by Darlington Chiluba
“
I PROMISE to pay the bearer on demand.” This is perhaps the most authoritative statement of purpose and commitment inscribed on many a currency, if not all.
It is a statement of purpose because it communicates the intention of money as an enabler of transaction. A firm commitment that transactions rely on the availability of money and its attendant integrity to comply to a contract or terms of a transaction.
Failure to comply to a financial contract either spells fraud or insufficient capacity – in other words, insolvency.
At national level, the integrity of the sovereign, communicates a nation’s ability to meet all its obligations when they fall due domestically and internationally.
It is not inconceivable for a country to cease servicing local debts while committing to paying international debtors. The inverse is also true when interest or other payments on international debts are frozen, while domestic debt is serviced.
The Zambian case exemplifies the latter: when the country temporarily froze all debt service on its international obligations in 2020 due to excessively high interest rates that resulted in higher payments on the Eurobonds.
The trouble with private financial markets like the Eurobond markets is their insatiable appetite for information. Like any commercial bank, this information allows the lender to ascertain the borrower’s ability to meet their obligations.
The need for information is essential for the lender’s own integrity as a financial institution and to the people whose money they use to lend out. It is a basic compliance principle for any client of financial institutions.
In Zambia’s case, the country borrowed $750 million in 2011 when all economic indicators were impressive from an investor’s perspective. The actual contract was signed after the 2011 elections in 2012.
The request to borrow was filled with the requisite information about the nation’s history such as revenue streams (showing capacity to repay), potential growth against mineral resources and other necessary information requested by the lender.
In a space of two years, 2014 and 2015 Zambia borrowed a further $2.25 billion on the back of infrastructure growth, from the same markets. Whether in 2015 or 2024, $2 billion is a significant amount of money which cannot be easily dismissed without proof of applicability. This is partly the reason the Bondholders went in a panic about Zambia when the country started to borrow from China for the same reason – infrastructure expansion.
Panic, or fear, is often driven by emotion than logic. But where investor relations deteriorate, developed capital markets, can misread the signals to justify and accelerate the panic.
For the record, banks use money received as deposits by one set of clients to lend to another set of clients at a price that is simply referred to as interest.
Therefore, any information that a client may be unable to repay loans affects both the lenders and the depositors who provide them the funds to lend.
As such, the panic among the bond holders created a picture of Zambia as being unstable and its bonds classified as junk status, shooting their price to unaffordable levels for the country.
This increase in interest payments rose faster than the increase in revenue collections of the country thus a default was inevitable – selective or not. What Zambia did better than other countries was keep the domestic financial integrity fully functional.
The technocrats at the Ministry of Finance and National Planning and Bank of Zambia have not received their fair share of credit on this score.
Fast forward to 2024, Zambia is still plagued by the twin problems of inflation and an unstable currency largely due to the disparity between revenues and debt obligations.
According to the Ministry of Finance and National Planning, Zambia was meant to pay more than $2bn in debt arrears in 2022, an amount which increased to over $4bn by 2024. The debt was contracted in foreign currency therefore, part of the obligation is to find and buy foreign currency to settle the debt obligations.
What that means is that the Kwacha equivalent of that amount was to be sourced by Government, inexplicably creating a high demand for foreign currency and severely impacting the exchange rate.
It is easier when the real sectors – copper and agriculture – are performing at their optimum. When the two sectors are not performing at peak, then the sources of local currency become lean. The best way to get the economy running is to get back to basics, that is: get the real sectors operating at optimum.
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