WB urges State to buy back Eurobond debt

THE World Bank has advised Government to begin buying back some of the outstanding Eurobond debt before they mature instead of setting up a sinking fund which will not work due to Zambia’s persistent large fiscal deficits, making it difficult for the country to save. Government announced that it has set aside US$20 million for the refinancing of its three Eurobonds - the US$750 million, US$1 billion and US$1.25 billion, all falling due between 2022 and 2027 and respectively. According to the World Bank, by buying back some of the outstanding Eurobond debt in the years prior to its maturity, Government could reduce the repayment risks especially as the first two bonds had single bullet payments. The WB’s senior economist, Dr Gregory Smith, explained that this method could also reduce the final outstanding payment over several other Eurobond issues. “This strategy is something that Zambia should analyse and use to inform its own refinancing strategy. The Zambian government must switch from ‘passive’ debt management to being ‘active’ and must implement a strategy to reduce the cost of borrowing, extend the terms, and diversify the sources of debt funding,” Dr. Smith said. He said bondholders of existing paper could also be invited to exchange Governments holdings - for up to a stated amount, of a new issuance. Dr. Smith explained that this strategy had Government paying back existing debt with new debt; the Eurobonds essentially get rolled-over, but with a careful analysis of the trade-off between containing repayment risk and reducing cost. Meanwhile, Dr. Smith said the sinking fund method to finance Eurobonds would not work for Zambia due to its persistent large fiscal deficits which made saving impossible. “Given the persistent large fiscal deficits, saving in this manner has not been possible. In addition, the level of international reserves has fallen short of the four months of import cover Zambia Plus target, “Considering the lack of ability to save and the inability to build the targeted fiscal buffers, and the large size of the repayments due, the refinancing route should be properly explored as the most practical solution,” Dr. Smith said.