Economist Emmanuel Zulu says the move by the Bank of Zambia –BOZ- to change the structure in which bonds are issued is vital in helping government manage its domestic debt.

Recently BOZ announced that effective January 2024, government bonds will be issued at par in the primary market for all new insurances. This means that government bonds will be sold at their face value, meaning the cash amount to be invested will be the same as
the face value amount.

BOZ explained that issuance at par entails that the coupon rate for each instrument will be determined during the auction and advised that the coupon rate for each instrument on auction will be the respective highest accepted yield rate. it was stated that re-issuances of any existing bonds and secondary trading of any bonds may be done at discount, par or premium depending on market conditions. The change has been made to streamline Government debt metrics and debt service in general.

Speaking in an exclusive interview with the Zambian Business Times –ZBT, Zulu said Zambia is having an issue with debt servicing and that the government does not want to overburden itself with debt service hence the resolve to change the structure in which the bonds are issued. He said the discount that was being given to investors needed government money to be paid. “So the government was incurring costs on the coupon itself as well as on the discount that was given to the investors” said Zulu.

He further added that the country already has a crisis and is uncertain of the direction that the external debt restructuring deal will lead. He said with this issue, it is difficult for the government to have enough fiscal space to even afford discounts. “We will actually see a different situation this time around were people pay the actual amount of the bond and the government can plan from how much it has realized and how much it will pay over a certain period of time” said Zulu.     

Zulu explained that bonds were initially sold at a discount and that government was paying the difference when the bond matures. “What use to happen was that the government would issue a bond of maybe 300 million kwacha and sell it for 250 million kwacha, but upon maturity the government had to pay the difference which was 50 million kwacha. So that was a huge cost on government” said Zulu. He said what government is lining to, is that at whatever price the bond is issued at, that is what will be obtained at maturity. This means one has to pay for the actual price that the bond has been issued at.

Zulu said this also makes an adjustment as the coupon payments may not be known prior. “The coupon payment will be known after the auction has been done which makes them to plan properly” Zulu. He said the Bank of Zambia has been struggling to plan properly because they do not know how much exactly will be realized from the bond sell. He said once BOZ knows the bond sell, it will be able to determine the coupon payments which makes it easier to for government to manage debt payment.

He added that the aspect of discounts was not working well for government in managing debt because the difference becomes a debt to the investor. “So investors were opting for that because they knew that even if they invest a million, they will buy the bond at maybe 800 and get the 200 as increase in capital” said Zulu. He said now that they will be no discounts; BOZ will be compelled to raise the coupon rates so in order to attract investment in the bonds. “Probably we will see coupon payments that are more aligned to the prevailing interest rates because what use to happen initially was that coupon payment were less than the prevailing interest rates, so that cannot be maintained because the government still needs money so they still need to issue bonds” said Zulu.

He said to make the bonds attractive with this arrangement, the government will have to raise the coupon payments and align them to the prevailing interest rates at that particular time. He said investors will still benefit from higher yields despite them not taking discounts.

Zulu however noted that as good as it is in trying to streamline and manage debt on the aspect of government, investors may be skeptical to go for longer term bonds. He explained that this is because of the uncertainty of the environment were interest rates are projected to go higher. He said the coupon rate is given, it cannot change during the tenure of the bond hence most investors will tend to go for shorter term bonds so that they can be assessing the market. He said this may affect the 20 year bond that the government intends to introduce next year as people would look at the time value of money as opposed to locking money for a longer period in an environment that has uncertainty with regards interest rates and a projected rise in the future.

Zulu however said that the move is in line with the debt strategy government wants to adopt of minimizing domestic debt going forward. “I think this is the way it should be, and it is not a new practice, it is practiced even in other countries that are also trying to manage debt”