The past week has been interesting specifically around the unfolding ‘refinancing’ discussions by the general public. This was brought to the fore after the President raised the subject with the President of Turkey. Listening to the ensuing debates and discussions was perhaps as interesting as to those debates and discussions that unfolded on the topic of inflation in late 2016 following the inflation inducing foreign currency driven base erosion of that period.
At the time, it was interesting to wander into the supposedly intellectual social settings and to listen quietly to the amazing specimens of exchanges on inflation, and to see the ensuring temper flares and inflammations all arising from the subverted analysis by the intellectual types, particularly from those that had reasonably sewn up a good credibility tag over time.
At the time, lawyers, accountant, engineer, traders, medical doctor’s types became experts at espousing the intricacies of inflation. And the unraveling conspiracy theory that were seamed in, made the discussions that much interesting, if not for the anger that some instigated, convinced of the ineptitude of a government cover-up.
In an article on inflation during that period, I had noted that for those few weeks that it was topical, it wasn’t a rare occasion to find one speaking knowledgably about the subject of inflation and suggesting that the slide noted may have been artificially twisted to support an economic recovery narrative. And I had also noted then, that it was very believable, if you did not know better.
This refinancing episode has been reminiscent of that period, in terms of the anger it has weeded out in ensuing debates in some circles, in terms of the conspiracy theories unfolding, and the new unison non-expert, experts that have become experts overnight. The parallels with the inflation subject are many. But perhaps the best approach to this subject is to begin at the beginning, with the topic itself. So what is refinancing?
The financial times lexicon has a simple up to the point definition. It defines refinancing as repaying old debt with the proceeds of a new loan that has more attractive terms for the issuer, such as a lower interest rate or a longer maturity.
Simplified further, this means that the debt position remains unchanged, rather, what may likely change in this scenario of refinancing may be the level of interest charged on the loan or the tenure of the loans, from say the current remaining 4 years on the initial Eurobond to about 10 years giving the government more opportunity to galvanize funds from different sources to repay the loan in time.
In this case, it is important to underscore that almost all countries in the world issue debt to finance their growth, among other things. In so doing, there are a number of assumptions that a government makes in laying out the plans for the repayment of such contracted debts. More on that later, but first, the contracted debt may be either a Sovereign debt or a government debt. The difference with these two debts is that a Sovereign debt is issued in foreign currency whereas government debt is issued in a domestic currency, Kwacha in our case. An example of the sovereign debt is our Eurobond, while the typical types of government debt are the treasury bills and government bonds. In most cases in Zambia, and governments worldwide, the financing of the redemption of treasury bills and government bonds is through refinancing. And the simple way to tell whether refinancing is happening or not happening is by simply looking at the level of debt and asking a simple question on the maturity of debt. Has debt reduced? If it has not reduced, you are dealing with a case of refinancing. Governments worldwide have to deal with refinancing one way or another. And so as with treasury bills and government bonds, it is business as usual to seek to refinance a sovereign debt.
To understand how widespread refinancings are, let’s review the recent refinances for context;
Ben Wright (2014) wrote in the UK Telegraph in December 2015 that nearly one hundred years after it was first issued, the UK Government announced that it was redeeming all of the UK’s government World War One debt amounting to £218m of so-called “4pc Consols” – bonds that were first issued by Winston Churchill in 1927, partly to refinance National War Bonds originating from the First World War. This was the first planned repayment of this kind of the perpetual bond by the UK Government for 67 years extending the repurchasing programme to include all of the debt that the UK incurred during the War to take advantage of low interest rates to refinance this debt with new, more conventional, bonds.
Consider another case of refinancing reported by the Independent of Ireland. Dono ‘O’ Donovan (2014) wrote in 2014 in the Independent of Ireland that the Irish Government borrowed up to €4bn on the private money market in a series of bond deals aimed at repaying costly IMF bailout loans early at a yield – or effective rate of interest on the new bonds of 2.5pc or half the interest rate charged by the IMF for its share of the EU/IMF bailout.
Further, in August 2015, the Irish Examiners wrote that between 2016 and 2020 almost €60 billion of bonds would have to be paid back, so there was a need to come up with attractive switching terms into longer-term debt or new funding options to keep investors happy and ease the burden on the sovereign.
Looking elsewhere in Europe, in Italy, it was reported of the public debt at around €2.2 trillion, their government was planning on refinancing €635bn of bonds at the end of 2017.
Just in Africa here, in November 2017, Reuters reported that Ghana sold 5.29 billion cedis ($1.16 billion) worth of long-term bonds to help restructure its high public debt. The transaction was about restructuring the short-tenure treasury bills into long-term bonds to bring in debt with longer maturities.
The whole point of the above discussions or examples is that debt is big business and is happening all around us every day. In fact it is smarter in so far as the local currency is stable to refinance than settle sovereign debt because of the potential effect on GDP of withdrawing hard currency from an economy.
Now on the issue of repayments, Governments world over and ours included, plan different scenario on how to repay its loans. It may do so by raising taxes over the duration of that loan, it may plan to pay by hoping to drive economic growth at a pace that is faster than the debt, it may do so by pursuing more aggressive austerity measures or it may plan to pay in the interim by a refinancing option. More nations in the world than not, have different measures of debt refinancing option available as an interim measure. In fact for domestic debt it is almost a given that refinancing happens everywhere. Refinancing has an advantage that it brings less shock to an economy than the adverse impact that a full debt repayment can have on GDP growth arising from withdrawing funds from the economy.
In Zambia, a number of commentators have been opposed to deficit financing and instead have wanted the country to focus on harnessing investments from savings. In other words, the orthodox alternative to economic management is lauded, which has a primary focus on monetary management of our economic and a general belief that the private sector will be incentivized so far as there is policy and monetary stability to grow our economy. This general belief forgets one key concept, the private sector is very risk averse and therefore will not invest significantly in a sector or region that has no discernible infrastructure and so the borrowing to build infrastructure has been a necessary catalyst of the growth we continue to see. At the same time, it was easy at the time of contraction of the subject debt, for any economist of salt, to have known that refinancing was going to be necessary at some point. The reason is simple, our budget deficits.
This can be best understood by looking at our key statistics of 2018. Of the 2018 budget, the plan was that K49 billion or 68.5% of the budget was to be sourced from domestic revenues with K2.4 billion coming by way of grants from various co-operating partners, while the balance of K20.1 billion was to be financed from domestic and external borrowing.
In short, the budget gap represented by grants and non-fee/tax revenue income was anticipated to be around 31.5%, a 3rd of the total budget for 2018 or in economic speak when compared to the GDP at about 7% deficit. With this kind of budget scenario, the policy alternatives that makes sense is those that spur productivity at a rate faster than the growth of debt.
If we look at this from the debt perspective, here is where we are; the current total national debt announced is $9.3 Billion or about 45% of our GDP, and about 145% of the 2018 national budgeted expenditure and about 211% of the 2018 budgeted national revenue. The annual interest charge assuming a nominal 5-6% average annual interest charge means that our outlay is about K5.5 Billion in interest from internally generated tax revenue per annum or about 13% of our internally generated revenue.
This scenario makes the repayment of debt from internal sources in the short-term more difficult to achieve and the stories from those that talk about the sinking fund more incredulous. If not refinancing, then what? The arguments for the economist and for the citizenry must be on how we can assist government to come up with policy initiatives that ensures that our revenue collection exceed the current 16% of GDP. It is only an increase in our revenue mobilisation that will stabilize the debt and it is achievable, but for now refinancing must be the key word as measures are put in place to up our revenue.
About the Author
Kelvin Chungu is an Assurance and Advisory professional and is contactable on +260-97637748 and kelvin.chungu@fizambia.com