Photo: UN Photo/Luiz Roberto Lima The Patriotic Front (PF) Government yesterday marked one year in office and the nation is so far impressed with all what the party has done in its 12 months tenure.
A number of success have been scored in its short time in office and among them, is the successful issuance of the US$750m Euro Bond.
As Zambia got the US$750 million Eurobond issuance, against a 5.5 per cent spread over 10 years, it showed that investors have the confidence in the Zambian economy to reap a profitable return.
This is not the first time Zambia has got Eurobonds. As defined, Eurobonds are debt investments in which an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate to a nation.
The two 1973 " Euro-dollar loans of US$50 million and US$100 million, raised in June and September respectively, helped to cushion the impact of Zimco bonds redemption on the foreign reserves." writes the 1973 Bank of Zambia annual report.
However the critical factor in understanding the financial dynamics of the Eurobond has to be weighed against the current global financial situation.
It must be noted that the Euro bond and Zambia's US$2 billion plus reserves are in US dollars. Sadly another event that overshadowed Zambia's Eurobond success was the US Federal Reserve statement that said it would expand its holdings of long-term securities with open-ended purchases of US$40 billion of mortgage debt a month in a third round of quantitative easing (QE3) as it seeks to boost growth and reduce unemployment.
In other words, the US Federal Reserve is going to print money to the tune of US$40 billion a month until the US economy picks up.
What this spells is that the depreciation rate of the US dollar or float rate will increase and the US dollar will buy less and less goods and services as its purchasing power drops.
In plain language, the US dollar is liquidating itself.
This is quite evident in that in 1990 a one hundred US dollar note could buy groceries in Zambia to last a month, today it's just a couple of days.
This crisis today was the calamity that Zambia faced in 1972 as recorded in the Bank of Zambia 1972 annual report.
The report noted that "between the end of 1972 and the beginning of 1973, disturbances escalated to other major foreign exchange markets.
'This led to the widespread introduction of floating currencies.
'The US dollar devalued.
'The Sterling Agreement failed as developing countries were adversely affected by the general realignment of currencies in December 1971.
'Those that escaped a large fall in reserves as a result of the first US dollar devaluation were severely hit six months later by the Sterling float.
'A further fall in reserves of developing countries was caused by the second US dollar devaluation in February 1971."
After the devaluation the US dollar and other European currencies went on a float, which is a continuous devaluation. Today that float rate has increased.
Therefore reflecting on Zambia's US dollar reserves today, their purchasing power is disappearing at an accelerated rate and this will be witnessed by an increase in imports and import costs as import volumes drop.
The end result is a growing balance of payments problem.
Consequently as reported in the Times of Zambia of May 21, 1989 in an article by Lawrence Kazenda entitled Where did our "forex" go? he writes, "in the same month (November 1971) the Financial Times reported that there had been an abnormally heavy drop in Zambia's foreign reserves.
'According to the paper the amount dropped from K267 million to K22.2 million."
More foreign exchange disturbances can be expected after China changes its Premier as its huge US dollar reserves get compromised. China will react decisively.
Naturally economists will argue that copper prices will remain high giving Zambia the capacity to pay back the Euro bond.
As expected, copper prices will be high as the Federal Reserve prints more money and other countries like China start off loading US dollars on the global money markets for safer investments, being hard core minerals that actually run the economy as they build base metal stock piles.
However, the small print that most economist miss was well noted in the same 1972 Bank of Zambia report that, "after June, when Sterling floated, the rise in Sterling prices did not compensate for the depreciation of Sterling, so that prices in Kwacha terms fell; and since Zambia produced more copper during the second half of 1972 than during the first half, the weighted average price of copper in Kwacha was probably lower in 1972 than in 1971... Copper receipts were adversely affected during the second half of the year by the floating of the pound Sterling in June, which also affected the value of Sterling reserves."
As Zambia heads to produce 1 million tonnes of copper in the next couple of years, this does not necessarily translate into increased revenue in real terms, to purchase more imported goods and services, as the rise in copper US dollar based prices does not compensate for the depreciation of the US dollar despite Zambia's increased copper production.
The next effect of the Euro bond money on the economy will be an increase in demand for infrastructure materials which in turn will drive up inflation and the cost of housing.
This was typical in the 1970s as government doubled its infrastructure budgets and the demand for cement, steel etc drove up prices. Increased costs drove up interest rates, which translates the Kwacha losing its purchasing power or poor domestic liquidity.
This then saw former President Kaunda print money much like what the QE3 policy is doing today in the US economy.
Naturally as noted by Richard Hall in his book entitled The High Price of Principles: Kaunda and the White South, he writes, "the annual report of the Auditor-General, Robert Boyd, became more singeing. Boyd announced his resignation as his report on 1967 was tabled before the national assembly in October 1968.
'Millions were unaccounted for and many departments had exceeded budgets without any authority.
'Prestige projects had often been far more expensive than the original estimates-the national assembly itself was expected to cost £330,000, but the final bill was £560,000.
'The Auditor-General's swansong was forty-two pages long and every page was an indictment of the civil service."
Naturally the prestigious projects that the Euro bonds are set to materialise will experience cost over runs, time delays etc and this will drive up the costs of the bonds themselves and Zambia may start borrowing to clear the same loans as interest accumulates.
Within this debt cycle percentage increases in government expenditure above the economic growth rate as noted the 1964 Seers Report, the 1967 Brown Report and the 1969 Turner Report will produce unemployment and compromise the real value of existing wages which was the hall mark of the First Republic.
Yet all is not lost as Zambians have the past to guide them to avoid the pitfalls of heading into another debt crisis.
The main core of the past debt crisis was an unstable US dollar value that reflected such a position on the import side.
As the export US dollar revenue purchasing power fell, it meant import volumes decreased thus creating shortages and this increased prices for goods and services locally.
It is these increased costs that drove up the domestic costs of projects beyond their projected budgets.
Therefore the notion that the Euro bond interest rate of 5.5 percent is acceptable may not be so when compared to Spain as its bond issuance interest rates were around the Zambian figure which were said to be high for Spain.
One can argue that the Spanish economy, the fourth largest in Europe, is not growing like Zambia's at seven plus percent, but a seven percent growth rate has to be converted into actual values and figures before being compared to Spain.
It is here that Zambia's growth rate would appear insignificant.
If this is the case, then the real value of the Euro bond may well exceed the capacity of the Zambian economy.
One may argue that the economy has grown from a US$1 billion economy to an export economy that touches US$10 billion.
Sadly the US$10 billion under the current foreign exchange retention regulations does not flow through the Zambian economy to add value to the Kwacha.
As exporters are allowed 100 percent direct foreign exchange retention, the foreign exchange that drives the exchange rate is based mainly on mine wage, local costs and tax obligations.
It is that dismal supply that has to pay back the Euro bonds and not the full export revenue.
It is here that government's SI 33 that compelled local suppliers to use the Kwacha saw the Kwacha appreciate meaning paying external debt was made cheaper and this can even be made cheaper and easier to pay back the Euro bonds if SI 33 touched the mines.
However SI 33 avoided touching the main foreign exchange generators-the mines-which if it did, would have seen the Kwacha reach levels of about K1,500-K700 per US dollar.
In other words the notion that the Euro bond can be easily paid off is based on a copper derived US dollar revenue that does not interact with the Kwacha remains invalid.
However it's the Kwacha that has to pay the Euro bond back on a insignificant foreign exchange supply based on local mine costs and the resulting converted currencies and not the entire US dollar export revenue.
It was this crisis that sparked off the nationalization of the mines in the 1970s as government found it impossible to balance its loan obligations.
Unfortunately, with the US dollar purchasing power crisis at the time like today, government was out maneuvered in its nationalization policy on the financial value side as US dollar liabilities were transferred to the Zambian economy.
Fortunately this time around history serves as the best teacher and an absolute SI 33 that covers the mine sector, would mean that the entire strengthen of Zambia's export revenue of about US$10 billion, would be added to the strengthen of the Kwacha, thus making it easy for government to pay the Euro bond even within 5 years, while at the same time the SI 33 policy covering the mines would insulate the Kwacha and the Zambian economy from effects of a falling purchasing power parity of the US dollar, thus in turn protecting the price structure of the Zambian economy.
Unfortunately operating an absolute SI 33 system requires a whole new business mind set and operational level for the private sector, which was clearly lacking when a partially SI 33 was introduced.
All in all the Euro bond has opened up a host of opportunities for the Zambian economy provided certain policies are taken to protect the country sliding into another debt crisis.
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