The Liberty to Spend - the drawbacks of eurobonds
Updated: Oct 11, 2020
Eurobonds are often cited as a funding alternative that allows African governments to depart from a reliance to foreign aid and increase their accountability to private investors. As referenced in our previous article, cash strapped Sub Saharan African governments continue to rely on Eurobonds as an instrument for debt relief. More countries have been attracted to Eurobond markets as they reap the benefits of floating interest rates and exposure to a diverse pool of investors. Unfortunately, Eurobond markets have not kept governments accountable for their spending.
Prospectuses reveal no details about the intended use of the proceeds, giving governments the flexibility of spending proceeds as they see fit
To issue eurobonds, governments are required to submit prospectuses of over 150 pages, presenting detailed information including the economic factors and projections of their countries. These prospectuses, however, reveal no details about the intended use of the proceeds, giving governments the flexibility of spending proceeds as they see fit. For example, in the prospectus Benin a issued in March of 2019, out of 183 pages, the prospectus devoted only one sentence to detail the use of the proceeds. The government of Kenya b had a similar one-sentence summary in its prospectus for the eurobond issued in 2019.
Benin eurobond prospectus issued in 2019
Kenya eurobond prospectus issued in 2019
Unlike other sources of foreign funding where proceeds are raised for specific projects, eurobonds do not involve the same level of accountability. Governments are only kept accountable for the outlook of their overall economy and their perceived ability to pay back the eurobond proceeds
This liberty in spending could be good news. Using eurobonds, African governments can safeguard their sovereignty as they are not tied to special foreign interests that might influence how they spend. What is worrisome is that - this granted freedom, functioning similarly as a blank check, has led and will continue to lead to inefficient expenditure and misappropriation of funds. In some cases, African governments have used Eurobond proceeds to repay other commercial debts and/or vice versa. In others, government agencies, with existing crippling debt and no third party oversight, were responsible for managing eurobond proceeds. In 2018, the Kenyan government borrowed 2.1 billion dollars in eurobonds and used 600 million to pay back existing debt; the country has been trapped in a refinancing crisis exacerbated by the global pandemic c. Another example is the Zambian government which has been repeatedly accused of spending borrowed funds on projects that favor the government’s political standing rather than the country’s economy d.
This lack of transparency has negatively impacted the private sector and private citizens in general. As African governments rely on fiscal revenue to repay public debt, private citizens will be on the hook to pay back loans they have no visibility on and cannot keep their government accountable for.
In recent years, African governments active on eurobond markets have been under pressure to raise fiscal revenues. In a lot of cases, government spending has not translated into economic growth and higher fiscal revenues necessary to repay Eurobond debt. In Nigeria for example, fiscal revenues are getting even lower while more debt accumulates e. As eurobonds progressively mature, such fiscal pressure can only get worse, leading to severe tax increase, and again putting the private sector responsible for debt they have no way of accounting for.
Copyright: Financial Times
We recommend that African governments publish enhanced disclosure of the use of their Eurobond proceed to help with the following:
1- Increase accountability among citizens – Help taxpayers understand the usage and potential benefits of the funds borrowed.
2- Contribute to more accurate risk ratings – Help rating agencies to better measure the risks of each country and attract more investors. A lot of African leaders and citizens have complained in the past about inaccurate risk ratings that unfairly affect their borrowing cost. Enhanced and intentional disclosure could fix this issue.
References:
a - Prospectus Eurobond Benin March 2019
b - Prospectus Eurobond Kenya 2019
c - "Why the government has become hooked to eurobonds"
d - "How Zambia's excessive borrowing will affect you soon and bring back the IMF"
e - "Rising cost of government debt unsettles investors in Nigeria"
https://www.ft.com/content/a8140736-6db2-11e9-80c7-60ee53e6681d
Authors
Levi Kedowide, Founder, TUKA Institute
Marylin Quaidoo, Resident economic expert, TUKA Institute
In collaboration with
Chenjing Wang, VP TUKA Institute