Public auctioning of TBs uphill task but necessary

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Reserve of Zimbabwe governor John Mangudya

THE Reserve Bank of Zimbabwe (RBZ) announced that it has finalised the operational framework for publicly auctioning Treasury Bills (TBs) and is set to re-introduce this auction system which it abandoned years back during the hyperinflationary era. RBZ governor John Mangudya confirmed that plans and an operational framework is now in place for government paper’s return to open-market operations.

Financial Matters Shingai Moyo

Mangudya said: “There was a committee set up headed by the Ministry of Finance and Economic Development to come up with the operational framework. The terms of reference have been completed and we are just working on a few modalities but the system is expected to resume soon.”

Return to open market operations for Treasury paper is very critical as it will bring transparency to the market.

The RBZ has since been issuing out these financial instruments through private placements, an act that has caused public outcry and uncertainty in the financial markets. Currently, there is so much uncertainty on the stock of TBs in the market, a situation that has seen these financial instruments being heavily discounted by banks.

The government has been issuing out TBs to fund its budget deficit, paying its domestic creditors and arrears, purchasing banks’ non-performing loans through the Zimbabwe Asset Management Company (Zamco), and recapitalise the RBZ through Infrastructure Development Bank of Zimbabwe and ZB Bank, among other state-owned banks and parastatals. TBs were also issued as repayment for foreign currency account balances and tobacco retentions that were confiscated by the RBZ in 2008.

Generally, there is so much uncertainty of the exact stock of TBs in the market with some estimating that they are slightly below US$2 billion. In a US$14 billon economy, this implies that sovereign paper in the market is above 10% of the country’s national income and around 50% of the 2016 national budget.

As the economy continues to fall, government revenues have dwindled, resulting in increased appetite by the government to borrow on the domestic market to bridge the financing gap. Through private placements of TBs, the government has been identifying those cash-rich corporates and organisations, negotiating for funding and issuing them TBs in return. Some suppliers to the government received their payments in the form of TBs as well.

Interestingly, some micro-finance institutions were handed TBs as repayments on civil servants. Sadly, these TBs are being heavily discounted for cash by banks at rates exceeding 60%, crippling operations of holders of this untrusted sovereign paper who are in dire need of cash.

A return to the auction system guarantees a discernible yield gap, meaning all investors get similar returns. This is opposed to the current scenario pertaining to private placements where individual investors get different rates depending on each individual investor’s negotiating power.

The move to re-introduce the open-market operation and publicly auction TBs is long overdue and Mangudya and Chinamasa are likely to face a timing problem. Market confidence seems to be at its lowest ebb and it will take long for the market to accept and willingly participate in the public auctioning of sovereign paper. In a normal economic set-up, banks will be in the forefront of bidding for these Treasury instruments in the primary market and then trade them in the secondary market, deepening the financial service sector. However, in this current economic environment, there are fears that the open-market might not be successful as the RBZ will come to the market with a defined interest rate and may fail to raise the targeted amount of funds. Investors might also be reluctant to bid for TBs unless the RBZ clarifies the amount of TBs already in circulation and the purpose it is issuing out the Treasury paper for. Political uncertainty and currency issues will also provide strong headwinds on the success of a public auctioning system in the current economic environment.

Although it is an uphill task, the move to re-introduce the public auctioning system of government paper is highly recommended as it brings transparency to the market.

Moyo is an economic and financial consultant. He writes in his personal capacity.

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