Treasury bills key in unlocking liquidity gridlock

Clive Mphambela

RECENT proposals by the Bankers Association of Zimbabwe for government to reconsider its position regarding the issuance of treasury bills seem to have fallen on fertile ground given the recent announcement by the Reserve Bank of Zimbabwe (RBZ) and the Ministry of Finance that authorities actively considering the introduction of short-term money market instruments.

 
RBZ Governor Gideon Gono told bankers at the Institute of Bankers Zimbabwe’s 43rd annual winter banking school in Nyanga that government, in close collaboration with the Ministry of Finance, is currently seized with the modalities of introducing short term paper.

 
Gono said the introduction of government bonds was geared at reactivating the interbank market and resuscitating the lender of last resort function of the central bank by availing securities.

 
According to Gono, the economy will derive immense benefits from the issuance of short-dated instruments, such as increased interbank trading, supported by the availability of collateral security for lender-of-last- resort, as well as for the settlement systems such as Zimswitch, RTGS and the cheque clearing system.

 
“Additionally, the government will have bridging finance to cover the unfunded expenditures and smoothen spending patterns,” he said.

 
Gono’ s comments at the winter school come after economists argued the active participation by government in the country’s capital markets has some long term benefits to the economy and by not doing so, government was in fact reneging on a key role.

 
Quest Financial Services managing director James Msipha said whilst government’s cash budget approach sounded good, it was not practical. He said although dollarisation had caused RBZ to lose the ability to print money, the government had capacity to borrow both domestically and externally to increase its expenditures.

 
“Every government must borrow, the caveat is that the money must be put to good use,” Msipha said, adding that government could be shooting itself in the foot by not playing the local capital markets.

 
“I subscribe to the school of thought that says government should participate actively in the local and international bond markets. This will gradually build a pool of both local and foreign investors that are comfortable with our sovereign risk, who will take advantage of the increased investment options and at the same time provide government with liquidity, especially for capital projects,” he said.

 
Although this would improve government liquidity, the funds raised should not be used for consumption but for capital projects that had potential to generate future revenue or influence service delivery in the system. An example was the Kariba South project, considering that the starting point for any recovery was to capacitate the energy sector. New revenue generation would also shorten the economic turnaround life cycle.

 
Msipha said government paper would certainly provide the much-needed acceptable security in the country’s money markets and make them more efficient by encouraging interbank trading. It would also improve income for banks as they would have trading income. Pension funds would also participate and there would be a more equitable allocation of capital across all financial markets as opposed to concentration in equities.

 
“I think naturally interest rates will take a cue from rates prevailing in the bond market. We will also see deposit rates tracking this benchmark and improving and this will encourage some sort of saving in the economy and hence an improvement in market liquidity. And who knows, our markets will be attracting long term money as people invest in
these instruments,” Msipha remarked.

 
However, he warned that should government choose to borrow locally, there would be need to minimise the crowding out of private sector credit, which was also critical for the revival of both domestic production and consumption.

 
“Despite the fact that banks’ loan to deposit ratios are presently high, government can come up with a threshold to say they will borrow up to a maximum of 10% of all deposits or a certain percentage of GDP,” Msipha proposed.

 
He also suggested that the TBs or bonds floated could be targeted at foreign capital or people in the diaspora, the same way as the CBZ diaspora bond, and would attract foreign capital. The crowding out effect could be limited if there were threshholds.

 
The Quest Financial Services MD argued that it was critical for the authorities to take steps to put Zimbabwe firmly on the world’s financial markets, soon rather than later.
Banking analyst and CEO of Oxlink Capital, Brains Muchemwa, said the issuance of TBs was not so much about the solvency constraint of the central government or the urgent need to bridge the gap in financing critical government projects, but more about efficient allocation of financial resources.

 
“The importance of TBs in our market is more about optimising the pricing of financial assets in the market and giving guidance in managing future expectations relating to interest rate policy and inflation risks, with the overall effect of bringing about efficient allocation of financial resources,” Muchemwa pointed out.

 
He argued that the issuance of TBs did not change the ugly reality that government finances largely funded recurrent expenditure and very little remained for capital projects.
He said until such a time as the aggregate government expenditure was shifted and re-aligned to reflect a progressive balance between consumptive and capital expenditure, TBs could be issued, but implementation of government projects would remain a big challenge.

 
Muchemwa also believed that issuing treasury bills would not immediately improve market liquidity, insisting this only improved when banks were able to unwind their illiquid positions and invest in near liquid assets.

 
“The issuance of TBs and the resultant establishment of a benchmark risk-free rate, on their own, will not see improved liquidity in the market save to say that market players switching to more liquid assets will have a significantly reduced opportunity cost as the TBs will at least have a return above zero,” he said.

 
According to Muchemwa, crowding out was inconceivable, considering that the central government was already running on a very tight cash budget and would not be able to plunge much deeper into domestic debt.

 
Chartered Financial Analyst and MMC Capital Head of Research, Itai Chirume said government was currently constrained in terms of debt servicing capacity.
“The country’s failure to settle debt arrears, failure to increase civil servants’ salaries and the huge proportion of salary payments all coming to over 70% of total revenue all point to conditions of future default on issued Treasury bills and bonds,” he said.

 
Chirume said government’s liquidity in the short term might improve at the expense of reduced credibility going forward because of the prospect of default. Conditions in the economy were reflective of a deceleration in the rate of growth in future revenue (especially in the short term) and the Finance ministry had already revised budgetary expectations on the revenue side for the rest of this year.