Money is power. But it is more powerful when it’s within your control and reach to exercise your will, so that you are able to impose punishment or grant relief.
It is the same at a broader level. For governments to exercise punishment requires courts and prisons or indeed the entire judicial system to function. Conversely, relief means government ensures availability of medicines in hospitals, electricity in homes and factories and so on. Both these scenarios require availability of money. This is simplistic but true.
For an economy to survive, government must protect its principal (domestic) sources of income. This is sovereignty. An exercise of power for the preservation of the national interest.
So, when Zambia selectively defaulted on part of its foreign debt in November 2020 ratings agencies and other experts treated this as a prophecy fulfilled. Government had been warned of excessive external borrowing relative to the country’s ability to service debt. Because of this action ratings agencies ascribed junk status to the country, labelling it a country that is unable to refund money it has borrowed. This was expected. Afterall, the writing had been on the wall.
However, in that commotion, government made a very bold decision to continue servicing its local debt and embolden the domestic market. Government understood that crashing the domestic market by not servicing local debt would have had far reaching catastrophic consequences for the country.
Other countries have exercised such protectionist measures on their economies as a supreme sign of sovereignty and national interest. For example, Malaysia imposed exit taxes and capital controls during the Asia crisis of 1997-8. Malaysia experienced a mass withdrawal of foreign owned capital which nearly brought the country to its knees until government put plugs in the financial system to protect the domestic economy from collapse.
By refusing to collapse the domestic market, government ensured it had finances within its reach to fund the most crucial sectors of the economy. Consequently, Zambia’s long-term rating on local currency was upgraded in April 2021 by Fitch (a ratings agency). The upgrade was not a guarantee but reinforces the principle that an economy dies when there is no money to create credit.
The creation of credit is important for production. Production is important for the economy whether in agriculture, manufacturing or services. Production responds to demand and demand creates price. Price conveys value while inflation is the inspector of value. Without it, the possibility of overpricing is likely.
To see this clearly, domestic financing increased to nearly 15 percent of the total national budget in 2021 which means that government expects to raise around $790 million during this year to finance various programs. It also means that government guarantees to repay that amount over an agreed period. For this to work, creditors must believe that government is able to repay their loans. In other words, guarantee must override the risk perception of those willing to lend money to government.
Creditors must believe that a government that defaulted on two Eurobond debt service payments of about USD 42.5 million in November 2020 and USD 56.1 million in January 2021 has guaranteed to repay $790 million domestic debt. It is a hard thing to achieve but the fact that there has been no default on domestic debt and that government is pursuing this avenue aggressively appears to have impressed investors and ratings agencies thus far.
For example, the weighted average on yields for T-bills was 23.43 percent for December 2019 and fell to 19.80 percent by December 2020 during the default paranoia period. That number rose to 20.64 percent by early May 2021. For the longer-term investments (government bonds), only yields on the 10-year bonds dropped. Overall, however, the weighted average for all long-term instruments was still in 30 percent range.
The point of these numbers is to show that returns for investing in the Zambian domestic market were affected momentarily but regained momentum after a short period. When returns are low, investors (especially foreign) pull away their funds to invest in other lucrative markets. When the returns – expressed as yields – are high, investors tend to bring in more money. Interestingly, higher yields act as an indicator of lower risk in most cases.
The risk indicator suggests that the easier we can refund domestic loans, the more we attract money into our economy from domestic and foreign sources.
We are not yet in the clear, the challenges are still very present and difficult, but I venture to say we are not in trouble. The production and credit functions are the lifeline of many an economy and protecting one means securing the other simultaneously. By protecting the domestic market and allowing credit to flow, the farmer is assured of receiving money for their produce. By guaranteeing the domestic market, the banks can cautiously extend their funds instead of withholding credit altogether.
The most critical question now, is when will the tangible benefits of this action trickle down to where it matters most? When finance or credit becomes readily available, history shows that economies have recorded significant growth. At the same time, when finance fails to reach the core areas of any economy, the same history shows that society revolts against finance.
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