Debt, debt, then more deabt

BY SHADRACK MUYESU

African countries are increasingly taking up debt as they approach the repayment period when most capital market Eurobond loans mature. The negative effects on economic growth have been telling. In the last four years the continent’s sovereign external debt balance has risen faster than the Gross Domestic Product. On average, countries are paying out more in debt service than they are receiving in loans.

Because of the sheer volume of these debts, more than half of the countries that issued sovereign bonds in the last half decade are on the verge of defaulting while the rest are forced to borrow so as to repay. The alternative, which is to borrow domestically, has left the private sector starved of funds further curtailing growth and limiting these governments’ ability to pay.

In the direst situations, as in Ghana, the International Monetary Fund has placed countries under intensive care supervision. The better placed, like Zambia, have applied for a standby credit facility while exploring the possibility of issuing another Eurobond. Dozens more dependent on single commodities for revenue will be seeking international relief in order to avoid difficulties.

Like Zambia, Kenya has already set in motion plans for yet another Eurobond. Reliable resources intimate that amongst the first orders of business for the Uhuru Kenyatta government will be to float the bond as a two-year, Sh76.5 billion syndicated loan to fall due in October and the same amount in five-year Eurobonds in June 2019 so as to get funds to refinance maturing debt.

Heavy Investment with minimal return

All this is happening while questions still linger as to the whereabouts of the last windfall. The maiden bond was aimed at raising funds for government’s infrastructure development without negatively impacting on the cost of borrowing for citizens. As it is, this objective was hardly achieved leaving the country, thanks also to the heavy recurrent expenditure, poor planning and an unstable political and economic environment, virtually unable to meet her debt obligations. Not only has the Standard Gauge Railway come in for severe criticism for its economic impotence, the railway, alongside a host of other government projects, remains far from completion never mind the money invested. As a result, government has been forced to take up more loans while also turning to the domestic market for support which has led us to the end we set out to avoid in the first place- a further escalation in the cost of borrowing and a stunted economy. On many people’s minds is whether another expensive debt is what we need.

There are those who believe that a country cannot run without debt, that all government money is in fact debt. For them another Eurobond, especially when the maturing debt obligations are spread out over a long period, is actually a good idea. And with the added advantage of strong economy and a positive growth outlook (at least according to the World Bank) they reckon that another issue would only be successful and if used properly, the answer to our debt crisis.

Proponents also point to the large debts of economies elsewhere, the United States for instance and what she owes China. What they fail to point out is that such debt is counterbalanced by the debt owed to them by other countries. They also conveniently leave out the large consumption base these countries enjoy, the fact that these countries are net exporters and the high levels of accountability there unheard of on this side of the shores.

There are those yet who wouldn’t advocate extra debt, especially in a country defined by impunity such as ours. For them, a properly guided government would be keen on replacing foreign direct investment with local direct investment and raising cash through among others, reducing reliefs on foreign investment and taxing consumption more. They cite Lenin with Russia and Mao with China as stellar examples. More so, corruption, market upheavals, political uncertainty, climate change and ill luck mean that interest rates will be higher as African debt is increasingly perceived as toxic.

If we can remember, many people questioned the idea of a Eurobond to fund grand infrastructure projects when there was a 30% hole in the budget. Many reckoned that such a loan could only be deemed properly used if spent on agriculture, which would have the net effect of boosting export. Also questioned was the actual worth of the bond and the money government would have to pay as interest.

While government placed the proceeds of the bonds at an excess of Sh200 billion, skeptics argue that its true value was much lower once all the charges had been deducted and market considerations factored in. So far government has been coy with details on transaction costs, the coupon rate (the interest rate that it will pay investors periodically and which stood at 5.875% and 6.875% respectively) the market interest rate and the maturity of the bond. The value of the bond itself is calculated as the total Present Value of the lump sum that will be due to the bondholder at maturity plus the present value of interest payments made for the duration of the bond. This means that, although the bond raised Sh176 billion not counting discounts and fees, in the end the country has to part with Sh278 billion in repayment.

A loan without a plan

Just like any other loan, issuing a sovereign bond must be on the basis of good faith. Government must not only be careful not to mislead potential investors on her creditworthiness, it must also honestly state the value of the bond and be very specific with how the proceeds are going to be spent. It owes this duty to the citizens. To curb an appetite for more loans, investment should only be in valuable courses with the greatest multiplier effect. As Michael Lipton advices in Why the Poor remain Poor, it must be such as to create a favorable export import balance and enhance food security- all with a view of spurring growth and creating wealth to enable payback. This type of investment can only be in agriculture, Kenya’s leading foreign exchange earner.

Unfortunately, Kenya has not done so. Assuming that the proceeds of the 2014 bond didn’t end up in private off shore accounts somewhere as has been reasonably claimed, government spent them on expensive projects with minimal profit value, in the short term at least. We are therefore hooked to loans. And the more we demand, the more expensive they are going to be as our corruption and poor planning has potential investors worried stiff. It’s a vicious cycle, and soon, the inexorable slide towards a sovereign default will reach its conclusion

Lest we forget, because of a similar lack of transparency and obvious signs of high debt risk, Zambia, which issued three Eurobonds between 2012 and 2015 totaling $3 billion has been unable to get a $1.6 billion bailout package of the International Monetary Fund since late 2016. The Edgar Lungu government cannot account for at least $2.2 billion of the proceeds while debt has soared to 60% of the GDP. And she is not alone, Senegal, Ghana, Mozambique and many more, are all borrowing to repay, but with a lot of trouble.

If the Jubilee government is not careful, this is where we could end up.