IT IS interesting that at any given time, there are some economic terms which seem more prominently used than others, especially in the media and among the sources.
At one time, somewhere around 2008, we had the global issues of economic meltdown or downturn or recession.
Before that do you remember the days of the macroeconomic policies, poverty datum-line, conducive and enabling environment, cash budget, facilitation, cost-sharing, restructuring, economic reforms and poverty reduction as opposed to poverty eradication?
This was before the need for austerity measures set in, globally, while locally terms and phrases like tightening the belts, sacrificing for mother Zambia, financial prudence, stakeholders as well as financial accountability have occasionally sprung up in the media.
The words or phrases currently not missing in most of the economic write-ups include the Eurobond, what with Zambia’s issuance of the third one, debt trap, debt sustainability, repayment capacity and maximum returns.
Not so long ago the phrases like unemployment and underemployment, decent jobs, exposure to currency volatility, debt management, budget deficit and started popping up and have continued to do so consistently.
Therefore, today I want to reflect on one of these phrases which will seemingly be with us for some time to come – the Sinking Fund.
The government should set up a sinking fund for the repayment of the Eurobonds! What does that mean?
To start with, what is a sinking fund?
From the layperson’s view, looking at the phrase on its face value, it looks downright negative – like an abyss where you, unfortunately, throw your money, for some reason, which can never be recovered since it sinks.
A simple research, however, shows a different meaning all together from what should be assumed – going just by the combination of the two words, sinking and fund!
The Financial Diction, an online resource, define sinking fund as a fund to which money is added on a regular basis that is used to ensure investor confidence that promised payments will be made.
According to this resource, the fund is used to redeem debt securities or preferred stock issues.
Another source, Investor Word states that this is a fund into which a company or Government sets aside money over time, to retire its preferred stock, bonds or debentures.
In the case of bonds, incremental payments into the sinking fund can soften the financial impact at maturity as investors prefer bonds and debentures backed by sinking funds because there is less risk of a default.
At a personal level, for instance, if a worker has a loan with a long maturity period, of say five years, he/she could open a special account into which he/she could be depositing some amounts every month, from the salary income.
This will enable the borrower to be ready to pay off the principal amount when it comes due after the five years.
For Zambia, the sinking fund has become popular because of the three Eurobonds the government has issued in the last three years.
On June 9, 2015, the Zambia Institute for Policy Analysis and Research (ZIPAR) recommended to the government to consider setting up the sinking fund to help repay the first two bonds in 2022 and 2024.
This would involve putting aside money each year into the sinking fund for the two Eurobonds to insulate the government against future adverse macroeconomic conditions, like the fall of the Kwacha since the bonds are in United States dollar.
The government saw sense in this and went ahead to adopt the recommendation.
About three weeks ago the Zambian Cabinet in principle approved the establishment of the Sinking Fund for the two first Eurobonds.
The sinking fund is for the repayment of the US$750 million and the $1 billion whose maturity dates are in 2022 and 2024, respectively, and is expected to run over nine years in which funds will be accumulated for the repayment of the bonds at maturities.
This is expected to reduce pressure on the national budget, militate against foreign exchange and other external risks.
Further, the sinking fund will also ensure that Zambia maintains the credibility and integrity on the international capital market.
But what is the legal backing for the government’s move?
Article 120 (1) of the current Republican Constitution states that there shall be charged on the general revenues of the republic all debt charges for which the government is legally responsible.
Section 2 of the same Article provides that:
“For the purpose of the Article, debt charges include interest, sinking fund, the repayment or amortisation of debt and all expenditure in connection with the raising of the loans … and redemption of the debt thereby created.”
This means, therefore, that the Constitution authorises the establishment of sinking funds on the repayment of the public debts by the government.
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