HomeAnalysisBond notes facility: More heat than light

Bond notes facility: More heat than light

ON December 12 last year, the board of directors of the African Export-Import Bank (Afreximbank), during a quarterly meeting in the Seychelles, approved an Africa-wide trade finance initiative christened Counter-Cyclical Trade Liquidity Programme (CCTLP).

The Brett Chulu Column

Our Finance minister, Patrick Chinamasa, has in the past mentioned that the Afreximbank facility, which is said to be backing the bond notes/export-incentive scheme, is a counter-cyclical facility. The Reserve Bank of Zimbabwe (RBZ) chief, John Mangudya, as reported in the state media last week, also confirmed the facility was counter-cyclical. Connect the dots. It is almost certain the US$200 million facility our Treasury says has been extended by Afreximbank to support the bond notes/export-incentive scheme is coming from the CCTLP.

Both Chinamasa and Mangudya did not explain what counter-cyclical means insofar as this US$200 million facility is concerned, assuming, perhaps, it was a standard trade finance concept. As highlighted before, our monetary authorities should not assume that they are communicating only to the literati of society. Terms represent ideas.

Breaking down those ideas is what is expected when monetary authorities talk to the public using technical terms.

A brief background to the CCTLP is unavoidable in order to put into context the US$200 million facility the Cairo-headquartered Afreximbank is said to have extended to Zimbabwe. When the CCTLP was approved by Afreximbank, a total of US$3,5 billion was initially set aside. The programme was envisaged to run for two years, with at least 40% of Afreximbank’s committed funds going into the CCTLP. Central and commercial banks from eligible countries were to access facilities under the CCTLP umbrella. The rationale for the CCTLP was borne out of the realisation that the recent drastic fall in global commodity prices, especially crude oil and minerals, were severely reducing export revenues flowing into the largely commodity-dependent African economies.

The Afreximbank head, Benedict Oramah, indicated in an interview with CNBC Africa that some African economies have experienced 40%-50% declines in export revenues due to commodity price shocks. He also indicated that terrorism-linked disturbances in some regions of the continent such as East Africa had also curtailed export revenues. These two risk events have severely reduced foreign currency inflows, constraining current trade patterns in terms of imports and exports. As such, the CCTLP was crafted as a temporary trade support intervention to finance trade flows (especially critical imports) of eligible African countries facing foreign currency shortages induced by global commodity price shocks. This is what the counter-cyclical idea is all about.

Simply put, counter-cyclical funding is about cushioning a trader during times expected trade income is low, with the hope that patterns of income will normalise in the near future. It was also envisaged that the size of the CCTLP would be expanded by sourcing funding from other investors. Oramah divulged that the CCTLP has since expanded from US$3,5 billion to US$6,2 billion. One of the earliest beneficiaries of the CCTLP is the Egyptian central bank, which signed an agreement with the Afreximbank in February for a US$500 million trade finance facility. Despite our incremental knowledge of the mother fund (CCTLP) from which our bond notes/export-incentive scheme is very likely to feed, there remains critical specifics about the US$200 million facility where light is yet to be shed.

Facilities under the CCTLP canopy, according to Afreximbank, are of two types, unfunded and funded. This distinction is extremely critical. Unfunded facilities under the CCTLP are enumerated as guarantees and letters of credit. This is where the issue is. Our monetary authorities have not come out clearly on whether the US$200 million facility is funded or unfunded. Up to now we are being forced to second-guess the exact nature of the facility. With this additional grounded data, we know that there is a big probability this facility may be unfunded.

Let us quickly dispense with the possibility of letters of credit being a component of the US$200 million bond notes/export-incentive scheme. In this context, a letter of credit is an undertaking by a bank on behalf of its client (the importer) to pay a creditor (foreign supplier) once all conditions and expectations attached to the purchase are met. In a letter of credit, the bank’s client is essentially buying permission to substitute him/herself with the bank as the debtor. The RBZ scheme is about exports and not imports.

Clearly, letters of credit are out.

It is highly probable then that Afreximbank is providing a guarantee to a loan or loans the RBZ has contracted to fund the bond notes/export incentives. This scenario entails there are at least three parties to the funding of the bond notes/export incentives, namely, the funder, the beneficiary or legatee (RBZ) and the guarantor (Afreximbank).

If the unfunded CCTLP scenario is the one obtaining, the RBZ has an obligation to disclose to the nation the identity of the funder. It will not be enough to end at revealing the guarantor — we would need to know the primary funder. Under the unfunded CCTLP scenario, we would need to know the terms the funder, whose risk is being covered by Afreximbank, agreed with the RBZ. It is my sincere hope that the Afreximbank facility does not fall under the unfunded scenario because that will attract questions as to why the primary funder has been concealed.

If the RBZ export incentives are receiving cash flow under the CCTLP-funded option, the RBZ owes the nation to spell out in unpretentious terms whether the facility is a term loan or a revolving one. The Afreximbank has indicated the CCTLP is a two-year programme and, as such, the RBZ is expected to clearly articulate how payments for any interest and principal will be handled, given this two-year CCTLP frame.

Since the legitimacy of bond notes is dependent on real US dollars sitting somewhere (hopefully to be disclosed), the impact of the two-year life of the CCTLP on the validity of bond notes has to be convincingly explained. We are not in familiar standard territory and thus the RBZ must provide satisfactory answers on the length of the CCTLP and the life of the bond notes. Bond notes are a surrogate or stand-in currency. Fair enough. But what will bond notes surrogate when the time agreed to pay back the borrowed money arrives? It is clear that if the funded CCTLP scenario is the one obtaining, the question of when the loan is to be repaid is extremely critical.

A few more critical questions are in order: What cycle are we countering as a country for us to use a countercyclical facility? Fall in the prices of platinum group of minerals? Is this our major source of poor export performance? Can we honestly say that our pitiable foreign currency inflows owing to low foreign direct investment, low productivity and production volumes (including tobacco) are part of a cycle which we must counter? Let us not hide structural deficiencies behind the finger of a temporary cycle.

Keeping the nation in the dark on whether Afreximbank is merely a guarantor or the provider of the actual cash flow, casts an unnecessary pall on the RBZ-Treasury monetary-financed fiscal project.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal.

Recent Posts

Stories you will enjoy

Recommended reading