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Interest rates bloat public debt

Dumisani Ndlela

ZIMBABWE’S domestic public debt appeared set for a major explosion due to exorbitant financing costs, central bank statistics revealed this week.

Government debt doubled in a space of 15 days to $43 trillion by mid-June after reaching $21 trillion on June 2.

Bank sources indicated that unpublished estimates place the debt level at $48,2 trillion.

The sharp hike in debt had been spurred largely by high interest rates on government debt, most of which is held through short tenor treasury bill (TB) instruments.

Government debt held through TB stock amounted to $17 trillion by June 16, with interest on the TB stock amounting to $22 trillion, more than double the principal TB debt on June 2 of $8 trillion.

“We’re in a bind,” said analyst Washington Mehlomakhulu of Highveld Financial Services. “The method of funding debt is a major concern.”

Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono last year adopted measures making government securities, especially TBs, more attractive to private sector investors in order to attract funds to finance the large government deficits.

Investors had been directing their funds mainly to the equities market, shunning the money market because of weak returns. Gono had shortened the tenor of the TBs and increased returns on the money market instruments.

This had the effect of attracting funds back to the money market. However, this came at a huge cost to government as the cost of financing the short term paper had the effect of blowing up the domestic debt.

The yield on 91-day TBs is currently at 510%. Assuming the government continues to issue 91-day paper at this rate, the effective rate compounded quarterly is 2 569% annualised. “The cost of running that debt is worrying,” said Mehlomakhulu.

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