GOVERNMENT’S stock of Treasury Bills (TBs) has reached a whopping US$2,079 billion over the last two years amid concerns that this could crowd out private sector lending and force the central bank to adopt desperate measures as Treasury battles to meet its financial obligations on the back of economic implosion.
Currently, 96,8% of the US$4 billion national budget, a large chunk of government finances, is going towards paying recurrent expenditure in the form of the civil servants’ wage bill.
Central bank governor John Mangudya (pictured) told the Zimbabwe Independent that the issuance of TBs by government takes account of the need to strike a balance between the desire to bridge the gap between revenue collection and expenditure, and the need to ensure that the maturity profile is sustainable.
“It is against this backdrop that government has issued TBs under four categories. The first category are long-dated TBs of US$549 million issued to banks for the acquisition of non-performing loans by the Zimbabwe Asset Management Corporation (Zamco),” Mangudya said in an interview.
“The second category are long-dated TBs amounting to US$300 million issued for the capitalisation of institutions that include the Reserve Bank, Agribank, IDBZ, ZB, Cottco and Caps. The third category are medium to long-dated TBs amounting to US$780 million issued under the Reserve Bank Debt Assumption Act for the central bank debt taken over by government. The fourth category are short-to-medium-dated TBs in an amount of US$450 million issued to finance the gap between expenditure and revenue collection by government.
“In the case of Zimbabwe, it is important to note that the first two categories of TBs are held to maturity, whilst the other two sets of TBs can be traded in the market and/or used by the recipient to expunge their obligations at banks and other obligations without any physical cash movement.”
Two years ago, President Robert Mugabe signed into law the Reserve Bank of Zimbabwe (RBZ) Debt Assumption Bill amid outrage that the central bank was protecting beneficiaries of quasi-fiscal activities.
The Act paved the way for the government to assume liability for an estimated US$1,4 billion debts incurred by the RBZ before December 31 2008.
The central bank is now using the debt instruments to retire this debt.
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 TBs, Zimbabwe’s economy is on the edge of a precipice after cash shortages and a liquidity crunch eroded confidence in the banking sector. At this rate, analysts say, more TBs could have far-reaching implications on the economy.
Zimbabwe has been facing foreign currency shortages since last year as shown by long, snaking queues at banking halls and demand for cashbacks in supermarkets. Since the introduction of the multi-currency system in 2009, the United States dollar has been the dominant currency.
Local think-tank Labour and Economic Development Research Institute of Zimbabwe (Ledriz) contends that at this rate the country’s economic situation could worsen should Treasury over-rely on the debt instruments.
“The current stock of TBs is affecting macro-economic and financial sustainability. This is increasing government indebtedness at a fast rate and by so doing government is crowding out private sector lending by mopping up all the liquidity in the market,” said Ledriz economist Prosper Chitambara.
“Sources of revenue are declining and government will continue to seek recourse on TBs. At the current rate this is likely going to worsen with elections coming and pressure to pay civil servants bonuses. These TBs are not performing because government has no capacity to pay back.”
With exports collapsing, banking sources say close to 90% of the money circulating locally under the RTGS platform is not backed by nostro account balances.
Experts say what compounded the depletion of bank nostro account balances was the fact that the cash received from TB sales on the secondary market was almost immediately used to import goods and services, whilst in some cases the funds were repatriated or externalised by the beneficiaries.
This basically means that the local RTGS US dollar receipts from TB discounting added further pressure on bank nostro accounts. This happened at a time banks were required to maintain 5% of their total deposits in nostro accounts. The pressure ultimately resulted in the delaying of international payments and then eventually into the current cash shortage.
An economist who requested anonymity said fiscal pressure could force the central bank to print more bond notes to meet government expenditure. Last November, government introduced bond notes — a fiat currency — as an export incentive backed by a US$200 million African Export and Import Bank facility.
“Government’s default risk is now too high. These settlement gridlocks which come on the backdrop of a huge appetite from government to spend could force authorities to print bond notes outside the Afreximbank facility,” a Harare-based economist said.
Turning to interest rates, Mangudya said he sees the cost of borrowing softening this year.
He said over the past two years a downward trajectory of interest rates has been witnessed.
Lending rates to the productive sectors have progressively declined from more than 25% per annum in 2015 to 15% per annum in 2016 and to 12% per annum effective 1 April 2017, as enunciated in the January 2017 Monetary Policy Statement.