Sunday 11 October 2015

Should BoZ be counting Eurobond proceeds as part of forex reserves?

I have noticed that the Bank of Zambia (BoZ) has been reporting the proceeds of Eurobond issuances as part of the country's stock of foreign exchange reserves. To illustrate, I report in Figure 1 the end-of-quarter forex reserves as reported by BoZ in their Fortnightly Statistics Bulletins. The data runs from the first quarter of 2012 (12q1) to the third quarter of 2015 (15q3).*

            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.