Africa-Press – Eswatini. Externally financed projects are underway in the country.
Others are at the planning stage or rather in the pipeline. External institutions are expected to finance these projects. While government and public entities are receiving external loans, local investment fund managers boast portfolios with a value of E7.024 billion. This was sourced from the statement of funds and net assets for the year ended March 31, 2023. This is an abridged version of the annual report for the year ended March 31, 2023, for the Public Service Pensions Fund (PSPF). External debt refers to the loans raised through foreign lenders, such as foreign commercial banks, foreign governments and international financial institutions. In the case of external debt, all repayments must be made in the currency in which the debt was issued.
It is understood that the Government of the Kingdom of Eswatini usually prefers external concessional loans, as opposed to external commercial loans which may sometimes be provided by local investment fund managers. Concessional loans or soft loans have more generous terms than market loans. These generally include below-market interest rates, grace periods in which the loan recipient is not required to make debt payments for several years or a combination of low interest rates and grace periods. Internal debt refers to the money owed to domestic financial institutions and commercial banks. Five companies are responsible for investing money from PSPF in the domestic market. They are not allowed to invest it in government bonds, equities and treasury bills, etc.
It effectively means that the money is not supposed to be invested outside the borders of the country. The investment managers are Inhlonhla, which manages a portfolio valued at E3 463 104 000 and Stanlib Asset Management Limited Eswatini, which manages E2 142 887 000. Others are Sanlam Eswatini at E200 089 000, African Alliance has E440 757 000 and Old Mutual Eswatini with E777 961 000. African Alliance is in the process of financing the construction of the village for members of Parliament (MPs). Projects that were financed by external funders include the following:
* King Mswati III International Airport;
* International Convention Centre/Five-Star Hotel;
* Sikhuphe-Manzini-Mbandlane Highway;
* E3.5 billion-Mpakeni Dam;
* Over E400 million current transmission line projects for Eswatini Electricity Company (EEC);
* E720 million sourced from AfDB for Water Supply and Sanitation in the Manzini Region;
* Government through Eswatini National Petroluem Company (ENPC) may get loan from Taiwan to construct the Strategic Oil Reserve Facility at Phuzumoya.
It must be said that government estimates for the current financial year indicate that the oil reserve facility may cost E3.2 billion. In an interview on Friday, Minister of Finance Neal Rijkenberg explained that the foreign exchange did not mean taking domestic loan was cheaper than external ones. He said many factors were at play, which included the interest rates – locally and externally. Before taking a loan, Rijkenberg mentioned that government considered the balance between concessional external funding and commercial domestic debt. He said local funders did not offer concessional domestic debts because they were basically in a marketplace expecting very good returns for their investments.
concessional debts
Externally, the minister said government did not take commercial debts but concessional ones with the sole mandate to help the country improve the economy and social life.
Rijkenberg further explained that they received concessional loans from World Bank, International Monetary Fund, European Investment Bank, AfDB, Export-Import (Exim) Banks of India and Taiwan, among others. With regard to external debts, the minister said they were slightly cheaper from an interest rate point of view. In consideration of foreign exchange, he said, on average, Lilangeni lost six per cent a year against the US dollar. The minister of finance said government appreciated the new method called the Secured Overnight Financing Rate (SOFR). SOFR is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR).
SOFR took the place of LIBOR in June 2023, offering fewer opportunities for market manipulation and current rates rather than forward-looking rates and terms. The minister mentioned though that government continued to keep the domestic rates low. Thembinkosi Dube, a financial risk analyst, said the issue should be looked into from different perspectives. Dube said it was easier, from the face value, to accuse government of preferring external loans to internal ones. The financial analyst said fund managers managed monies on behalf of the clients, for instance, pensioners. He said their principal duty was to manage the risk because the client expected them to invest the money with portfolios that would repay it with good interests.
Dube said credit rating also played a part as fund managers would not release money to a risky government. He pointed out that the current credit rating released by Moody was not in favour of the Government of the Kingdom of Eswatini. “The fund manager may hold back and not invest in a government, whose credit rating is low,” Dube said.
He mentioned that external debts were indeed more expensive in terms of foreign exchange. However, he said, the risk associated with internal loans plus the cost of borrowing might also make them expensive as well. In order to manage risk, he said, the fund manager might increase the interest rate from two per cent, which was to be probably charged by external financiers to 20 per cent. In his 2023 budget speech, Rijkenberg, the Minister of Finance, said public debt management was one of the key objectives for government. He mentioned that government should ensure that debt stock remained sustainable by raising the required funding at the lowest possible cost over the medium to long-term, consistent with a prudent margin of risk. As at end December 2022, he said total debt stock stood at E31.75 billion, which was an equivalent of 42.7 per cent of Gross Domestic Product (GDP). Of this stock, he disclosed that external debt stood at E14.39 billion, equivalent to 19.5 per cent of GDP. On the other hand, the minister told the 11th Parliament that domestic debt stood at E17.36 billion, which was equivalent to 23.35 per cent of GDP.
easing debt
Even though the country’s debt stock had grown over the past few years, Rijkenberg suggested that government should keep the cost of its domestic debt within reasonable levels. He said they managed to ensure that all of the country’s external debt remained concessional. “This means Mr Speaker, that even though our debt is still slightly increasing, but if our GDP continues to grow with a minimum of 2.2 per cent, then our debt to GPD ratio remains the same,” Rijkenberg said. He said all indicators pointed to the fact that the country’s GDP would grow by even more than 2.2 per cent in 2023/2024. He said the growth would reduce government’s debt to GDP ratio. Eswatini is not the only country with a huge external debt as foreign loans for Mozambique amounted to E183.60 billion in 2020. Corporate Finance Institute advises that the most crucial disadvantage of external debt is that it often leads to a debt cycle – the cycle of continuous borrowing, accumulating payment burden and eventual default.
Under normal circumstances, Corporate Finance Institute says countries borrow from foreign creditors, mainly to finance their own excess expenditures, build additional infrastructure, finance recovery from natural disasters and even to pay its previous external debt. The finance experts said certain circumstances compelled countries to borrow money from outside, some of which are:
* When domestic commercial banks and financial institutions lack sufficient money to lend;
* When available domestic funds need to be utilised in other important areas, such as healthcare and education;
* When international financial institutions and foreign governments offer lower interest rates and easier repayment schemes than the domestic debt market;
* External debt risks.
The experts pointed out that there were several risks associated with foreign debt, which are as follows:
* Affects economic growth – Economic growth occurs when governments and companies incur capital expenditures that boost production and increase output and income levels. If large amounts of external debt need to be repaid, then there is less money left for investment purposes. It hampers future economic growth.
* Long gestation period – Gestation period is the interim period between the initial investment in a project and the time the project becomes productive. When external debt is used to fund infrastructure projects, it takes a few years for the project to start giving a return on the investment.
* Unexpected devaluation of domestic currency – If the currency of the borrowing country depreciates with respect to that of the lending country, then the real value of interest (as denominated in the domestic currency) will rise.
It is said that domestic debt may bring some prominent benefits such as lower exposure of the public debt portfolio to currency risk if and when the domestic debt is denominated in local currency. The debt is repaid in local currency. For instance, the Times SUNDAY carried an article in 2021 to the effect that the closer one looked at the E1.65 billion loan from India’s EXIM Bank for the new construction of the new Parliament building, the more plausible it became that it was poor judgment that would have negative impact on the taxpayer. In essence, analysts said the loan would leave Eswatini worse off – financially and economically. It was reported that the Eswatini Government would pay more than double the amount it would obtain. Besides the initial E1.65 billion principal loan; government was expected to part with an extra E2.2 billion repayable over 25 years.
The E2.2 billion would be in respect of interests and management fees. These figures were based on the exchange rate of E15.25/US$ (November 16, 2021). The current exchange rate is E18/US$. It effectively meant at that time the construction of the Parliament building would cost the taxpayers a total of E3.87 billion. According Statista, an organisation for economists, South Africa’s external debt reached over E3.06 trillion (US$170 billion) in 2021. This corresponded to the highest stock of foreign debt in sub-Saharan Africa. Nigeria and Angola followed, each with debts of E1.368 trillion (US$76.2 billion) and E1.206 trillion (US$67.3 billion). Economists said external debt in sub-Saharan Africa has been increasing. In 2020, the foreign debt burden in the region accumulated just under E14.22 trillion.
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