A FINANCIAL crisis is looming as it emerged this week that government is failing to honour Treasury Bills issued by the Reserve Bank of Zimbabwe on maturity worth US$1,5 billion to finance the government’s worsening deficit position and paying the state’s creditors, businessdigest has established.
By Chris Muronzi
The failure to honour payments has seen the paper being rolled over to allow government more time to raise funding.
Investigations show that the central bank has also been issuing paper secretly to government creditors.
Traditionally, central banks run open market operations to buy and sell government securities in the open market in order to expand or contract the amount of money in the economy, among other monetary objectives.
This comes after Finance minister Patrick Chinamasa disclosed in his mid-year fiscal policy review statement that a US$623 million budget deficit for the six months to June would be financed through the issuance of treasury bills by the central bank.
The budget deficit is expected to be over US$1 billion by the end of the year.
The disclosures heightened fears the financially struggling government could have triggered an inevitable financial crisis as liquidity conditions worsen in the market as banks mop up the paper.
Smarting from an exposure to a credit crisis characterised by shocking levels of non-performing loans,which rose to a high of US$700 million, banks have been taking positions on the paper and see the instruments as an opportunity to safeguard depositors’ funds in murky economic times.
Poor revenue collections in the half year to June and unrestrained expenditure on the part of government resulted in a cumulative budget deficit of about US$623,2 million, far above the full-year target of US$150 million.
“Failure to contain the budget deficit in the shortest possible time will worsen the deficit to an estimated year-end level of over US$1 billion,” said Chinamasa.
By Chinamasa’s own admission, budget overruns mean the country has no capacity to service domestic debt which has forcedbanks to roll-over on maturity, a development currently posing financial risks on domestic debt instrument holders and domestic financial institutions.
“This situation, unfortunately, is not tenable and is undermining the stability of the financial sector and overall economy,” Chinamasa warned. “Further to this, government borrowing is also crowding out lending to the private sector and, hence, stifling new domestic investment and growth.”
Although governments the world over are known to issue various instruments, Zimbabwe has no capacity to honour payments as and when they fall due.
Zimbabwe has a combined debt of US$10 billion it is failing to service.
Mangudya told businessdigest a fortnight ago that a total US$1,4 billion has been issued to date.
Of the US$1,4 billion, 50% has been utilised to capitalise RBZ and other institutions.
He said US$275 million had gone to government financing, while the Zimbabwe Asset Management Company (Zamco), a special purpose vehicle to absorb the banking sector’s non-performing loans, got US$300 million.
Mangudya added that the repayment of RBZ debt has been approved.
Zamco paper has 15-year tenure while some of the paper has wide-ranging maturity rates.
The central bank is seen issuing more treasury bills to retire the central bank’s debt of US$1,4 billion in line with the approved repayment plan, more than US$400 million for budget deficit financing and an unquantified amount to government creditors.
According to businessdigest’s investigation, some of the paper matures in 2017, 2018, 2019 and 2020.
A thriving discounting market has also emerged.
With an evident credit crisis besetting the banking sector, financial institutions have snapped up the paper.
Investigations show that stockbrokers, who are currently struggling owing to negative sentiment on the Zimbabwe Stock Exchange, are now trading treasury bills.
Treasury bills maturing in 2017 are being discounted at 11-14%, paper maturing in 2018 is being discounted at between 29-30%, while the 2019 and 2020 paper is being traded at 39-40%.
As of April, treasury bills taken up by banks shot up from US$326 million to a massive US$1,2 billion during the same period, cementing fears that government’s borrowing is crowding out credit activities in the banking sector.
Worryingly, given that government’s borrowings are largely unproductive, this scenario means further challenges for the economy.
To stimulate the economy, central banks tend to lower interest rates and increase the amount of money circulating in the economy.
It is generally accepted that low interest rates will buoy productive lending capacity of banks.
Currently, 96,8% of the country’s US$4 billion budget, the main source of government’s finances, is going towards paying recurrent expenditure in the form of civil servants wage bill. President Robert Mugabe in August last year signed into law the Reserve Bank of Zimbabwe (RBZ) Debt Assumption Bill amid outrage that the central bank had withheld the names of the beneficiaries.
The Act paved the way for the government to take liability of an estimated US$1, 4 billion debts incurred by the RBZ before December 31 2008.
Government defended the law, saying it would provide a clean balance sheet for the RBZ and enable it to attract international funding, as well as focus on its core business of being lender of last resort to banks.
Apart from the challenges posed by the treasury bills, Zimbabwe’s economy is on the precipice after cash shortages eroded confidence in the banking sector. The cash shortage could see sustained withdrawals from the formal banking system.
A look at key banking sector show that there has been a massive deterioration in a number of key banking sector fundamentals, directly contributing to the current cash squeeze.
RBZ’s figures for April 2016 show a marked drop in cash holdings — notes and coins — in bank vaults.
Total cash in bank vaults in the country was only US$135,5 million, a far cry from the peak cash holdings of almost US$400 million in December 2012.
The central bank’s orders to reduce both cash holdings and cap nostro balance thresholds have also contributed to the progressive deterioration of bank positions.
Furthermore, the increase in RBZ borrowing activities means banks are stuck with treasury bills, sucking productive lending.
The central bank figures show that treasury bill holdings and balances held with the RBZ by commercial banks have increased substantially in the last 24 months, whilst lending to the private sector has slowed down.
Between January 2015 and April 2016, total commercial bank credit to private sector entities declined by US$140 million from US$2,797 billion in January 2015 to US$2,653 billion as at 30 April 2016.
Bank holdings of trade bills, which also represent commercial lending, dropped from US$164 million to US$19 million in the same period, also confirming a reduced appetite by banks for commercial lending.
Bank balances held with foreign banks (nostros) have also been severely depleted from a peak of US$$489 million in February 2012 to a paltry US$133 million in April 2016.