Zambia to issue $432mln worth of COVID bonds for economic stimulus
At yesterday’s cabinet meeting held at Mulungushi International Conference Centre, Cabinet approved in principle the establishment of a K8 billion economic stimulus package that will be financed through the issuance of the COVID-19 Bond.
Cabinet sources say the allocation will go towards payment to retirees, contractors and suppliers.
Cabinet resolved that it is necessary to provide an economic stimulus through the issuance of the COVID-19 Bond in order to improve the liquidity levels in the economy that have reduced due to the Coronavirus pandemic.
COVID bond will be additional intervention from the April central bank stimulus package and May benchmark interest rate cut to boost growth.
According to the Business Telegraph
Budget finance in extraordinary times. In disease pandemic era, jurisdictions have had to seek extraordinary measures to fund economic programs. The central bank in Kenya, Nigeria and Ghana has stepped in to finance 3-5% of these nations gross domestic product which Zambia could be emulating. The COVID bond will be additional intervention from the April central bank stimulus package and May benchmark interest rate cut to boost growth.
Quantitative easing or actual bond issuance? Eight yards (K8bln) is the size of roughly 8 fully subscribed bond auctions and is 31% of the outstanding domestic arrears (K26.2bln), a top analyst said in a morning note. Pricing, tenor and mechanics of the proposed fixed income issuance are still vague. However inferring from the risk skew theme – towards lower dated higher yielding assets – and low appetite for bonds in the Zambian market evidenced by the deep under-subscriptions, it will be interesting to see how these pandemic bonds will be sold at a time when sovereign risks are high because that could have implications on the issuance premiums. Another way this can be facilitated is through ‘quantitative easing’ which would be inflationary to the economy. The initiative is a necessary spend in hard times but the issuance method will be very critical and will have implications.