Figure 1: Foreign Exchange Reserves, 2012 q1 to 2015 q3
Sources: Bank of Zambia and Ministry of Finance
As is clear from Figure 1, build-ups in forex reserves have coincided with successful issuances of Eurobonds. For example, in the third quarter of 2012 (12q3), the country issued its first ever Eurobond valued at US$750mn. Coincidentally, in the third quarter of 2012, our stock of forex reserves increased from about US$2.5bn at the end of 12q2 to about US$3.3bn at the end of 12q3. Thereafter, there was a steep decline in forex reserves probably as the money was released for infrastructure projects and/or utilized to intervene in the forex market (I have covered the last point before).
The stock of reserves was largely flat in 2013. Thereafter, there is a steep rise in 14q2 (second quarter of 2014) when reserves rise from about US$2.7bn at the end of 14q1 to about US$3.4bn at the end of 14q2. Coincidentally, a second Eurobond of value US$1bn was issued in 14q2. The reserves are immediately drawn down for, perhaps, the same purposes reported in the previous paragraph.
Reserves are largely flat at around US$2.7bn from 15q1 to 15q2. There is an immediate steep rise in 15q3 when reserves rise again from about US$2.7bn at the end of 15q2 to about US$3.6bn at the end of 15q3. 15q3 coincides with the issuance of a third Eurobond worth US$1.25bn.
It appears then that the Central Bank is including the proceeds of Eurobonds in reporting the country's international reserve position. This point was sort of confirmed when the Minister of Finance, in his Budget Address to the National Assembly last Friday, had this to say:
[A]s at end-September 2015, Zambia’s gross international reserves stood at US $3.6 billion compared to US $3.1 billion recorded at end-December 2014, representing 4.4 months of import cover. This improvement was partly on account of inflows from the recently secured sovereign bond.
Should the Bank of Zambia be including Eurobond proceeds in reporting our forex reserves? This does not make much sense to me at a conceptual level given that forex reserves should really be thought of as assets. In other words, in building up reserves, the Central Bank should go into the forex market and *buy* and thereafter *own* the reserves. By including Eurobonds in their reporting, it seems to me that the Central Bank is counting what really is a liability as an asset. They are bonds after all, right?
Unless BoZ has been purchasing the Eurobond proceeds from Central Government, using Kwachas immediately when the money comes in from abroad. But even then, doing so would imply that these are really temporary assets since the primary reason for issuing the Eurobonds was so that we could use them for infrastructure projects. In other words, Central Government would still want to have the US dollars back at some point to use them for their intended purpose. That is, BoZ would still be in the position of treating a liability as an asset.
The good folks at BoZ are way smarter than I am. There must be something that I am missing in my story. Can someone help me out?
* The latest Fortnightly Statistics Bulletin from BoZ does not contain data on forex reserves for 15q3. The number for 15q3 reported in the Figure 1 is taken from the 2016 Budget Address by the Minister of Finance.
I do not think that BoZ would sink low to breach reporting standards on foreign reserves. As you rightly put it “The good folks at BoZ are way smarter”! Note that when these Eurobonds first hit the central bank current account it might not have been timed to expenditure there and then. The projects undertaken needed periodic cash flows, implying in effect the government might have required to gradually drawing down on these funds. On the other hand, as far as the Eurobond lender is concerned interest is not worked upon completion of our capital projects but rather from the contractual date. Therefore, you will agree Doc that keeping such huge amounts of money on a current account as idol funds waiting to be spent whilst at the same time accruing interest repayments may not be very efficient. In the same vein you will agree that a spontaneous money supply has severe consequences on inflation which they have very much sought to keep within single digits. Hence, the government may invest these funds into money market instruments in this case the foreign reserves. These instruments are by nature trading instruments implying that you can liquidate them at any given time and not necessarily hold them to maturity. With such increased placements, the country tends to temporarily improve its import cover whilst awaiting expenditure on the capital projects commenced. Once these projects’ start requiring an inflow of cash the government then liquidate some portion of their reserves to finance these projects. This can be seen from the gradual decline in your analysis and the cycle gets right back when they contract another bond. However, one may argue and say why not lend on our market which has higher interest margins? Well the central bank has a limit on how they may interact with the commercial banks, by nature they are only a lender of last resort. Lastly, if your analysis is anything to go by, the question that this prompts is how sustainable is our economy if we will only save for a rainy day using debt money? The answer is we are not sustainable, we are not able to generate our own revenues sufficient to invest in foreign assets to provide long periods of import cover. At the same time it explains why even with the recent FX volatilities we could not be properly hedged and any central bank intervention in the market was simply cosmetic!
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