does not expect the Minister of Justice to announce the expenditure of two…[K2 million] whatever the figure is to go and ask other people whether we should be in court or not court. I don’t know that story but it’s to do with spending money that you did not plan to. You only spend when there is a flood because you have to save human life; when there is crisis in hospital, then you can justify spending…”
He said the desire for the government to borrow without conditionalities was an indicator of wastefulness and lack of accountability.
“When you jump to cheaper options of borrowing in the sense there are no conditions, it means you are borrowing with an intention to abuse the resources that you have borrowed which is very easy to do by the way,” said Hantuba.
“The propensity to save in this country is very low and so borrowing has become a cardinal part of the entire business.”