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.
End.
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