Centre for Trade Policy and Development (CTPD) executive director Isaac Mwaipopo has demanded for the operationalization of the Sinking Fund, warning that Zambia will be unable to repay any of its loans without one.
But Mwaipopo, however, conceded in an interview that it was hard to convince government to reserve funds for future debt repayment looking at the high rate of borrowing and lack of fiscal discipline.
“Operationalization of a sinking fund is key to Zambia’s debt servicing; it can also help Zambia earn the confidence from lending institutions like the International Monetary Fund. With regards to the Sinking Fund, CTPD has noted a number of policy pronouncements for close to two years, what the rest of the country doesn’t know is how far the Ministry of Finance has gone in operationalizing the initiative as it was meant to help prepare the country for debt-servicing following a number of loans the country has accumulated over the years from various sources, among which includes loans from the People’s Republic of China. Close to 30 per cent of Zambia debt stock is from China; this growing problem, which if not monitored, may have serious negative consequences. A sinking fund is a part of a bond indenture or preferred stock charter that requires the issuer to regularly set money aside in a separate custodial account for the exclusive purpose of redeeming the bonds or shares,” said Mwaipopo.
“In a statement recently issued by the Minister of Finance, it was mentioned that Zambia’s total public external debt as at end March 2018 amounted to US $9.3 billion from US $8.7 billion in 2017. The domestic debt stock (government securities) amounted to K53.5 billion from K48.4 billion over the same period, it is quite unfortunate that operationalizing of the Sinking Fund was not one of the measures government outlined under its plans to manage debt. Should government opt to operationalize the Sinking Fund, there will also be need to take into consideration concerns that had been raised by the World Bank where the institution raised flags on Zambia’s lack of fiscal discipline. In the current set-up, it is quite hard to convince government [of] reserving some funds for future debt repayment looking at the high rate of borrowing of loans. Good as a sinking fund may be, it also requires fiscal discipline. It is more important to put in place systems that will ensure that the fund is properly managed. In cases of poor management, the fund becomes a waste of resources and a drain on tax payers’ money.”
Government, through former finance minister Alexander Chikwanda approved the establishment of a Loan Sinking Fund back in 2015 for the purposes of paying back the two Eurobonds successfully issued in 2012 and 2014 of US $750 million and US $1 billion respectively.
However, that same year, government went ahead to issue an unprecedented third sovereign Eurobond worth US $1.25 billion that has a three-year amortisation plan, with payments due during the 2025-2027 period, which will average just under US $500 per annum.
The Zambian government will by 2027 be hit with a total amount of US $5 billion in interest and principal payments from all three Eurobonds or risk defaulting.