Monday, September 24, 2012


By. Dr. Mbita Chitala; Executive Director: ZAMBIA RESEARCH FOUNDATION


The news that Zambia has managed to secure a US$750 million Euro Bond is both good for Zambia and Africa in general. The Zambians that led the offer must be thanked and lauded.

Two views define Portfolio Investment (PI) such as the Euro Bond that we have raised from international capital markets.

1.       The most prominent and popular view raised by many Zambians and Neo Liberals is that PI will for the first time give our government access to this vast pool of capital that is available on the global financial market for development. The money so obtained is competitively priced and efficiently allocated without corrupt tendencies associated with foreign direct investments and bank borrowing. The Euro bond  will promote economic growth of Zambia.


It is further argued that the Euro bond in its form is superior to foreign bank borrowing as it has no contitionalities and external control disadvantages like the one Zambia has been subjected to by the IMF and World Bank under Structural Adjustment Programs.


2.       However, in reality, Portfolio Investment (PI) such as our Euro Bond  can and may serve our development if it is used to finance investment projects. Our government is therefore challenged that this is strictly adhered to.  In real life, the Euro Bond will be  allocated by global capital markets in accordance with rate of return criteria and not necessarilt to advance economic development of Zambia.

The Deputy Minister has argued that the money so obtained from the bond will be in the Bank of Zambia soon and will be used as part of the national budget. This appears to be one way of utilizing the money. However, this will introduce unnecessary political costs.


In other countries, governments appoint investment bankers and fund managers to invest the money in projects that have high returns. In other words, portfolio investments  is advanced to the private sector. And because of this, the investments so made are usually in speculative projects like commercial real estate development rather than in public goods such as roads and railways. Because of this speculative content of Portfolio Investment, such investment may tend to widen inequality between citizens.


It should also be pointed that portfolio investment made through investment bankers has other unacceptable behaviors. For instance,  the investment bankers have been known to create derivatives and other instruments which they trade on without the authority of the owners of such bonds. In a financial crisis, this behavior can be very devastating to the holders of the debt as we have experiences in Greece. In other words, the investment bankers tend to create difficulties which may for bond holders where there is insufficient management. This is the case in Milan, Italy where they are a subject of criminal investigation by authorities.


Furthermore, if this high value Euro Bond is not regulated by our government, it has the potential of increasing  macro economic instability. A collapse in speculative bubbles in stock markets can lead to a financial crisis and increase in poverty rates and income inequality.  Asset volatility can increase uncertainty, induce systemic instability and can therefore create vulnerability to the financial crisis and allow regressive capital flight from Zambia; Kwacha currency depreciation that will adversely affect export performance; debt service unsustainability and a return to pre HIPC syndrome where our country became vulnerable to a devastating debt overhang;    and asset price deflation.


Furthermore, Portfolio Investment  such as the Euro Bond can introduce constraints on policy autonomy in our country. The investors will usually forbid government from implementing an expansionally monetary policy which is the policy direction that works. They will oppose policies that result in reduction of interest rates as this will be seen to be abating or cohorting with the hated inflation. In other words, our government will not be allowed to enact laws or policies that restrict investor freedom


3.       The policy advice one can give is that, in general, the PF government has started well. The government must  as soon as possible  create a development vision by stating explicitly their industrial strategy, design policies in sectors and design performance targets and incentives. It will become apparent if this is considered, that, the government will need to create strategies that regulate capital inflows and outflows. Our country may consider advancing blunt restrictions on Portfolio Investment as is the case in China, India, Chile and others or introduce temporary controls as occurs in many countries that attempted to use global bonds such as the Euro Bond to develop their infrastructure. We must address our tax system  so that it influences the composition, and/or maturity structure of the portfolio investment so that we restrict capital flight and stop continued underdevelopment.


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