PUBLIC FINANCE PART 3: DEBT RESTRUCTURING
A debt is a loan that arises when two or more parties enter a mutual contract in which one party agrees to lend money at a profit while the other commits to paying back the full loan amount after an agreed period. In short, it is a mutual agreement that creates a creditor (the lender) and a debtor (the borrower) through an exchange of funds (the loan). The borrower undertakes to meet general and specific conditions of the loan as prescribed by the lender because it is the lender’s money under transaction. Typically, these conditions include actions to be taken in order to avoid default and/ or actions to take in case of default. When nations borrow, it is referred to as sovereign debt.
To that extent, a loan agreement is treated as an open document between or among the participants so that all details are disclosed and known ahead of committing the country. Every loan agreement, for example, must have the amount being borrowed; the tenor, or time it will take the borrower to pay back. It includes the fees expected to be earned by the lender and interest charged on the loan – these two aspects constitute the price of the loan. Importantly, the purpose of the loan is fully explained by the borrower and lenders can interrogate the authenticity of the intended use of borrowed funds, up to a degree.
The lender has the prerogative to determine the amount they wish to lend after they perform their due diligence and assess the risk profile of the borrower, especially their capacity to repay the loan on time. The borrower, too, must have done their due diligence to know that they are borrowing an amount that they can repay without undue strain on the economy. A worstcase business case of repayment must be done by the borrower. Each borrower, therefore, signs loan contracts fully aware of the conditions precedent and their obligations. Furthermore, debt restructures are a very normal phenomenon and lenders are often sympathetic to logical requests for debt restructuring. What puzzles lenders are requests for debt cancellation altogether.
This is because, if all parties are fully aware of all conditions, then why do governments return to the same lenders and request debt cancellation? From the lender’s perspective, the borrower is still the same; same country and same laws. The only change could be the new office bearers who have come to renounce their own laws. In the discourse of public financing, there are two principal points of view from which to discern the matter of debt cancellation, or more appropriately, debt restructuring. There are, of course, many other viewpoints but two will be sufficient for now. Firstly, and most obvious, blame the government. To say that the government has inexcusably failed in its fiduciary duty to manage public resources judiciously and therefore, failed at public financing.
This is the most preferred narrative because it provides the lender immunity from misperception and even responsibility under the credit terms. It suggests that all the blame must be directed to the financial incompetence of the borrowing nation and the inevitable corrupt elements within government. More cautiously, this notion further solidifies the integrity of the global credit system – and its capital markets – so that their rules of lending are largely unchanged to sympathize with the borrowing nation.
The second way of assessing debt cancellation is that sovereign debt is one of the most lucrative trades and income earners for private finance. This possibly makes public sector financing one of the most lucrative and steady businesses for creditors. So, while sovereign debt presents as a burden on the balance sheet of the country; conversely, it is logged in the profit and loss statement of the lender as income. This means that what appears to be a potentially bad loan for a country can be a means of extending a loan beyond its previous deadline and therefore earning income for a longer period for a creditor. Such scenarios provide lenders with leverage on a nation’s finances including its natural resources, where necessary.
This second perspective could partly explain why nations endowed with the most valuable resources are, paradoxically, among the most severely indebted. It also explains why revenues raised from resources such as copper, cobalt and others go towards debt repayment instead of improving economies overall. This is part of the reason for the disdain of capitalism (and capital markets) especially among developing nations. It is also the reason governments prefer government-to-government (or bilateral) lending because the conditions are more amenable than those driven by profit. However, this does not excuse bad planning and premature borrowing.
For example, Zambia had accumulated debt in excess of $7.5 billion by 1991, before liberalization took hold and provided solutions to expand the revenue base and seek debt cancellation. Zambia boldly underwent difficult Structural Adjustment Programs (SAPs) under the International Monetary Fund (IMF) tutelage and entreated the creditors to avoid generalizing debtor nations into one category because solutions will not deal with actual issues that led to debt acquisition, let alone repayment.
The liberalization agenda achieved two things concerning debt cancellation and economic efficiency: firstly, the merits proposed for debt cancellation in 1994 to 2000 successfully led to debt cancellation in 2005. Secondly, Zambia led the call for the Go East policy and opened the first Bank of China in Africa in 1997. This second point was meant to create a channel for huge capital flows from China that were not as expensive or disruptive as commercial sovereign loans, once debt cancellation was achieved.
The liberalization agenda was not a ruse to rob Zambians of their assets like the copper mines, as it has been vicariously misrepresented. In fact, Zambians became more economically empowered and prosperous during this period because government was made to share resources with its own citizens. This deliberately thought-out strategy created an open economy that enabled international trade to thrive using the capitalist template while simultaneously preparing ground for Chinese funds to grow the domestic economy organically. even at that time, and as far back as the 1960s, China had supported Zambia. It was a question of how we used the borrowed funds.
Liberalization left a template for future governments to understand that while infrastructure such as schools, roads and hospitals are important, it is more important when the citizens have been empowered with the mental capital to drive their own cars on those roads, to own their own hospitals and build their own universities and schools as indigenous owners of capital. This is why debt cancellation was pursued with intent and foresight by the Zambian government between 1991 and 2001.
On 30th July 2022 the Ministry of Finance and National Planning signalled appreciation for Zambia’s creditors’ committee to agreeing a consensual debt restructure plan wherein all parameters of restructure will be agreed in unison by all parties. This is not debt cancellation but a move to restrain private finance from commanding more public funds from the economy than the citizens. It gives the country breathing space because all lenders will agree to one agenda, which is debt repayment albeit under revised conditions from the original “term sheets” unlike previously when lenders were split between east and west. Without a doubt, the biggest question is will government seize this opportunity to bring back the country in the growth trajectory or it will be a question of Business as Usual? The next few months will be good to watch as they unfold.