WALLOWING IN THE DEBT TRAP

WALLOWING IN THE DEBT TRAP

The government has committed our country to a spate of new but very expensive borrowings from the international investment community once again. And once again the new loan will be used to repay a previous commercial loan that we are having a hard time repaying. This is what the new Minister of Finance, Mr Danny Faure told the National Assembly last week. It was apparent from Mr Faure’s demeanour on television that he was unsure of what he was getting us into.

Faure said that the new sovereign bonds denominated in US dollars with a repayment term of 5 years were oversubscribed. In other words, the demand or bid made by the various institutions for the bond exceeded the total face value of the bonds. This was of little solace to our beleaguered economy. Junkies too get offered more drugs than their emaciated body can tolerate. Faure said that since the government wanted to raise only US$ 200 million, it settled for that amount only, not one cent more.

In contrast to the previous loan, which were bank loans, the new loan although taken up by banks, can be sold in the international capital market by the bond holders should they want to get their money back before 2011. With the previous (banks) loan, which was called syndicated loan, we had to repay the capital or principal each year over the term (5 years) of the loan. This time we pay nothing back for the time being except the interest over the next 5 years. But we still have to pay the entire principal when it becomes due in 2011. Mr Faure, in theory could roll it over but at what cost?

While the Government has gazetted that it would be paying 9.125% interest per annum on the bond, an investment magazine said that the investment banks wanted and got 9.25% instead. In the same week they offered the Dominican Republic – a much poorer country - 7.8% for their bonds.

At 9.25% our annual interest cost will come to US$18,500,000, which is almost double what the government needs to support our students in colleges and universities overseas for a year. Over the life of the bond the total interest cost will be US$ 92.5 million, almost a third of the value of the borrowing. Since, the government has been struggling to find the dollars to pay for our student’s upkeep overseas, it remains to be seen just how much effort it will have to make to come up with twice that to pay the bond holders their interest.

Mr Faure said, part of the proceeds of the bond issue will be used to pay off the syndicated loan taken in 2002 from a consortium of international banks and we are still outstanding with them to the tune of US$ 65 million. When that loan was being celebrated, we were told that we got it rather cheap. So now it seems, we have taken a more expensive loan to pay off a cheaper loan that we were happily repaying. Things, however, may not be too bad for the government from one perspective.

Under the terms of the previous loan, the government had to surrender all its foreign currency earning fees, that is, airport and over-flight fees, all the tuna fishing license fees as well as all the IOT leasing fees to the consortium. Together this amounted to US$ 35 million – at least what was forecasted. That money never entered the economy. But you would not know it when you read the government revenue information during the national budget presentation. By paying off the Bank of Tokyo-Mitsubishi loan early, government will be able to free that money to enter the economy, at least in principle. But it would be barely enough to pay the interest on the bond. What’s left would just about cover the cost of supporting our students abroad. At least from now on they should be getting their money on time we hope.

Some of the proceeds of the new loan will also be used to pay off the arrears to the African Development Bank according to the Minister of Finance. Those loans were very cheap compared to commercial loans and we benefited also from generous repayment terms which included a grace period. Mr Faure admitted for the first time on behalf of the government that the extent of the arrears to the ADB has reached US$ 48 million. Mr Faure also told us that ADB money for the most part went to build our schools, renovate our hospital, lay our water pipes as well as building our fishing infrastructure. Because we cannot afford to repay those loans as envisaged isn’t it the same as saying, we could not afford such infrastructure as a country? Are we are now in a new category of international debtor nations, all on our own, called High Indebted Rich Countries (HIRC)?

According to the government Gazette, Lehman Brothers – the international investment bank - would be the sole facilitator for the exercise. Lehman Brothers merchant bank is of course, the purchaser and now owner of Heinz Foods Europe which also owns the Indian Ocean Tuna Ltd (IOT), the tuna canning factory in which Government of Seychelles has a 40% stake. IOT’s Chief Executive is a member of President Michel’s new National Economic Planning Council. Ironically, Government’s 40% stake in IOT and the purchase and lease back of some of the assets of the factory was made possible by dipping in the previous syndicated loan, which Mr Faure now want to liquidate with the proceeds of the bonds. Lehman Brothers investment banking arm stands to collect substantial fees for their effort and laugh all the way to the banks.

The irony is that the very high interest rate our Government is prepared to pay for a fresh foreign currency borrowing is in stark contrast with the 3% interest the government-owned Mortgage Finance Company charges for housing loans, some of which have been written off by President Michel during his long election campaign as an election bribe. To add insult to injury our government pays less than 4% to our local banks on its treasury bills, of which SR 500 million alone will be rolled over this month. This state of affairs makes no economic sense and is unsustainable.

Contrary to what Mr Chang Leng, the Central Bank Governor, claimed, the new US$ 200 million will increase our total external debt – at least at first. It has to, because only a part of the newly borrowed money will be used to pay old debts. Some will be used to clear foreign exchange demand for treatments abroad, which is a consumption expenditure paid for by new borrowings. The rest of the proceeds, Mr Faure promised us, will be placed in the Central Bank foreign currency reserves.

Mr Faure also informed the National Assembly that officials of his Ministry together with those from the Central Bank will be off to Paris and London to discuss rescheduling of other unpaid debts. Paris Club as well as the London Club won’t talk turkey unless we accept a macro-economic restructuring package managed by the IMF. Is this the sign the government has finally accepted the IMF macro-economic restructuring package, devaluation and all? Can we expect the unexpected in the budget in early December?

Nevertheless, Mr Faure will have a hard task in both Paris and London as our figures suggests. According to the IMF the extent of our indebtedness to the Paris Club countries and institutions at the end of 2004 was US$ 135.9 million, out of which US$ 67.9 were in arrears. Since none of the bond sale has gone to repay some of the arrears, the Paris club is bound to ask “what has changed”?

Multilateral and bilateral institutions do not lend on the basis of a credit rating. For them the real economy is their mantra. Mr Faure’s must convince them that he has a plan which would effectively put Seychelles in a position that it will effectively be able to repay its debts to the rest of the world in the foreseeable future while at the same time being able to provide certain public goods, services and transfers on a sustainable basis in the future. To ensure that such a plan is viable it must be accepted and policed by the IMF.