Financial risks embodied in the proposed ongoing railway (standard gauge) Eurobond funding arrangement are as follows;
Firstly; the risk of not timely channeled the euro currency of 6 billion into on-going railway project; if the solicited Eurobond is not spent entirely in the proposed project meaning that, the treasury department use 6 billion euros to meet other government expenditure, the euro debt will not be serviced timely since the project will not be completed on time so as to yield the expected proceeds, that could be allocated in paying the euro debt. This therefore, will lead to failure of the government to pay back the debt and become prone to blacklisted in the Eurobond market.
Secondly; the risk of not having enough earnings in the euro currency; if the country has no substantial proceeds in the euro currency, then will be using its local currency to service the euro debt. This will heavily force the treasury department to collect more tax and translate them into euro dollars to pay the debt. By collecting substantial tax, becomes the burden to its local investors and citizens, and hence, lead to the country to lag into weak economy.
Thirdly; the risk associated with the foreign exchange rate; Since the treasury department that represent the country in this transaction will enter into Eurobond contract of either fixed rate or fluctuating rate with its foreign bank. And by this rate, the country will face exchange risk since the government has to buy the euro dollars and service the debt. So the dollar may be much cost – fully at the time of repaying euro debt, and being much cost, it is a burden to the government.
Fourth; there is a risk when euro currency appreciates against local shillings; if this happen, the government through its treasury department will have to pay much euros than when they depreciates. It is obvious that, when the department will need to service the euro debt, will have to buy euro dollars, thus, with the depreciated shilling, the department will be forced to buy euros at any cost to safeguard its financing credibility in the face of the international Eurobond market.
Fifth; the risk of euro debt sustainability; It is when the government fails to service or pay its euro debt on time or completely fail to meet its euro debt obligation. If this happen to Tanzania government with expected euro bond funding, it will be subjected to be ranked ‘not credit worthy’, this means that, the government will not be funded anymore by any international market. So this is a great risk for the developing country with many expected projects like Tanzania.
Sixth; the risk of raising in interest rates associated with the euro debt; when the government fails to meet the interest servicing cost, and if the treasury department expects to service the euro debt by using proceeds collected from imposed taxes and unfortunately, those proceeds becomes insufficient even to cover debt interest, then the interest will be compounded and therefore, increase cost to the government as well as to the project.
Hambayi, T., n.d. Africa’s ticking time bomb: $35 billion worth of Eurobond debt WWW Document. The Conversation. URL http://theconversation.com/africas-ticking-time-bomb-35-billion-worth-of-eurobond-debt-59404 (accessed 2.7.18).
Treasury’s appetite for foreign debt seen as shilling’s biggest risk – Business Daily WWW Document, n.d. URL https://www.businessdailyafrica.com/markets/marketnews/foreign-debt-seen-as-shilling-s-biggest-risk/3815534-4249150-4b72jvz/index.html (accessed 2.7.18).